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Vulcan Insight | Cryptoeconomy facing increasing regulatory hurdles

On Thursday the Russian Central Bank proposed a ban on the use and mining of cryptocurrencies in a bid to stave off increasing financial instability and safeguard monetary policy dominance.

This comes just days after the Financial Conduct Authority in the UK announced it will be cracking down on the use of promotional ads and marketing strategies by cryptocurrency traders, fearing that consumers are being misled into undertaking risky investments they do not understand. This follows a move in December 2021 by the UK Advertising Standards Authority to ban advertising campaigns that exaggerate the potential benefits of owning cryptocurrencies while downplaying the risks involved.

While regulators globally are now moving to tighten control, many central banks are also planning to issue their own digital currencies in an attempt to stop crypto assets becoming more widespread and subsequently limiting the sovereignty of monetary policy. Such moves are now deemed necessary in order to avoid higher interest rates to contain inflation.

The environmental costs have also not gone unnoticed, with regulators also citing the damage the cryptoeconomy is doing to renewable energy sources. Bitcoin and other cryptocurrencies are “mined” by powerful computers that compete against others on a global network to solve complex mathematical puzzles. This process uses vast amounts of energy. The two largest cryptocurrencies, Bitcoin and Ether, rely on a mining method is called ‘proof of work’ which requires all participants on the blockchain digital ledger to verify transactions. Miners, who use enormous data centres filled with fast computers to solve complex puzzles, are rewarded for recording transactions with newly minted coins. Erik Thedéen, Vice-Chair of ESMA said that European regulators should consider banning this method and instead encourage the industry to use the less energy-intensive “proof of stake” model where the number of parties signing off on trades is much smaller.

The European Parliament, which is currently considering the Markets in Crypto Assets (MiCA) file has already seen moves by the Greens to limit the environmental damage caused by powering certain blockchains. “Proof-of-work is often associated with high energy consumption, a material carbon footprint and significant generation of electronic waste,” the amendments said. “These characteristics could undermine European and global efforts to achieve the climate and sustainability goals.” The Commission should identify which blockchain technologies “pose a threat to the environment having regard to energy consumption, carbon emissions, depletion of real resources, electronic waste and the specific incentive structures.” Such technologies “should only be applied at a small scale.” The file is expected to conclude in the coming weeks with a plenary vote in February so that trilogues can begin.

So far Crypto Traders are hanging tight, with the news drawing little reaction in the Crypto market. Despite these crackdowns Bitcoin is back up 3%, now valued at $43,000 at time of publication. The smart money is on the crypto companies who roll with the punches and position themselves as positive policy partners in the oncoming regulatory debates.

Compliments of Vulcan Consulting – a member of the EACCNY.