Cryptocurrencies have been condemned over their environmental record at a time when traditional investments have been rapidly moving towards greener environmental, social and governance (ESG) values. So how long will it be until crypto earns its green credentials?
Green investments are assets like bonds that pay for projects with positive environmental and social outcomes. Green bonds for example, contribute to cuts in greenhouse gas emissions, an increase of renewable energy capacity and uptake in clean transport infrastructures.
Crypto investments on the other hand are widely seen as environmentally unfriendly, mainly because of crypto mining and the huge energy it demands. Mining in the context of crypto refers to a mechanism called "proof of work" (POW) where crypto "miners" use specialised computers to solve complex mathematical equations to secure transactions and create new coins. This is where the energy use comes in.
Agencies and organisations like the International Energy Agency and the United Nations have raised concerns about the effects of crypto mining - particularly Bitcoin, the best-known crypto asset.
The environmental footprint of crypto
The United Nations University Institute for Water, Environment and Health estimated that in 2020-2021, Bitcoin networks had significant carbon, water and land footprints. Bitcoin's carbon footprint was equivalent to burning 38 billion tonnes of coal, while its water footprint (mainly used for cooling systems) would have met the domestic water needs of more than 300 million people in sub-Saharan Africa.
The Cambridge Blockchain Network Sustainability Index puts the electricity consumption of Bitcoin networks above those of several developed countries, including Norway and Sweden. For investors who are serious about achieving ESG goals, this aspect of crypto would likely be a deal-breaker.
It is also made difficult by the lack of regulations around crypto activities. After years of being on the fringes of financial markets and being considered a "get-rich-quick" venture, crypto investments are becoming mainstream. But there is still little regulation to protect investors and ensure participants adopt practices that are in line with ESG values.
Sceptics point out the major issues plaguing these markets including the use of cryptocurrencies and platforms for money-laundering, scamming, and price manipulation.
So it is certainly hard to make a green case for crypto. But at the same time, it would be misleading to look only at one side of the coin. The fact is that crypto has a challenging but reachable path towards being widely accepted as green.
Decarbonising the crypto industry
First and foremost, the industry itself has recognised the need to change practices and processes to become more sustainable. In 2021, a significant number of players in the crypto industry signed the crypto climate accord (CCA) with the long-term target of decarbonising the global crypto industry by 2040.
The CCA set two interim objectives. The first was the development of standards and technologies to have 100% renewably powered blockchains as soon as 2025. The second aim states that signatories should achieve net-zero emissions from electricity consumption by 2030.
Recent developments in technology suggest the industry has started putting plans into action, with the appearance of sustainable tools and infrastructures.
Several companies such as Mara and Argo are working on technologies like energy-efficient immersion cooling systems that significantly reduce the energy consumption required for mining.
These companies are also developing systems that can recycle heat produced by digital assets and from data centres, and redirect it to provide energy to communities. The implementation of these technologies is facilitated by the relative mobility of crypto miners and the opportunities that some governments and regions offer to them.
In addition, the crypto industry has seen the emergence of self-proclaimed environmentally friendly cryptocurrencies, such as Cardano public blockchain and Powerledger. These currencies use a less energy-intensive mechanism called "proof-of-stake" (POS) rather than POW.
Unlike POW, POS miners must stake their holdings (the amount of cryptocurrency) when validating and verifying transactions and records. So if a miner tries to falsify records, they could potentially lose their stake. The process removes the need for the complex computer calculations and so cuts the energy use dramatically. In fact, in 2022, the cryptocurrency Ethereum transitioned from POW to POS, reducing its energy consumption by nearly 100%.
The path towards green crypto is being eased by institutions like the Financial Stability Board, which is taking steps to provide frameworks for understanding, compliance and achievements of ESG goals and values.
Together, these elements could open the door to a future where conscious investors can take a chance on cryptocurrencies.
Jean Bessala, Lecturer in Finance, Salford Business School, University of Salford
This article is republished from The Conversation under a Creative Commons license. Read the original article.
