Does your cryptocurrency investment meet ESG criteria?
A few years ago, cryptocurrency was just a subject of fascination for tech geeks. However, today it has managed to generate huge interest among large institutional investors and companies like Tesla and Microsoft. And crypto exchanges like CoinSwitch Kuber have made crypto trading for the common man a transparent matter. Despite the popularity, the trip was rocky.
Periodic FUDs (Fear, Uncertainty, and Doubt) launched around the future of cryptocurrency have hampered progress. And the latest concern raised by countries like China (which recently banned cryptocurrency mining) concerns its ESG (environment, social and governance) impact. But are these concerns real? We will explain to you the real impact of cryptocurrency, mainly Bitcoin, on our environment and our society.
Bitcoin, uh, is it sustainable?
According to an estimate from the Cambridge Bitcoin Electricity Consumption Index, the annual energy consumption of Bitcoin miners in 2019 was close to that of a small country like the Netherlands. It is almost certain that you have come across this fact on the internet as a Bitcoin review. But that doesn’t paint the full picture.
Yes, bitcoin consumes a fair amount of energy. However, what is not said is that bitcoin is as green as its energy source. Just like electric vehicles, bitcoin can also be mined using 100% non-fossil energy. A recent study by the Bitcoin Mining Council shows that 56% of the energy used in global bitcoin mining comes from renewable sources.
In addition, for a technology that is at the forefront of revolutionizing the entire global financial system, energy is well spent. According to Cathie Wood, CEO of Ark Invest, “Bitcoin is much more environmentally friendly than the traditional gold mining or financial services industry it seeks to replace.”
Additionally, Bitcoin is helping solve a major problem in the energy industry – the seasonal overproduction of renewable energy that goes unused due to storage issues. Mining operations, unlike traditional consumers, are mobile and can be relocated to the source of power generation. For example, the abundant solar and wind power produced in Texas makes it an ideal destination for miners.
While shocking, Bitcoin can also help reduce emissions by absorbing 400 metric tons of carbon dioxide produced each year during oil extraction. Dry natural gas, an unwanted byproduct of oil production hitherto burnt on site, is consumed by bitcoin mining farms located next to oil factories. Recognizing the potential, the governor of the state of Wyoming recently signed a bill exempting the use of natural gas flares for cryptocurrency mining from taxation.
And of course, there is little talk of ‘proof of stake’ cryptocurrencies that are not based on a power hungry mining process. Cardano (ADA), Ripple (XRP), Nano (NANO) and Solana (SOL), among others, are greener alternatives to Bitcoin.
Social and governance consequences of cryptocurrency
Much of Bitcoin’s ESG concerns in the mainstream media have been overshadowed by its environmental impact. However, there are two other important components – Social and Governance – which are often overlooked.
The decentralized nature of cryptocurrencies which does not require a single authority to oversee transactions is fundamental to the socio-economic changes brought about. Global transactions between people no longer require interference from governments or financial institutions.
Freeing people from intermediaries in transactions eliminates the burden of commissions, transaction costs and other hidden charges. As former RBI Governor Raghuram Rajan noted, cross-border payments or remittances are a key area where cryptocurrencies can play a definite role.
Cryptocurrency also helps solve the problem of banking the unbanked. Traditional financial services such as borrowing, money transfers, remittances and grant transfers have remained inaccessible to more than 1.7 billion unbanked people around the world, as the UN reports. Today, anyone with a cell phone and an internet connection can send and receive money using cryptocurrencies such as Bitcoin, Litecoin, and Ripple.
Perhaps Bitcoin’s biggest contribution to the world comes from its borderless, permissionless, seizure-free, and censorship-resistant features. For people under authoritarian regimes, Bitcoin has served as a financial tool that can gain them freedom. And in the face of monetary difficulties due to a poorly managed economy, as seen in Maduro’s Venezuela where annual inflation rates have reached 6500%, Bitcoin acts as a way to preserve people’s lifelong savings.
Is Bitcoin for Criminals and Money Launderers?
An article on governance and cryptocurrency cannot be complete without answering the most common question – Bitcoin is used for illegal activities and therefore is bad.
According to Elliptic, a blockchain analytics company, illicit activity (e.g. dark markets, ransomware, frauds) accounted for less than 1% of all bitcoin transactions. The transparent nature of Bitcoin allows the traceability of all transactions, including illegal activity.
Bitcoin, like the internet, is neutral with valuable properties for both good and bad players. However, as technology evolves and adoption increases, the share of illicit transactions will become negligible. And in any case, the volume of illicit activity via traditional financial services does not match the minute proportions of blockchain.
Whether or not cryptocurrency is an ESG-compliant investment is a well-settled question. According to Chainalysis, global cryptocurrency adoption has increased by 2,300% since the third quarter of 2019, with emerging countries like India and Vietnam leading the way. CoinSwitch Kuber, India’s largest crypto exchange, alone is home to over 1 crore of registered users in the country.
Cryptocurrency is a once in a lifetime investment opportunity based on breakthrough technology, and looking away because of half-truths is like missing the forest for the trees.
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