When one thinks of crypto, the most famous example that springs to mind is the cryptocurrency Bitcoin. In ESG terms, one commonly hears that bitcoin mining - the process of adding transaction records to Bitcoin's public ledger of past transactions or blockchain - uses more energy than a given entire country, for example Argentina and uses energy which is derived from coal. The proof of work consensus used by Bitcoin is particularly energy intensive. Other cryptocurrencies use different consensus mechanisms which are less energy intensive, for example proof of stake or even proof of authority. In addition to using a less energy-intensive consensus mechanism, other ways of reducing the impact of energy usage that are being adopted include offsetting greenhouse gas emissions and using renewable and clean energy sources.
Signatories to the Crypto Climate Accord (CCA)[1], inspired by the Paris Climate Agreement, are crypto market participants that make a public commitment to achieve net-zero emissions from electricity consumption associated with all of their respective crypto-related operations by 2030 and to report progress toward this net-zero emissions target using the best industry practices. CCA also counts UN FCCC Climate Champions amongst its supporters.
It is also worth recalling the distinction between cryptocurrency as an asset, and the distributed ledger technology (DLT – of which blockchain is but one example) by which transactions are recorded and assets transferred. DLT has a wide number of potential use cases in financial services that may be deployed in ways not relying on complex consensus mechanisms. It may be that the technology underlying cryptocurrency is ultimately more effective in achieving ESG outcomes.
Next up in our ESG in the balance series: S is for Social - is crypto only an investment trap for the unwary consumer, and a vehicle for financial crime, or can it facilitate positive societal benefits?