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Article | 29 September 2022 | ESG
Are cryptocurrencies really damaging the environment?
Cryptocurrencies have not had the best environmental track record and it’s easy to understand why. The primary argument for crypto not being ESG-friendly stems from the processing power required to mine the cryptocurrency and complete transactions in it. When you compare how much electricity needed to mine a digital asset versus the electricity used by a reasonably large country each year, you start to get the idea. For instance, Bitcoin the world’s first and most recognised cryptocurrency, consumes more electricity in a year than Sweden. A huge carbon footprint which becomes understandable when you realise that about 1 billion people around the world will use cryptocurrencies in 2022.
Even Tesla’s CEO Elon Musk, whose tweets usually move the crypto market, suspended the automaker's acceptance of bitcoin for purchases last year due to concerns about the cryptocurrency's impact on the environment. But it is crypto’s second-biggest crypto currency. Ethereum that has been making most of the headlines recently, as this month it updated its technology known as ‘The Merge’ which will reduce its energy consumption by 99%. Before The Merge, Ethereum mining used up as much electricity as Switzerland, which is about 72 terawatt-hours a year.
Ethereum, previously ran on proof-of-work, where computers all around the world competed to solve puzzles so they could add a new block to the chain. That is very energy-inefficient because all the crypto miners compete to solve the puzzle at the same time, with only one winning; so all other energy is wasted. On the other hand, Ethereum has moved to a proof-of-stake approach which means that the network chooses a participant to make the next update based on the amount of the respective cryptocurrency that participant holds and how long they have held it, as well as an element of randomness. This move could represent 0.2% of the world’s electricity consumption disappearing overnight. And although other cryptocurrencies, including the biggest, Bitcoin, will remain as energy-intensive as before, the announcement has enthused environmentally conscious investors, as pressure grows on the crypto world to bolster its ESG credentials.
While we welcome any technology advances that can reduce a carbon footprint by 99%, we are still wary about cryptocurrency as an asset class. Not just because of the speculative frenzy that surrounds it. But mainly because for the most part crypto in all its forms just doesn’t face the same standards of consumer protection, disclosure, governance, safety and soundness that traditional assets do. It may be that, with some stricter standards, crypto assets could represent the digital asset of the future but first there are many hurdles to clear. Yes, it’s true digital assets are in the midst of a transformation and crypto’s role in finance is growing. But we think that it’s important to remember the technology is still new and we believe it’s not yet out of its ‘wild west’ boom and bust phase.