Crypto’s Complicated ESG Relationship

August 8, 2022
Regulators are increasingly turning their attention to the environmental damage caused by crypto-assets. VIXIO discusses these issues with the crypto industry, whom acknowledge many of these problems, but also note that things are beginning to change.

Regulators are increasingly turning their attention to the environmental damage caused by crypto-assets. VIXIO discusses these issues with the crypto industry, whom acknowledge many of these problems, but also note that things are beginning to change.

In January this year, the vice-chair of the European Securities and Markets Authority (ESMA) made headlines when he suggested there should be a bloc-wide ban on the main form of bitcoin mining.

Erik Thedéen, who also holds the role of director-general at Sweden’s Finansinspektionen, sounded the alarm over the rising proportion of renewable energy devoted to crypto mining, concerned about the negative impact it was having in Sweden and the reality of the EU realising the goals of the Paris agreement.

At the time, ESMA played down Thedéen’s statements, indicating that he had said them independently of the EU authority. However, other officials across the EU, including from central banks and the European Parliament, have also expressed concern. The latter, for example, recently raised a motion to ban proof of work crypto mining.

“With environmental activism growing and pressure on all industries to address these concerns, many people are looking at crypto and some of the climate problems it can cause, notably energy consumption,” pointed out Pavel Matveev, chief executive at Wirex.

Although the European Parliament eventually voted against the amendment, it showed how concerned many lawmakers are about the potential growth of an industry that could have negative consequences for the climate.

“Many participants in the industry acknowledge and understand that there is no point in being the technology of the future if you put the future at risk,” said Jonathan Wykes, UK and Europe chief at the crypto platform, CEX.IO.

Going forward, mining technology will largely be powered by renewable energy and the heat generated is repurposed to reduce energy waste, he predicted. “So the good news is that collectively the industry can become sustainable.”

Policymakers, corporations, and other entities around the world are right to take notice, he continued. “Action needs to be taken to lower the carbon footprint and pressure from governments is indeed needed to make a change. Investors need to consider the nuances of individual cryptocurrencies and weigh the pros and cons based on their sustainability goals.”

“As crypto enters its institutionalised era, we're seeing the growing importance of ESG mandates and environmental reporting requirements,” said Kirsteen Harrison, Environmental Sustainability Adviser at Zumo.

It should be expected that requirements like this will be formalised through regulation, Harrison pointed out, noting that the EU's provisionally agreed Markets in Crypto Assets (MiCA) framework is a prime example.

“That's a good thing if the rulemaking can be approached sensibly, it means the problem can't be neglected and there's a driving force for positive change. Not only that, but over time it provides the clarity in treatment that allows for institutional players to get involved.”

Harrison’s company, Zumo, caused headlines earlier this year when the Edinburgh-based crypto start-up suggested that the sector must target full decarbonisation by 2030.

She did, however, suggest that often, financial services and regulators can focus too much on bitcoin in the discussion regarding environmental issues. “We need a mindset shift on this issue. The industry is far more than Bitcoin.”

Sustainable blockchain projects are engineering innovative solutions to climate challenges, she told VIXIO. “Seen in the longer view, we're stubbornly optimistic that this industry can be a net positive in tackling the global climate crisis.”

“Bitcoin needs to be decarbonised, and fast, there's no question there,” Harrison pointed out. “But you have to see the opportunity as well to signal market demand for renewable power, to harness energy pockets others can't, to provide grid utility in a renewables-powered future that will call for a high degree of flexible load.”

Environmental concerns are predominantly focused on the amount of energy expended in mining crypto-assets.

“However, crypto comes in a wide variety of flavours,” pointed out Ryan Shea, a crypto economist at Trakx.

Bitcoin, for example, uses Proof-of-Work (PoW) mining as its decentralised consensus mechanism to validate transactions and create new tokens up to the 21 million supply cap.

Ethereum, the second largest cryptocurrency by market cap, uses the same method, but this will change to a much less energy-intensive Proof-of-Stake (PoS) protocol sometime in a matter of what could be weeks.

It is claimed that PoS is 99 percent more energy efficient than PoW.

Once Etherereum does make this transition, Shea estimated that only 40 percent of crypto-assets, measured by market cap, will be using the energy-intensive PoW protocol, of which the vast majority is bitcoin.

Given the decentralised nature of the Bitcoin network, there is no straightforward way to determine information on the environmental impact - which can ignite criticism as instead, it must be estimated.

“The method used is to attempt to identify the location of the bitcoin miners from their IP addresses and then combine that information with the carbon intensity of electricity generation at the given location,” Shea pointed out.

Using this method, he suggested that the best-guess estimate for the electricity mix for bitcoin is 60 percent fossil fuels with the remaining 40 percent coming from hydroelectric, nuclear and other renewables.

“This mix is very similar to electricity generation globally, and bitcoin is nothing special,” said Shea. “If anything, there is a bias towards greater use of renewables, which have tended to fall in price relative to fossil fuels, because bitcoin miners are extremely sensitive to the cost of electricity as it is their largest running cost.”

Harrison added that the industry may be an easy target.

“The transparency of crypto electricity consumption as the industry's almost sole input is a double-edged sword,” she said. “It makes the sector easy to decarbonise, but it also makes it an easy target for criticism.”

That can lead to apples and oranges comparisons, she said. “Yes, crypto's environmental impact can look significant in isolation, but as we know financed emissions of the traditional financial sector are orders of magnitude greater than the direct emissions of the finance sector itself.”

“We need to harness crypto's native advantages in showcasing what industry-wide decarbonisation can look like.”

And, Harrison continued, this decarbonisation, and transition to Net Zero, is a whole society cause.

“No one can go it alone. With that said, the Crypto Climate Accord, the crypto industry's own voluntary association on this issue, has put in place an ambitious 2030 net zero target and is working collectively to define standards, agree on reporting and tackle the problem at the source with ‘proof of green’ solutions that target the industry operators at the source of crypto electricity consumption.

“At a sector level, it's about getting the industry working together on where the biggest impact can be made and putting in place the intermediate targets that make sure we are keeping on track for that 2030 goal,” she said, discussing Zumo’s report.

“Of course, working with what is an inherently globally distributed and decentralised technology, it relies on active collaboration and shared incentive for effective change.”

Our premium content is available to users of our services.

To view articles, please Log-in to your account, or sign up today for full access:

Opt in to hear about webinars, events, industry and product news

To find out more about Vixio, contact us today
No items found.