Following the collapse of US-based crypto exchange platform FTX, the future and stability of crypto has come into question once again. Jeetu Kataria, CEO of DIFX, a global cross-asset exchange, argues that the real value of cryptocurrencies lies in its financial and social inclusion
Following its debut as a new asset class, crypto seems to have quickly gotten a bad rap because of its negative impact on the environment. Out of all cryptocurrencies, the main culprit is Bitcoin. The world’s most popular cryptocurrency is believed to consume more electricity in a year than Kazakhstan, the Philippines and Finland, according to the Cambridge Bitcoin Electricity Consumption Index.
Even though environmental or energy crises are typically the reasons to raise flags on Bitcoin’s energy consumption, Environmental, Social, and Governance (ESG) investing is another concept that looks deeply into the matter. ESG investing gauges each investment based on three main criteria, and Bitcoin, may come a little short on the Environmental side.
While crypto is still predominantly problematic from an environmental standpoint, we must weigh its positive ESG impact too. Perhaps crypto isn’t sustainable, however, it surely contributes to the social aspect and communities it operates in—an important factor in ESG. The most fundamental example is crypto’s ability to enhance financial inclusion for people globally.
Crypto is en route to becoming greener
The enormous energy consumption is a result of Bitcoin’s mining process, which is carried out through millions of powerful computers plugged into the blockchain. Bitcoin uses a model known as Proof-of-Work (PoW), which is not the most environmentally friendly way to run a cryptocurrency on a blockchain.
For a long while, the second most popular blockchain Ethereum also ran on the PoW model. In a bid to become more sustainable, Ethereumrecently shifted to a model known as Proof-of-Stake (PoS). The transition has been dubbed “The Merge” which helped the Ethereum blockchain become much more efficient by reducing energy usage by up to 99.5 per cent.
Specialists concede that the Ethereum Merge is a great step towards a greener crypto future, and we have already started witnessing the positive feedback and ensuing changes across the ecosystem. For example, the Merge has prompted Green Crypto Research, the world's first sustainability rating for cryptocurrencies, to revise Ethereum’s ESG rating from C to B.
Stressing the S in ESG
For a technology that is still in its infancy stage in terms of adoption and growth, the debate of whether investments in digital assets are ESG-compliant is a rather flawed approach to the sector’s business model. While we expect to see further efforts to reduce the environmental impact of crypto, we must consider the social purpose of crypto’s energy consumption in serving communities, creating limitless, borderless, and decentralised banking alternatives for everyone.
Such societal aspects of crypto are worthwhile and can help shape the future of the 1.7 billion unbanked people across the world as per the World Bank. The positive social impact of crypto must be an integral part of the ESG narrative. Many of us are slowly but surely starting to believe in the legitimacy of this holistic approach as opposed to that centred around the environmental footprint alone. In fact, the positive social impact of crypto is a counter force that offsets—if not outweighs—the negative environmental impact of digital currency.
Contrary to common knowledge, ESG is in fact being considered in a serious manner within the crypto industry. Many crypto miners and companies are using renewable energy such as solar and wind power to facilitate their operations. Blockchain and web3 companies are striving to improve their operations through hybrid energy models.
Similar to any emerging sector, there will be obstacles lying ahead. What is important to keep in mind is that crypto and blockchain can certainly lead us to a far greener world. We must engage in a more objective dialogue about the intersection of crypto and energy, encouraging companies and individuals to accelerate the transition to clean energy sources while also providing them with the means to do so.
The automotive industry represents a good example of how car manufacturers could have come together several decades ago to set and follow certain emission standards. This would have helped sustain a healthier planet, cultivate a culture of innovation early on, and avert billions of dollars in cost as a result of imposing those standards eventually. The blockchain industry is now at a similar inflection point. The question is: will we be wiser than some of the world-changing industries that preceded our times?