Two sides of the same coin? – Cryptocurrency’s complicated relationship with ESG

On 31st October this year, Bitcoin turned 13 years old, and the question to be asked is whether crypto is an ESG Halloween terror or a solution to an age-old horror movie conundrum. Crypto has surged in recent years, with investors looking for a faster, more secure, transaction method. The big question for ESG investors is how much electricity is this ‘mining’ consuming? Crypto companies that have streamlined their transaction process can make substantial commissions from payments, acting as the new age Mastercard or Visa. A market made of individuals with very little knowledge of crypto, akin to the lack of knowledge behind credit card technology, make up 40% of transactions. A survey using data from 750 investors conducted by Cardify found that only 16.9% of investors who have bought crypto ‘fully understand’ the currency, while 33.5% have zero knowledge. This data suggests that crypto transactions are becoming more popular amongst the wider population, as the barriers to entry are decreasing.

Regarding the environmental viability of crypto, the primary issue is the sustainability of supporting a global community of miners. By estimates from the Cambridge Bitcoin Electricity Consumption Index, the annual power consumption of Bitcoin miners in 2019 was akin to that of the Netherlands. However, this does not take into account the sources of this electricity. According to estimates from the Bitcoin Mining Council, around 56% of the energy used for mining comes from renewable sources. This is a good start, but it does not alleviate the 44% produced by non-renewables.

However, Bitcoin mining has aided some renewable energy producers, providing an outlet for surplus electricity that cannot be stored during times of low demand. The portable nature of mines allows them to be transported to the location at which energy is produced, thus limiting unnecessary costs associated with energy distribution. According to Cathie Wood, CEO of Ark Invest, a disruptive investment management firm, ‘Bitcoin is much more environmentally friendly than the traditional gold mining or financial services sector it seeks to replace.’ Mining can reduce waste emissions; in Texas, 400 metric tons of unutilised carbon dioxide emissions are consumed by crypto mining annually. Natural gas, an undesired by-product of oil production is consumed by mining plants set up along the sides of the oil fields. Mining is changing the Texan landscape, using up previously wasted, useable fuel. Recognizing this potential, the governor of Wyoming has exempted this process from taxation.

When investigating the ESG evaluation of crypto, it is easy to be blinded by the environmental debate, yet often little is said regarding the social and governance aspects. The decentralized nature of cryptos, requiring little to no authority to oversee transactions, is fundamental to the social changes that are brought forth. Transactions no longer need governments or institutions to oversee them. Bitcoin or other currencies such as Ethereum do not operate as fiat currencies. Crypto can also address issues regarding barriers to entry in the financial world. Arguably, crypto is offered as a new bank for the financially illiterate, as only a phone signal is necessary to make a transfer. For people under authoritarian regimes, bitcoin offers a way to protect wealth in the form of a decentralized currency, with no chance for government-induced inflation. This can be best demonstrated through Petromoneda, a crypto launched by the Venezuelan government in 2018 at a time of high inflation and is now a mandatory payment method for government services. It allows Venezuelans to circumvent US sanctions and access international financing.

It is also important to mention the issue of using crypto for illicit activities, an obvious hindrance to any stock’s ESG valuation. The blockchain analytics firm, Elliptic, estimates that only 1% of transactions made through crypto are illicit, a similar rate to that of illegal cash transactions. Statistics such as this discredit the fear of a network of criminals running the blockchain network, the flexibility of crypto allows for more room for evolution than regular currency.

Much of Western media portrays environmental destruction and energy consumption as the last word on crypto’s ESG valuation. However, it is very easy for those holding a relatively stable currency to ignore the obvious benefit that a decentralized, power-to-people currency can have on worldwide transactions. Energy use may be an issue, as is the case with most sectors, however, the ‘S’ and ‘G’ values of crypto, the key to real return, must be given some credit when considering an overall ESG evaluation.

By Louis Christie

Sector Head: Philipp Jiang

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