Cryptocurrency and Environmental, Social and Governance Criteria
Is it possible for Blockchain and Distributed Ledger Technology to align with ESG principles?
Cryptocurrency mining, as it is already widely known, consumes a large amount of energy, as does Distributed Ledger Technology (DLT), whose technology promises transparency and efficiency as well as accessibility to financial products.
But energy consumption, as we mentioned in a previous article, is only one part of the Environmental, Social and Governance (ESG). Other sub-issues around ESG will be discussed below.
Cryptocurrencies are based on blockchain technology, which first appeared with Bitcoin in 2009. Since then, the cryptocurrency industry has skyrocketed, numbering thousands of cryptocurrencies and valuing the market at around 2 trillion dollars. 50% of the market cap is made up of Bitcoin. Over time and as the market continues to grow and expand, the public and regulators have focused on how much and how this market affects the wider communities. It is important to mention that the industry has made significant progress in establishing itself as a legitimate and potentially world-changing space.
What is ESG? The ESG is derived from the initials of the words environmental, social and governance criteria. ESGs are standards that a company must meet for its activities, which have been used by investors either to control potential investments that have a detrimental effect or to modify the criteria for making new investments. More specifically, environmental criteria examine the way in which a company operates, such as the use of energy and the pollution of a company. Social criteria mean how it manages relationships with employees, suppliers, customers and the communities in which it operates. Finally, the governance criteria examine how transparent a company is, what is the leadership of each company, the composition of the board of directors, the remuneration of the executives, the internal and external audits as well as the rights of the shareholders.
But what is the relationship between ESG and Crypto?
The ESG criteria are a set of standards for a cryptocurrency, used by socially conscious investors to control potential investments. However, companies and investors have not yet fully linked ESG to cryptocurrencies.
As is already known, there is a strong environmental impact of cryptocurrency mining, this concerns both the general public and the institutions. Bitcoin (BTC) and Ethereum (ETH) have seen significant increases in price, as well as in users, especially in recent years. But it is important to mention that there are strong doubts about the consequences of the widespread adoption of cryptocurrencies. Many have expressed strong confrontations (mainly sceptics and environmentalists) on dirty energy consumption, which if continued at the same rate can cause constantly increasing carbon emissions and as a result intense and rapid climate change.
The environmental impact of cryptocurrency mining, and more specifically of Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy, due to the computations (computing power) needed for mining, consumes as much electricity as whole countries together.
- It is important to note that not all cryptocurrencies have a significant environmental impact. Many of them do not use mining at all.
Usually, those who refer to the energy use of cryptocurrencies do not take into account the many other cryptocurrencies that exist, they pay attention and emphasis to Bitcoin. Bitcoin accounts for about 70% (in 2020) of the total power of top cryptocurrencies.
- According to the University of Cambridge, Bitcoin consumes 104.96 Terawatt-hours (last updated: 7 Oct 2021) of electricity each year.
Recently, environmentalists have expressed another major concern. What is this concern? Everything shows that bitcoin mining tends to become more and more demanding.
The amount of greenhouse gas emissions from bitcoin mining depends on the energy source. More specifically, if the produced energy comes from fossil fuel such as coal then it means the release of carbon dioxide produced by the process into the environment and contributes significantly to climate change. The exact opposite happens if the energy comes from clean energy sources, such as wind, solar or hydroelectric energy.
Finally, it is important to note that the European Union has recently adopted a Sustainable Financial Reporting Regulation (SDFR), which requires products to be classified in specific and environmentally friendly ways.
- Products that support the ESG objectives in a binding manner.
- Products that invest heavily in sustainable or other ESG initiatives.
- Products that do not fall into any category.
The “S” is at the heart of the promise of decentralized financing for financial inclusion.
Cryptocurrencies were created to be decentralized and to facilitate actions that traditional currencies and investments could not. The blockchain is responsible for the validation of transactions, thus replacing government oversight and giving access to financial and banking services for millions of people. In effect, removing intermediaries could eliminate the financial rent associated with certain activities, reduce transaction costs.
Blockchain can provide a transparent, reliable and traceable transaction log. The main key feature is the resistance to frauds. This would be particularly useful in areas with an increased rate of corruption. It is important to make it clear that Transparency and Traceability are supported by the protocols and codes that support applications and digital assets.
In recent years, due to the rise of cryptocurrencies, there has been a steady increase in companies targeting and relying on the field of cryptography. Institutionalists are taking steps to enter and get involved in this competition. Everything shows that the governance of cryptocurrency companies is already in focus.
Cryptocurrencies are considered legal in most parts of the European Union (EU), but cryptocurrency exchange regulations depend on the individual Member States. Taxes also vary from country to country within the EU with a range between 0% and 50%. The court of the European Union 6 years ago ruled that exchanges of traditional currencies in cryptocurrencies, and vice versa, are considered services, which should be exempted from VAT. Thus the regulations on cryptocurrency exchanges may differ depending on the Member State and compliance with the European Central Bank (ECB), the European Banking Authority (EBA), the European Commission (EC), etc..
There is no doubt that this technology has the potential in many cases to help companies and governments to succeed in a better way towards their goals.
As we already understand, the criteria for the Environment, Society and Governance (ESG) are a set of standards for cryptocurrencies, which are used by socially conscious investors in order to control potential investments. More specifically, environmental criteria (which have been of particular concern to public opinion recently) take into account the sustainability and the carbon footprint of a consensus model of a protocol, which, however, is taken seriously by many potential investors, but also already invested in them.