Cryptocurrency popularity is at an all-time high despite the recent bear market that took place towards the end of 2021. However, Bitcoin, the most popular cryptocurrency worldwide, mining is not environmentally friendly due to its high energy consumption, so what can be done as the cryptocurrency hype is not going away anytime soon?
Manoj Mistry is the Managing Director of IBOS Association, with over 25 years of experience in the financial services market. He has worked across Europe, North America and APAC developing business strategies in regional financial institutions coverage, global custody product development and strategic relationship management.
Talking to The Fintech Times, Mistry explains how cryptocurrencies can be more environmentally friendly, following an analysis of different countries’ responses to digital currencies:
More than any other cryptocurrency, Bitcoin continues to dominate the headlines. A Google search for Bitcoin returns 4.7 billion results, while its current market share of the global crypto market cap ($1.7trillion) is 39 per cent.
But Bitcoin mining – the process by which new Bitcoins enter into circulation each year – requires a vast amount of electricity as miners use vast data centres filled with fast computers to solve complex puzzles.
In a world that is committed to combatting climate change by reducing CO2 emissions, as conformed by the recent COP21 summit, investors are understandably concerned with the environmental impact of investing in cryptocurrencies: they do not fit comfortably in their portfolios as environmental, social and governance (ESG) issues rise up the investment agenda. This is particularly true of Bitcoin. Last year, Elon Musk tweeted: ‘We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.’
Global Response to the Green Problem
To date, Bitcoin mining has largely been undertaken in countries that are heavily dependent on fossil fuels – most notably coal. Top of the list is China, the world’s largest consumer and producer of coal which fuels nearly 60 per cent of the country’s energy generation. Until recently, China led the way generating 75 per cent of newly mined Bitcoins before it banned all domestic crypto mining last June.
Other countries have since taken up the slack. In the second half of 2021, Kazakhstan, which also relies heavily on coal-fired power stations, became the world’s second biggest cryptocurrency mining country after the United States. According to data published by the Cambridge Centre for Alternative Finance, the US share of the global hash rate increased from 17 per cent to 35 per cent, while Kazakhstan rose 10 percentage points to 18 per cent.
So, is there a green solution to this energy problem? Some crypto players are taking active steps in order to try and create one. A group of 200 crypto entities recently teamed up with the Rocky Mountain Institute, an environmental lobby based in Colorado, to create a Crypto Climate Accord (CCA). The CCA’s summarises its aim: “We’re working collaboratively with the crypto and blockchain industry to accelerate the development of digital #ProofOfGreen solutions and set a new standard for other industries to follow. Inspired by the Paris Climate Agreement, the CCA is a private sector-led initiative for the entire crypto community focused on decarbonising the cryptocurrency and blockchain industry in record time. Together, we will #MakeCryptoGreen.”
In specific terms, the CCA aims to cut carbon emissions from electricity use to net-zero by 2030, which will be realised by carbon offsets and by switching all blockchain technology to renewable energy sources by 2025 and using energy tracking tools such as green hashtags. Last month, the CCA created a template on how to conduct environmental crypto audits that could reassure institutional investors with ESG concerns.
Proof-of-Work vs Proof-of-Stake
Regulators are also having their say. Erik Thedéen, vice-chair of the European Securities and Markets Authority, recently told the Financial Times that cryptocurrencies posed a risk to meeting climate change goals in the Paris agreement. He added that European regulators should consider banning proof-of-work (PoW) mining method and push the industry towards the less energy-intensive proof-of-stake (PoS) model to reduce energy consumption. “The solution is to ban proof of work,” said Thedéen. “Proof-of-stake has a significantly lower energy profile.”
Whereas PoS uses randomly selected miners in order to validate transactions, PoW uses a competitive validation method to confirm transactions and then add new blocks to the blockchain. Because it is deployed in most cryptocurrencies, PoW is well-tested and therefore widely trusted in terms of security. By contrast, the PoS algorithm creates a more scalable blockchain with higher transaction throughput. However, it is perceived as being somewhat less secure than the entirely decentralised PoW algorithm.
But PoS also offers a big green upside. According to Bloomberg, PoS advocates claim that, compared to PoW, it cuts power consumption by 99.95 per cent. Ethereum, second only to Bitcoin in total market cap and currently a PoW network, is moving away from PoW mining to PoW validators. To solve its scalability problems, its next big update, Ethereum 2.0, would convert it into a PoS network. Meanwhile, Cardano, which currently has the sixth-largest market crypto capitalisation, is the biggest entirely PoS cryptocurrency.
Irrespective of these technical developments, geo-political events sometimes upset the best-laid plans. Volatility can be as disruptive to ESG objectives as it is to crypto asset prices. Ukraine’s bid to become a big crypto player, supported by recent government moves to regulate the sector, has been upended by significant Russian aggression on its borders. Ironically, the recent Ukraine unrest has also helped to underpin a somewhat weaker crypto market in recent weeks.
The ESG impetus that now drives the global investment community will inevitably affect the future operation and structure of crypto entities. Beyond commitments to energy-saving solutions such as the CCA, increasing pressure from investors will make it very likely that those involved in all aspects of the crypto market are required to embrace green energy as a means of supporting their activities in the near to medium term.