The environmental challenges of blockchain

07/06/2022

Blockchain, the technology that gave rise to cryptocurrency, is often seen as one of the greatest innovations of the 21st century.

Some experts herald it as the Internet of Value because of its new distributed concept. Most cryptocurrencies are produced by a so-called mining system, a protocol for validating transactions by solving mathematical problems. The "miners", who lend their computing power, are increasingly attracting public scrutiny for their ballooning electricity consumption and carbon footprint. However, the technological developments in the works suggest that this problem could be resolved in the years to come.

Electricity consumption and carbon footprint: devastating and demonised

The main challenge blockchain currently faces is its environmental impact. This challenge was highlighted by a survey of the Luxembourg market conducted in the fourth quarter of 2021 by LHoFT and PWC with the participation of ALFI.

This survey reveals that 31%1 of respondents consider ESG to be the number one issue. In a world where climate change is a top priority, one of the protocols used, POW (Proof Of Work), is strongly criticised because it is a glutton for energy. This criticism comes in the wake of many (sometimes contradictory) studies and analyses of electrical consumption related to blockchain activity. If Bitcoin were a country, it would rank as the 26th largest consumer of electricity2. It is acknowledged that POW, which underpins the capitalisation of 65% of cryptocurrencies, is a major consumer of energy. The Cambridge Bitcoin Electricity Consumption Index3, which provides quantified data about the crypto network, reveals that Bitcoin’s energy consumption over a rolling year is estimated at 133 terawatt hours. In addition to the energy consumed, its carbon emissions are also denounced because mining devices often have short lifespans (less than 1.5 years) and are hardly recycled.

Putting the information in context

Compared to other business sectors4, Bitcoin’s electricity consumption is still lower than that of the financial industry, for example. Data centres are also among the most energy-intensive activities. For cryptocurrencies, non-POW protocols such as POS (Proof Of Stake) consume up to 99% less energy. Ether, the second-biggest cryptocurrency in terms of capitalisation, has begun its migration to the POS protocol. Also, we should point out that almost 70%5 of the energy currently used to power the cryptocurrency industry is renewable. Finally, some projects have been designed to use the heat generated by mining machines to heat schools, swimming pools and hospitals6.

Regulatory debates

Blockchain electricity consumption is also on the agenda of the main regulatory authorities and market infrastructures. MiCA (Markets in Crypto Assets), the European regulatory framework for crypto-assets, has long debated restrictions on these energyintensive protocols. Parliament finally voted on 15 March not to ban the use of the POW protocol. At the same time, some market infrastructures planned ahead and asked to add environmental considerations. For example, in preparing to admit three security tokens to the Securities Official List (SOL) of the Luxembourg Stock Exchange, Societe Generale incorporated these elements into its documentation. This consideration is not limited to regulators and existing infrastructures. The cryptosphere is well aware of the challenge it must tackle; as such, it has issued a charter that targets carbon neutrality for the sector by 2040.

Crypto and blockchain: a positive social impact

Although bitterly criticised for environmental reasons, the social aspect of cryptocurrency is a different matter entirely. In a world where more than a billion people do not have bank accounts, cryptocurrencies can be a solution to draw them to payment circuits. Because the transactions are automated and low-cost, they are contributing to micro-finance. The only requirement is a smartphone with an internet connection. In addition to cryptocurrency, the underlying Blockchain technology has traceability and transparency features that make it possible to develop interesting use cases. Land registries are a prominent example. According to the World Bank, 70%7 of the world’s population does not hold legally registered land. As a result, there have been a multitude of initiatives to address this shortcoming, particularly under the leadership of the United Nations Development Programme.

Not to mention governance

Governance is also a vital topic in emerging technologies. Traditionally, corporate governance is centralised with identified roles and responsibilities. The concept is completely different in the context of cryptocurrencies, given their "distributed" nature. Decisions here are taken by communities and, depending on the method, through votes and in a transparent manner. The votes are stored in so-called smart contracts, which make them tamper-proof and transparent. These decentralised organisations are likely to grow in the years to come, as DLT/crypto projects are launched. The issue of regulation will definitely be raised one day, particularly in terms of responsibility. Cryptocurrencies and the underlying blockchain technology are a wonderful invention, a source of innovation and the impetus to develop ambitious, ground-breaking projects. The energy consumed to bring it to life is a real challenge in a world where global warming is everyone’s business. The development of new protocols could thus enable the technology to achieve its potential in the coming years, and to enable the whole world to benefit from it.

Laurent Marochini, Head of Innovation, Societe Generale Securities Services Luxembourg

1Crypto-Assets Management Survey - lhoft.com/en/ crypto-asset-management-report/
2climate.selectra. com/fr/empreinte-carbone/bitcoin (in French only)
3https:// ccaf.io/cbeci/index
4www.nasdaq.com/articles/acomparison-of-bitcoins-environmental-impact-with-that-of-goldand-banking-2021-05-04
5www.lemonde.fr/pixels/ article/2021/06/13/les-cryptomonnaies-encore-tres-energivoresa-la-recherche-d-un-avenir-plus-vert_6083959_4408996.html (in French only)
6www.journaldunet.com/economie/ finance/1505665-le-bitcoin-va-t-il-sauver-la-planete/ (in French only)
7World Bank Group IEG: ieg.worldbankgroup.org blog/why-land-administration-matters-development

Banner EIS