The paradoxical role of crypto assets In pursuing ESG goals
While there has been increasing institutional interest in digital assets, such as Bitcoin, some hesitancy in adopting this new asset class remains. A significant contribution to this hesitancy stems from concerns about compatibility with ESG goals. This article takes a look at the seemingly paradoxical role crypto assets play in pursuing ESG goals.
An environmental impact not as bleak as you may think
Let’s rip off the band-aid. This point has been heavily debated in the past year, with some arguing that digital assets are fundamentally incompatible with environmental goals. There is no doubt that the Proof of Work (PoW) consensus mechanism consumes a considerable amount of electricity and generates vast amounts of e-waste. Bitcoin mining in particular is the best example of this problem. However, PoW is what makes Bitcoin so secure, which provides tremendous value regarding the S and G elements of the ESG goals, as will be discussed later.
As paradoxical as it may seem, PoW is in some ways supporting a shift to more environmentally sustainable infrastructure in the long term. Firstly, the constant demand for more efficient ASIC (Application Specific Integrated Circuit) mining chips has led to an incredible amount of innovation. ASIC chips are also used in artificial intelligence and machine learning. Efficiency gains in mining are translatable to other industries. Furthermore, Bitcoin is enabling a shift towards cleaner energy by making solar and wind energy economically feasible and creating a use for energy that would typically be wasted, such as overproduction and flare gas. Additionally, the possibility of on-chain carbon credits would bring a great amount of transparency and allow CO2 offsets to be directly integrated into the value chain, for example in machine-to-machine payments.
As it stands right now, we encourage institutions with exposure to CO2-intensive digital assets such as Bitcoin to calculate their footprint and offset accordingly. The paper “Bitcoin: CO2 Emissions From An Investor Perspective And How To Compensate Them”1 is a good starting point for such calculations.
A beacon of light for the social dimension of ESG
Social causes are where digital assets shine. The permissionless nature of public blockchains allows anyone with a smartphone and an internet connection to partake in a globally standardised financial system. This is important not just because more people worldwide own a smartphone than have access to a bank account, but for a variety of other reasons as well.
Digital currencies promote financial inclusion by allowing anyone to participate. They promote equal opportunities, as monetary policies are standardised depending on the digital asset, not depending on geographical borders. This can provide protection from inflation, particularly to those in lesser economically stable countries. A common practice in developing countries involves a family member moving abroad to work in high wage countries and sending a large portion of their salary home to support their family.
Such transfers are called remittances. Traditional payment facilitators charge a significant fee on remittances, with the total remittance market being valued at over $700Bn in 20202. That is billions of dollars each year being charged to some of society’s most vulnerable members. Digital assets, such as Bitcoin, enable direct international money transfers without middlemen or percentage fees. Crop production is the livelihood of many farmers in developing nations. Due to lacking infrastructure, insurance companies typically don’t offer crop insurance in these places, leaving farmers vulnerable to an increasingly volatile climate.
Etherisc takes a decentralised approach to insurance, allowing farmers to sign up via their smartphones and automating payouts based on Weather Satellite data. While this is just a single application, decentralised approaches promise to greatly reduce risk all across the developing world, improving investability and, by extension, economic development. Another significant challenge regarding socioeconomic development is the protection of land and property rights. According to the World Bank, only 30%3 of the global population has legally registered rights to their land and homes. This is problematic, as it may lead to the seizure of land, food insecurity, and generational livelihoods being wiped out. This isn’t so much a problem in the developed world, but in lesser developed countries, where populations are already most vulnerable, it is. Blockchain technology provides a technical foundation that can be used to build an accessible, incorruptible, and standardised system for recording and verifying land ownership.
Overall, traditional institutions such as banks, insurance providers, etc. have not been accessible to a majority of the world population. Rather than waiting for legacy infrastructure to reach these places, digital assets enable a decentralized approach that anyone can opt in to regardless of location, documentation, and physical access.
A benchmark for transparency in terms of governance
Governance, in the context of ESG goals, is centred around transparency, reliability, and fairness in the decision-making process. There is a significant overlap between these attributes, and what is offered by a decentralised public ledger. Digital currency protocols, like Bitcoin and Ethereum, are exceptional examples of fair and transparent governance.
Fundamentally, there is a democratic process influenced by contribution and community standing. It is fully open for anyone to join, audit or criticise. This form of decentralised governance is further becoming accessible by the use of Decentralised Autonomous Organisations (DAOs). DAOs are essentially a smart-contract structure consisting of a shared treasury and voting shares. They can be used for a practically limitless number of applications. Examples include collaborative businesses, sports clubs, political activism groups, and investment funds. DAOs are already very much a reality today, though in relatively primitive form.
In conclusion, the ESG goals and the ambitions of some of the main use cases of Blockchain technology are very much aligned, making the world more equitable, transparent, and fair. There is still work to be done on the environmental side of things, and there are concerns about blockchain being used for nefarious purposes. Nonetheless, we are optimistic about its overall contribution to our world.
Philipp Sandner, Head of the Frankfurt School Blockchain Center (FSBC)– the Frankfurt School of Finance & Management
Cedric Heidt, Research Associate – the Frankfurt School Blockchain Center (FSBC)
2Credit Suisse, January 2020. ‘Payments, Processors, & FinTech If Software Is Eating the World…Payments Is Taking a Bite’.
3Source: World Bank, March 2019.