Cryptocurrencies, since launched, have faced an acute attention of retail investors and till date, continue to enjoy such benefits.
In just past year, Indian investments have grown from $200 million to a staggering $40 billion in cryptocurrencies.
But a recent barrier that comes to investments in crypto, lies in great inclination of the global market investors towards fulfilling their Environmental, Social and Governance (ESG) parameters.
This happens because with advent of climate change, there is greater customer inclination observed towards emissions concerns and sustainability practices followed by the companies.
In addition to the above, with countries’ leaders driving the energy transition, private as well as public investments too have faced a bigger transition.
Stability is one thing in mind while investing and the renewables have rather seen constant support, be it in pandemic or otherwise.
A recent study has pointed out how cryptocurrencies may be creeping into various investment portfolios related to the institutional investors, that too without their notice.
This can possibly happen if the crypto-related companies or the ones investing in it, are included into the securities being tracked by these investors.
The authors of the study explained: “Regardless of whether a cryptocurrency-exposed company passively monitors or actively engages in the governance of cryptocurrencies, understanding how it approaches the intersection of its strategic plan and the long-term development of cryptocurrencies may help investors make more informed risk decisions”.
Why the risk is concerning to all?
Of all the ESG risks arising out of possible cryptocurrencies’ usage, emissions, electronic waste and the requirement of proof-of-work to generate tokens, have turned to be the highest in question, such as bitcoin, requiring the most energy usage.
Other possible risks include cybersecurity, money laundering and even the financial risks associated with cryptocurrencies themselves.
On similar lines, the countries like China have recently opted to ban cryptocurrency mining based on its ESG (Environmental, Social, and Governance) impact.
We ask: are cryptocurrencies sustainable?
Although the World Economic Forum has told that most (78%) of the electricity used for operating on cryptos come from the renewable sources, there has always been a debate whether the conventional international financial systems or the cryptocurrencies depend on more energy intake.
Another study by Bitcoin Mining Council has calculated the amount of green energy for sourcing crypto related operations to be 56%.
While others like the Cambridge Bitcoin Electricity Consumption Index have claimed the power consumption through Bitcoin mining alone in 2019 to be enough for powering a small country like the Netherlands.
But one is sure that while countries try harder to push themselves towards their emission goals, cryptos and blockchain technology can surely help out. For example, Tata Steel is partnering with HSBC to drive their contracts worldwide using blockchain.
It is even claimed that cryptocurrencies eat up the excess renewable energy being produced in different operations and parts of the world.
While oil extraction, it can aim for annual reduction of emissions by absorbing 400 metric tons of carbon dioxide and the dry natural gas, an undesired gift by oil production as a by-product is utilized by bitcoin miners efficiently.
A CEO of an investment firm explains: “Bitcoin is much more environmentally friendly than the traditional gold mining or financial services sector it seeks to replace.”
Cryptocurrencies: the liberator of society and economy?
Since the cryptocurrencies are rather managed in distribution, no single financial authority commands absolute control over it. Therefore, global transactions no longer require their permission to be achieved.
An investment firm’s founder explains: “Capitalism is about building everybody up, so our version of ESG is focused on finding investments that are not just good for investors or the CEOs, but also focus on the employees and the greater community”.
“The other side of cryptocurrencies is their social impact, where many proponents argue that it provides access to financial resources for the underserved. I think that’s way overstated.”
Society, at large has been liberated to operate freely. No need of middlemen to meddle through or even no need for illegal transaction needs.
As former RBI Governor Raghuram Rajan once duly noted, ‘cross-border payments or remittances’ can be easily accustomed using cryptocurrencies.
However, an expert asks: “Have we removed the trusted third party, or have we just moved them to the side?”, considering the transactions still depend on the development teams updating the codes.
It was quite visible in the Pandemic, how a few of our fellow citizens faced issues with direct benefit transfer, so e-RUPI (no internet required) came to rescue. Cryptocurrencies can even serve the purpose, with only a mobile and internet connection at hand.
It has, therefore, served the problem of people who remain unbanked and deal with a lot just to make efficient transactions although the knowledge about cryptos remain bleak.
All this seems surprising yet it is true.
However, not only for good, Bitcoins and others of its kinds, can also be used by criminal entities.
As per common understanding, for evading the government policing but as per a relevant study, only less than 1% of all the bitcoin transactions could be linked to illegal activity. This is due to its transparent operational attributes.
“So there is still a third party that you have to trust. That could be a problem. Are we just going from a trusted third-party intermediary that can be easily identified to one that we can’t identify?”
Whether the cryptocurrencies qualify the standards required under ESG or they simply come with varying ESG risks, still remains in doubt. We can ascertain with investments in cryptos rising, not exploiting the very resource available at hand, is an opportunity lost.