Certain cryptocurrency assets, like Bitcoin, have a considerable ecological footprint, with an estimated annualized energy consumption equivalent to that of mid-sized countries. This enormous carbon footprint is mainly due to underlying blockchain technologies that demand immense computational horsepower.
As companies increase their exposure to crypto (through support for cryptocurrency transactions, customers who hold crypto assets, metaverse marketing and operations, etc.), it can lead to elevated risk. What is the impact of cryptocurrency on the environment, and is there a responsible approach to mining? Read on.
Cryptocurrency and the Environment
Cryptocurrency is a digital version of government-issued currencies that are protected from fraud or theft by cryptography and compiled using blockchain technology. This generates an infinite number of digital journals or records on dispersed computers. It will:
- Let businesses purchase and sell products without involving a financial institution or payment processor, intermediaries that generally impose additional fees for international transactions. By creating irreversible transactions, cryptocurrencies can help mitigate the dangers of chargeback fraud.
- Assist a business with collecting new funds and enhancing its financial liquidity. A business could potentially receive a loaned cryptocurrency without the restrictions which come into play when borrowing fiat currency from a traditional financial institution.
- Bring in new customers. Every business accepts conventional currency, but not all companies accept cryptocurrencies. This distinction has the power to attract new consumers and demographic groups, which an enterprise can’t reach with only fiat currency.
However, industry experts are worried that Bitcoin and other cryptocurrencies could create an environmental risk. In order to verify transactions, their blockchain networks require machines from around the world to solve intricate equations. This practice, known as mining, is highly lucrative because those who engage in it get compensated with Bitcoins.
All these mining-related equation-solving computations consume a substantial quantity of energy. Bitcoin already consumes more electrical power annually (149.63 terawatt-hours) than nations like Malaysia and Sweden. Cambridge Bitcoin Electricity Consumption Index.
How Does this Contribute to Climate Change?
It is difficult to ascertain precisely how much of this electricity is generated through the combustion of fossil fuels such as gas and coal and its emissions that exacerbate global warming. However, given that almost two-thirds of the world’s electricity is generated by fossil fuel-powered infrastructure, it is not difficult to fathom how certain cryptocurrencies will, obviously, only worsen our climate change challenges.
In 2018, Nature Climate published a study that stated that Bitcoin’s growth might produce enough emissions to push up worldwide temperatures by 3.6 degrees Fahrenheit (2 degrees Celsius) by 2033.
These effects have not gone unnoticed by regulatory authorities, and businesses need to take note. In June of 2020, New York authorities refused air permits to the Bitcoin mining venture Greenidge Generation. Authorities cited “substantial greenhouse gas (GHG) emissions connected with the project” as their justification for denial.
In some cases, cryptocurrency miners can resort to illegitimate means to avoid the high costs of energy consumption, even as it causes a large carbon footprint.
In Colorado, a federal investigation unearthed crypto mining operations propelled by natural gas wells running on public-lease properties, siphoning off energy before it entered the electrical grid and transforming it to cryptocurrency without paying royalties. Typically, generators and other associated machinery are mounted on trailers, allowing the entire operation to be quickly relocated to prevent inspection.
Therefore, businesses with cryptocurrency exposure have to be mindful of the ethics around crypto mining and weave it into their Environmental, Social, and Governance (ESG) roadmap.
Is it Possible to Reverse the Trend?
Large-scale cryptocurrency generators frequently operate in regions where energy is plentiful, trustworthy, and inexpensive. However, the processing of cryptocurrency transactions and the generation of new currencies need not be energy-intensive.
Proof-of-stake (PoS) is a substitute for proof-of-work (PoW) for authenticating transactions in cryptocurrency and creating new cryptocurrencies that do not require extensive computing capacity. The permission to verify transactions is granted with respect to the total amount of cryptocurrency you “stake” or commit not to sell, instead of burning energy to perform calculations.
Other validation techniques, like proof of history, proof of elapsed time, proof of combustion, and proof of capacity, are also being explored. The developers of Ethereum have retired the proof-of-work mechanism of the blockchain, which could facilitate a 99.9% drop in greenhouse gas emissions.
Switching to renewable energy to power computations, rather than fossil fuels, is another option.
Fred Thiel, the chief executive officer of the cryptocurrency mining firm Marathon Digital Holdings, announced his intent to make the company carbon-neutral. According to the Cambridge Index website, renewable energy sources like solar and wind already generate sufficient energy to run the entire network of Bitcoins nine times over.
Businesses have to also stand their ground and push for change – to ensure a more sustainable and environmentally favorable cryptocurrency production line. Elon Musk, for instance, announced in May 2021 that Tesla would no longer accept Bitcoin until he was sure that it could be generated sustainably.
Ultimately, businesses will need to decide if investment in specific crypto-assets meets their environmental, social, and governance (ESG) goals. Financial institutions will have to incorporate crypto-assets’ climate-related financial risk factors into their climate strategy.
A significant number of global banks, spanning 40% of the world’s banking assets, have voluntarily pledged towards attaining net zero emissions in their investment and lending portfolios by 2050, with interim goals set for 2030. Environmentally responsible crypto mining is an essential stepping stone for this target.
Armed with this information, businesses can make better decisions about their blockchain assets and crypto investments, and ethically benefit from crypto and blockchain development.