Bitcoin & The 'E' in 'ESG': Much Ado About Nothing?
There is no ‘e’ in Bitcoin. Admittedly there are a few in cryptocurrencies, but for the purpose of this article we shall refer to them as ‘cryptos’. Ethereum does not quite present us with the same problem. But at a comparably modest price of $1,426, the market does not seem to consider it as exciting a proposition as Bitcoin. Yet the dominance of Bitcoin in everyday business-conversation is perhaps rivaled only by climate change concerns and other ESG-related factors. This article will briefly examine the extent to which this should justify a pivot away from Bitcoin to other more environmentally friendly cryptos.
Bitcoin operates through a proof-of-work that depends on the entire network of computers working to verify each transaction that occurs. Verified transactions are recorded on a block, and every ten minutes a new set of transactions is effectively recorded on a new block. This new block linearly connects though a chain to the preceding blocks. The entire affair is structured as a competition, in which the victor is the computer that verifies each transaction (subject to this subsequently being verified by other computers on the network). The lucky computer is awarded 12.5 Bitcoin (a number which halves every 4 years), and the competition recommences. But not for all. The number of Bitcoin transactions has skyrocketed as its price has increased. This of course means more transactions are waiting to be processed at any single point in time. Yet the size of each Block is fixed at 1 megabyte, and the average block creation time is 10 minutes. The average backlog of Bitcoin transactions for each round (as measured by the number of transactions in the mempool) has increased alongside the price: on October 2 2020, there were 34.267 million transactions in the mempool. On March 4 there were 85.004 million transactions. This raises an important issue: if the vision for Bitcoin is for a more decentralized system in which the absence of dominant intermediaries facilitates binary transactions, the present settings are ill-suited to ensuring both the certainty and efficiency of transactions on the one hand, and widespread use on the other. This is the first sustainability problem.
The second sustainability problem relates to Bitcoin’s supposedly negative environmental impact. The evidence surrounding this remains contested. It seems that any strong position taken on this issue is immediately subject to relentless (and not always convincing) ‘debunking’. Although a study of this issue lies beyond the scope of this article, it is worth outlining the arguments. Many climate activists point to the abundance of mining facilities in Inner-Mongolia, Xinjiang, Khazakhstan, Georgia and Western Australia. In all of these regions, coal and natural gas are the main sources of energy. A 2018 study by researchers at the Technical University of Munich estimates that Bitcoin industry’s annual carbon emissions was 22 megatons.
Opponents of this view are quick to point out what they perceive to be a lack of granularity in the evidence. They emphasize that several miners have set up operations in areas like the Sichuan province of China, which they claim has an abundance of cheap hydropower. They also point to the several facilities that have been set up in Iceland and Canada, where the population is sparse, the energy is green and abundant, and the climate cool enough to prevent computers from overheating as they churn through masses of data. For every claim that Bitcoin’s energy consumption equals that of Norway, there is the riposte that 76% of miners use renewable sources of energy.
There is no global register of Bitcoin miners, nor is there any mapping-out of which mining computers are connected to which energy sources. Miners tend to maintain some degree of anonymity, and are often not forthcoming about their energy sources. This is hardly surprising. Rosy though the depiction of mining in Iceland is, there is growing resentment against the ubiquity of mining operations: environmentalists like Tomas Gudbjartsson fear the damage to large areas of wilderness as hydroelectric dams sink untouched land in water. The energy supply Reykjanes region in the southwest was nearly exhausted in April 2019, which is alarming given Iceland’s reputation for both a sparse population and an abundant supply of energy. Similar tensions between miners and communities over the use of energy and its environmental impact were apparent in Oregonand Upstate New York, where electricity rates for crypto operations were hiked in 2018.
Why does all this matter? The question of Bitcoin and the environment appears inconclusive. Even if the overwhelming evidence suggested Bitcoin mining itself had bad environmental consequences, Silicon Valley has long been an offender in this respect. Five years ago, a lot less people worried about whether the data centres responsible for each Google search were powered primarily by green or brown energy sources. But we live in a very different world now. The trend towards a more social-oriented capitalism was accelerated by the pandemic. It is difficult to imagine that Bitcoin or any other crypto could embed itself within our financial system without aligning itself with the economic mores of the time. This is especially true if Bitcoin is to someday serve as a medium of exchange. There is a growing conception that the dollar will eventually lose its position as the chief reserve currency. This is driven in part by the amount of debt the Treasury has taken on, and thus the perception that the dollar will increasingly prove a poor store of value. Bitcoin’s value in part stems from a belief that it can be both a store of value and a medium of exchange. But a currency ceases to be effective is it lacks the trust of the economic agents that rely on it. And it is within this context of trust that the problems and events we associate with Bitcoin matter. One such problem is its relationship with the environment, arguably the greatest social concern today. But there are others. Notwithstanding Nakamoto’s vision of a currency that can bypass the need for trust in an institution, it is unreasonable to suppose that Bitcoin can be separable from all the dubious activities it facilitates. About 20% of new Bitcoin was mined in Xinjiang in February 2021. As a Barrons article notes, ‘ because of the atrocities occurring in Xinjiang, ‘any product produced there brings with it high ethical and regulatory risk.” The decentralized nature of Bitcoin exposes it to an innumerable range of associations that could undermine the trust economic agents place in it. Resolving the problems around its carbon footprint presents a first step towards alignment with the socio-economic principles our largest companies will eventually follow.
Emeka Nduka-Eze is an LLM Student at NYU, having graduated with an LLB degree from the University of Durham in 2019. He spent summers working in Law firms in London, and maintains a strong interest in Corporate Law and Financial Markets. He is currently working as a Spring Intern at the Security and Exchange Commission’s New York Office, and will sit for the New York Bar Exam in July 2021.