Ways Cryptocurrency Can Be ESG Friendly
Blockchain and cryptocurrency are some of the most exciting innovations of the 21st century. Crypto, in particular, has the potential to affect the financial industry in several positive ways. The potential benefits are endless, from increased financial inclusion to easier cross-border transactions.
However, in all the great arguments for the existence of crypto, there appears to be one glaring weakness. This weakness is the excessive energy use of crypto, which has become a concern for many environmentalists. One can truly understand why the crypto’s energy use is concerning, as it often translates to a significant carbon footprint.
In a world struggling to prevent drastic climate change, crypto must become ESG-friendly to meet its full potential. So how can this happen?
How Crypto Impacts ESG
ESG stands for Environmental, Social, and Governance. It is a term used to gauge the impact of businesses/projects on the world in various ways. From the term, it is clear that there are three parts to ESG. However, with cryptocurrency, the focus is understandably on environmental and social.
On the social front, crypto has a positive impact in some ways. For one, crypto could be instrumental in driving accessibility to financial services. In essence, the unbanked can easily access financial services with cryptocurrencies. Such an increase in financial inclusion has major social and economic benefits for the world. For instance, McKinsey recently found that the widespread use of digital finance could significantly boost the GDP of emerging economies.
Notably, there are a couple of social concerns with crypto. For instance, it has been long believed that crypto provides a cover for illicit activity. Due to its decentralized nature, crypto could encourage use by criminals. One significant illegal activity that is particularly concerning with crypto is money laundering. However, according to Chainalysis, between 2017 and 2020, illegal activity accounted for less than 1% of total crypto activity.
The ESG problem with cryptocurrencies exists on the environmental front. In this regard, the highlight is the unsustainable energy requirements of crypto. This issue mainly results from the energy-consuming Proof-of-Work (PoW) process used to mine new coins. To contextualize the problem, Bitcoin consumes more yearly electricity than in countries like Sweden and Norway. Much of this electricity is provided through the use of fossil fuels. So what can be done?
How Crypto Can Be Made ESG Friendly
For crypto to become ESG friendly, energy efficiency is the most important subject to address. Unfortunately, the PoW validation method is simply unsustainable and will continue to cast a shadow on crypto use. Thankfully, alternative processes like Proof-of-Stake (PoS) have proven to be quite efficient. Notably, it is estimated that a transition to PoS could cut bitcoin’s carbon footprint by 99%.
Furthermore, key stakeholders can address many of the social concerns with crypto with strategic regulation. This is already being implemented in several countries through AML, KYC, and CTF requirements. This way, the potential of crypto being used for various criminal purposes is limited.
With such increased regulatory oversight and an energy-efficient mining process, crypto will undoubtedly become ESG friendlier significantly. This outcome will, in turn, allow the world to harness the full potential of crypto across various industries.
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