Should ESG Investors Own Crypto?

The rise in popularity of cryptocurrencies has presented investors with a new challenge: determining how to weigh the potential benefits of investing in cryptocurrencies against the risks that they pose to the environment and society. An examination of the argument from both sides of the problem.

Despite the recent exponential rise seen in the cryptocurrency business, this newly emerging asset class still has a lot of unanswered questions for investors that include environmental, social, and governance (ESG) concerns in their investment strategies.

Cryptocurrency has the potential to offer a number of benefits to society, including financial inclusion and the ability to "be your own bank." But it could also have a number of problems, such as a large carbon footprint, a high rate of theft through hacking, and no central point of control.

The crypto community, legislators, companies, and other organizations from around the globe, are now engaged in a heated discussion about these problems. Investors, for their part, should think about how complicated different digital currencies are and weigh the pros and cons of the situation in light of their own goals for sustainability.

As an important first step, the Cryptocurrency Research team at Morgan Stanley and the Sustainability Research team thoroughly investigated the main environmental, social, and governance concerns about this asset class.

Calculating Carbon Intensity

The process of creating and verifying new transactions on the blockchain is referred to as "mining," and it is almost impossible to get around the reality that cryptocurrency demands a significant amount of computational power, which in turn consumes a lot of energy. Bitcoin, for example, has a yearly energy usage similar to the amount of power generated entirely in the Netherlands.

According to Jessica Alsford, who is the global head of sustainability research, "every single dollar of Bitcoin produced is significantly more carbon intensive than every single dollar of gold mined." In other words, according to the calculations made by her team, the carbon intensity of Bitcoin transactions was almost 14.2 million times higher than that of Visa credit card transactions.

The carbon intensity of running the bitcoin network is obviously dependent on various factors, one of which is the method by which new transactions are confirmed. For instance, the "proof of work" procedure employed in Bitcoin demands much more energy than the "proof of stake" approach that Ethereum, the world's second most renowned cryptocurrency, hopes to adopt later this year.

In addition, a significant number of crypto mining businesses have committed to carbon offsetting and are using energy derived from renewable sources. Nevertheless, this is a difficult request. According to Alsford, "We estimate that powering Bitcoin's annual energy needs using green energy would require the infrastructure equal of the entire U.S. solar fleet." As long as Bitcoin and other cryptocurrencies are still profitable to mine, the amount of energy needed to do so will keep going up. However, as time goes on, miners may use energy that comes from greener sources.

Concerns about cryptocurrency's influence on the environment are more than just a question of social responsibility. This may be the most important point. "We see an ongoing danger of governments regulating energy usage for crypto mining," says Sheena Shah, the lead cryptocurrency analyst for Morgan Stanley. "We see a continued risk of governments restricting energy use for crypto mining." She points out that some countries, like China, have completely banned cryptocurrency mining, while others have put a lot of limits on it.

"Mining prohibitions are unlikely in established markets," she continues. However, the government of the United States has discussed the climate effect, and some EU officials have recommended banning energy-intensive crypto mining.

Weighing Social Pros and Cons

Despite the high energy requirements of Bitcoin, many of the characteristics that make it an appealing alternative currency also go hand in hand with its genuine advantages to society, such as greater financial inclusion. These benefits include more financial inclusion.

According to Alsford, "one method to enhance access to financial institutions for the unbanked might be to boost access via cryptocurrencies." One could say that getting access to cryptocurrencies is easier than getting access to a regular bank account, since anyone with a smartphone, laptop, and internet connection can get to cryptocurrencies.

In addition, cryptocurrencies can facilitate cross-border transactions that are both quicker and less expensive, making it simpler for people to send money to family members living in other countries. Because of this, cryptocurrencies could be better than the country's currency in countries where the currency is volatile or in the process of losing value.

But, despite the fact that cryptocurrency could make it easier for people to get access to money and do business without middlemen, it is also a popular way to pay for illegal activities.

Academic experts have estimated that between January 2009 and April 2017, 46 percent of Bitcoin transactions were tied to illicit activities. The total value of these transactions was $76 billion, equivalent to the illegal drug markets in the United States and the European Union. There is a counterargument to this, which consists of several estimations that depict a different image of illicit behavior across all cryptocurrencies. In 2021, illegal activity is expected to be linked to $14 billion worth of bitcoin. This is about 0.15 percent of the total amount of cryptocurrencies that will be traded.

Understanding the Role of Governance

Blockchain networks are decentralized databases of transactions that are used by the majority of cryptocurrencies. No single entity has the authority to set or enforce restrictions within these databases.Anyone can come up with their own cryptocurrency, and the world still doesn't know who came up with the idea for Bitcoin first.

At first glance, this seems to contradict the principles of good governance and raises many issues, one of which is the following: who decides the rules governing how a cryptocurrency should function? Is there a board of directors that we can speak with? Is it always the case that cryptocurrencies and the apps that use them comply with the law?

Naturally, those who favor cryptocurrencies believe that this kind of decentralization is the very essence of sound governance, particularly because no one organization has power.

For their part, the analysts who cover cryptocurrency and sustainability at Morgan Stanley believe that new crypto regulations will likely change the rules of investing in crypto-related products. This belief is based on the analysts' belief that new crypto regulations will likely change the rules. But it doesn't look like this will make it easier for investors who care about sustainability to understand the complicated structure of the asset class, at least in the medium term.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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