Blockchain, Crypto, and ESG – Oh, My!
Because of the intangible nature of cryptocurrencies, it’s easy to overlook the environmental and social issues surrounding the space.
Source: Bloomberg[1]
Because of the intangible nature of cryptocurrencies, it’s easy to overlook the environmental and social issues surrounding the space.
Our goal with this post is to highlight some of the biggest risks posed by the cryptocurrency market over the short and long term. We will classify these risks into:
(1) environmental impact (energy consumption, supply chain issues, and e-waste management)
(2) cybersecurity and human capital management
(3) ethical implications (including misleading marketing, harmful business practices, and criminal activity)
Additionally – at the very end of this publication (after “Movers & Shakers”), we have a brief “Crypto 101” to add a bit of context for anyone not familiar with the space.
Environmental Impact of Cryptocurrencies
As we describe in the “Crypto 101” section at the bottom, the mining of cryptocurrencies requires specialized hardware that is highly energy intensive, requires the mining of rare minerals, and leaves behind a large e-waste footprint.
Energy Consumption & Emissions
The University of Cambridge has developed a real-time tracker of Bitcoin’s electricity consumption, globally[2]. As of June 2022, mining of bitcoin consumed an estimated 117.7 TWh of electricity per year. This represents 0.53% of the world’s total electricity consumption, and is a similar level of consumption to entire countries like Sweden, Norway, or the Netherlands. For further comparison, the Bitcoin network consumes 1,708% more electricity than Google, but 39% less than all of the world’s data centers—together, these represent over 2 trillion gigabytes of storage[3]. The carbon footprint of Bitcoin’s consumption is equivalent to that of the entire city of Las Vegas[4].
Source: University of Cambridge[5]
Supply Chain Issues
In addition to the impacts of cryptocurrency mining, the impact of producing the hardware is also material. Chip manufacturing uses up to 30-50 megawatts of peak electrical capacity, enough to power a small city[6]. Additionally, the electronic equipment required for cryptocurrency mining uses rare earth metals that are unevenly distributed across the globe, with a vast majority of deposits in China. Rare earth mining involves the degradation of huge areas of land and often results in releases of radioactive materials to the environment. Additionally, there are a variety of risks to worker safety and human rights in rare earth mines in countries like China[7].
E-Waste Management
Finally, we want to highlight the impacts of the hardware once it reaches the end of its life. Cryptocurrency miners use application-specific integrated circuits (ACICs), which have a lifespan of only 18 months. At the end of their life, the ASICs become e-waste. A 2021 article published in the Journal of Resources, Conservation & Recycling estimates that the amount of e-waste generated by Bitcoin miners grew from 1 metric kiloton (kt) of mining devices in 2014 to over 30 kt in 2021[8]. The biggest problem with e-waste is that it requires very specific handling. Many recycling plants in the United States have found that it is too expensive to properly handle e-waste, and have found that shipping it overseas is much less expensive. However, less developed countries often lack the ability to reject imports or to handle the e-waste appropriately. The EPA has expressed serious concerns about unsafe handling of used electronics and e-waste in developing countries, that results in harm to human health and the environment[9]. For example, there are problems with open-air burning and acid baths being used to recover valuable materials from electronic components, which expose workers to harmful substances. There are also problems with toxic materials leaching into the environment. These practices can expose workers to high levels of contaminants, which can lead to irreversible health effects, including cancers, miscarriages, and neurological damage.
Cybersecurity & Human Capital Management
There are a variety of cybersecurity concerns (phishing attacks, illegal trading platforms, malware, account security) related to cryptocurrency. Companies involved in cryptocurrency need to recruit and retain skilled developers ensure the security of data platforms. This requires strong human capital management practices. A study conducted by Morningstar[10], highlighted that companies involved in blockchain have weighted human capital risk scores that are 17% higher than the benchmark.
Source: Morningstar[11]
Ethical Implications
A recent study conducted by Morningstar indicated that financial services companies involved in blockchain experienced significant to severe business ethics controversies, suggesting that many firms are unprepared for tightening crypto regulations[12].
Misleading Marketing
Because of the relatively unregulated nature of cryptocurrency, companies historically have used exaggerated (and potentially misleading) claims about their tokens. In October of last year, the cryptocurrency called Tether and crypto exchange Bitfinex will pay $42.5 million to settle civil charges from the U.S. Commodity Futures Trading Commission (CFTC) over allegedly making misleading statements and making illegal transactions[13].
Harmful Business Practices
Like other disruptive new technologies, cryptocurrency has caught regulators unprepared. At the state level, last week the New York State Assembly passed a bill that would impose a two-year moratorium on energy-intensive proof-of-work cryptocurrency mining facilities that receive behind-the-meter power from fossil fuel power plants[14]. Why does this matter? Behind-the-meter power allows mining facilities to receive power from a power plant before it is sent to the grid. This means that as long as a power plant is active, mining facilities have guaranteed power, while consumers might face shortages.
Criminal Activity
Because of the lack of user data, cryptocurrencies have historically been seen as a safe haven for criminal activity. Anonymity allows hackers, tax evaders, and other “bad actors” to launder money outside of the traditional banking system. In 2020, online scammers using cryptocurrencies made off with $2.6 billion[15]. It is worth noting however, forensics experts are developing tools for mapping blockchain activity and flagging illicit activity.
Hot Tea
To expand on last week’s topic of the energy crisis and tie in this week’s theme of the environmental impact of cryptocurrency, we want to highlight a story about How Crypto is Undermining the Energy Transition.
For those of us here in Texas, watching crypto-miners flow in, there is some concern about the already strained ERCOT grid - As ERCOT Pushes Energy Conservation, Some Fear Crypto Biz Could Tank Texas' Faulty Power Grid.
Finally, we want to spill some non-crypto tea:
· Power Giant NextEra Pledges to Eliminate Emissions by 2045 Without Offsets
· Less Than 10% of Climate Funds are Aligned with Global Decarbonization Goals: S&P
· H&M, Lululemon Back $250 Million Fund to Decarbonize Fashion Supply Chain
Sustainability Movers & Shakers
Our Sustainability Mover & Shaker this week is Terra McKenna of Zero Waste Collective. Terra runs a global online community that serves as an educational hub for the zero waste lifestyle movement. While it’s hard to imagine generating zero waste, there are some great tips in here for reducing your eco-footprint in an achievable way. Tara also offers business coaching at tara-mckenna.com.
Crypto 101
For anyone who has, on principle, avoided getting into crypto and who (perhaps) wants to stuff a sock in the mouth of the next bro-dude who can’t shut up about crypto, we’ve put together a high-level overview of the crypto space. TLDR – Cryptocurrency relies on the blockchain and the mining of cryptocurrencies required specialized (and energy-intensive) hardware.
Source: Statista[16]
What is Blockchain?
Cryptocurrency transactions occur through transparent distributed ledger technology called a blockchain[17]. A blockchain is exactly what it sounds like – a chain of sequential blocks that build on one another that create a permanent, unchangeable ledger of transactions or data.
What is Bitcoin and How Does it Work?
The first cryptocurrency, Bitcoin, was launched in 2009 in the aftermath of the 2008 financial crisis with the goal of creating a decentralized, peer-to-peer, electronic cash system. Unlike traditional currencies, Bitcoin was intended to operate independently of a centralized authority and without banking intermediaries to facilitate transactions.
Bitcoin was the first application of blockchain technology. Bitcoin doesn’t exist in physical form, rather transactions are sent directly from the sender to the receiver without any intermediaries. Holders have complete control over their bitcoin, which can’t be accessed without a cryptographic key. This is why we heard stories about people who bought bitcoin over a decade ago and were frantically digging through their attics to find the key as Bitcoin reached all-time highs in November (or people who lost access to millions of dollars in Bitcoin upon the death of a relative). Buyers and sellers can send and receive coins over the network by inputting the public-key information attached to each person’s digital wallet.
New bitcoins are created through a competitive and decentralized process called "mining". The network of Bitcoin miners use specialized hardware to fill a block and verify a transaction. To delve deeper into the crypto mining process – cryptographic hashing takes any input and turns it into a fixed-length, completely unique, alphanumeric code called a “hash”. Each new block has a value called a “target hash”. In order to add a transaction to a new block, miners need to produce a hash that is lower than or equal to the numeric value of the target hash. A transaction fee is awarded to whichever miner adds the transaction to a new block. Fees work on a first-price auction system, where the higher the fee attached to the transaction, the more likely a miner will process that transaction first. Because the target hash is entirely random, mining is a function of trial and error. A key feature of Bitcoin is its fixed supply of 21 million[18]. Because of the fixed supply, block rewards decrease over time. Every 210,000 blocks, the number of Bitcoin received from each block reward is reduced by half. As of 2021, miners receive 6.25 bitcoins each time they mine a new block. The next bitcoin halving is expected to occur in 2024 and will see bitcoin block rewards drop to 3.125 bitcoins per block[19]..
The Market for Cryptocurrencies
Since 2009, many other cryptocurrencies (like Ethereum and Tether) as well as a variety of other blockchain applications (such as enterprise data management, decentralized apps, and decentralized finance) have emerged.
The market capitalization of the almost 19,000 cryptocurrencies in circulation is currently around $1.75 trillion — about the same as the gross domestic product of Italy, the world’s eighth largest economy[20].
A growing number of investors have been focusing on cryptocurrencies. Allied Markets Research projects that the size of the global crypto asset management market will reach $9.36 Billion USD by 2030[21] (which is greater than the GDP of some developing countries).
[1] https://www.bloomberg.com/news/articles/2016-08-25/this-is-your-company-on-blockchain#xj4y7vzkg
[2] https://ccaf.io/cbeci/index/comparisons
[3] https://www.visualcapitalist.com/visualizing-the-power-consumption-of-bitcoin-mining/
[4] https://www.sciencedaily.com/releases/2019/06/190613104533.htm
[5] https://ccaf.io/cbeci/index/comparisons
[6] https://connect.sustainalytics.com/hubfs/INV/Thought%20Leadership/Sustainalytics-An-ESG-Lens-on-Blockchain-and-Public-Equities.pdf?utm_source=eloqua&utm_medium=email&utm_campaign=sustainability&utm_content=36292
[7] https://hir.harvard.edu/not-so-green-technology-the-complicated-legacy-of-rare-earth-mining/#:~:text=Worker%20safety%20is%20not%20prioritized,laborers%20are%20overworked%20and%20underpaid.
[8] https://www.businessinsider.in/cryptocurrency/news/bitcoin-mining-generates-30-7-kilotons-e-waste-annually-enough-to-cover-luxembourgs-e-waste-five-times/articleshow/91764218.cms
[9] https://www.epa.gov/international-cooperation/cleaning-electronic-waste-e-waste
[10] https://connect.sustainalytics.com/hubfs/INV/Thought%20Leadership/Sustainalytics-An-ESG-Lens-on-Blockchain-and-Public-Equities.pdf?utm_source=eloqua&utm_medium=email&utm_campaign=sustainability&utm_content=36292
[11] https://connect.sustainalytics.com/hubfs/INV/Thought%20Leadership/Sustainalytics-An-ESG-Lens-on-Blockchain-and-Public-Equities.pdf?utm_source=eloqua&utm_medium=email&utm_campaign=sustainability&utm_content=36292
[12] https://connect.sustainalytics.com/hubfs/INV/Thought%20Leadership/Sustainalytics-An-ESG-Lens-on-Blockchain-and-Public-Equities.pdf?utm_source=eloqua&utm_medium=email&utm_campaign=sustainability&utm_content=36292
[13] https://www.reuters.com/technology/tether-bitfinex-agree-pay-425-mln-fines-settle-us-cftc-charges-2021-10-15/
[14] https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/#:~:text=The%20Texas%20grid%20operator%20ERCOT,the%20state's%20troubled%20power%20grid.
[15] https://www.washingtonpost.com/technology/2021/09/22/stolen-crypto/
[16] https://www.statista.com/chart/27561/evolution-of-the-crypto-economy/
[17] https://www.coindesk.com/price/bitcoin/
[18] https://www.coindesk.com/price/bitcoin/
[19] https://www.coindesk.com/price/bitcoin/
[20] https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/#:~:text=The%20Texas%20grid%20operator%20ERCOT,the%20state's%20troubled%20power%20grid.
[21] https://www.alliedmarketresearch.com/crypto-asset-management-market-A12525#toc