Beyond Bitcoin: The hidden side of blockchain and its effect on ESG
What’s the problem with Bitcoin and its effect on ESG? And what about blockchain? Is it “good” or “bad” for corporate governance and sustainability? Cygnetise’s CEO and Co-founder, Steve Pomfret, attempts to answer these questions in his latest blog below.
With Bitcoin dominating global headlines over the past couple of months, a number of questions naturally follow close behind, providing rich discussion points. Banks, regulators, politicians, fund managers, the general public have all engaged with topics such as:
Why is it going up? Should I invest in it? How long will it last? Am I missing out on something? Is it good? Is it bad? Is it ethical?
But, as opinions remain varied, we’re still lacking any uniform and widely agreed-upon answers. It’s not too long before people then ask further about blockchain – the underlying technology to cryptocurrencies – and its social impact and environmental sustainability.
What is blockchain? - Blockchain is the digital, peer-to-peer and decentralised ledger that records all transactions. It’s a record of events/data that is shared between many parties, and once the information is entered, it cannot be altered, making it secured from tampering and revision.
Many, including myself, have previously written and spoken about the differences between Bitcoin and blockchain. However, as the issue persists, I thought it’d be good to bring up the topic and give you some fresh perspective.
The problem with Crypto and its effect on ESG
A couple of years ago, a private banker told me that when taking on new customers, they refused to accept anyone who had ever traded a cryptocurrency (i.e., Bitcoin, Ethereum, etc.). And the reason for this was because once you have these in your e-wallet, you can practically use this currency without a trace.
Following the financial crisis, regulators have introduced a series of strict measures to ensure that customers of financial institutions were checked for any previous criminal activity and, the flow of money, where possible, was tracked and traced, in order to make financial crime more easily identifiable.
For example, when transferring money, reasons need to be provided, including details of the goods that may have been exchanged. But Bitcoin and other cryptocurrencies work around this issue for criminals, and for those who prefer to hide transactions. Once exchanged for US dollars or any other fiat currency, it goes stealth. In the post-COVID digital world, as we quickly move towards a cashless society, with ‘e-cash’ increasingly being accepted, crypto is thus presenting an attractive option for those looking to exploit vulnerabilities in the financial system.
So, without going any deeper, Bitcoin is not very ESG-friendly (Environmental, Social, Governance).
In the financial world, ESG refers to a class of investing that is also known as “sustainable investing” - an initiative for the conscious of us who want to help the world by minimising any environmental, social and governance risks.
Hence, looking at Crypto from an ESG perspective, we can immediately identify the following three key issues:
Environmental - the computational power of Crypto networks uses excessive amounts of energy, which really isn’t very environmentally-friendly. For example, according to the Cambridge Bitcoin Electricity Consumption Index, the average consumption of energy used for Bitcoin mining is as near as the level of the yearly energy consumption of the Netherlands.
Social – the use of Crypto and any off-the-market transactions encourages anti-social behaviours and manipulations. According to the latest CipherTrace Cryptocurrency Anti-Money Launder and Crime Report, cryptocurrency frauds and thefts level hit a staggering US$1.4 billion in the first half of 2020, suggesting that 2020 might have resulted in the second-highest value in cryptocurrency crimes ever recorded.
Governance – due to its decentralisation, Crypto has very little governance or regulatory oversight (as it’s a ‘dark pool’).
But here’s the thing, the technology that drives Crypto, blockchain, has limitless use cases that are proving to be the complete opposite and are actually helping organisation to enhance their ESG compliance and performance.
The other side of the (Bit)coin
2016/17 saw much excitement around blockchain, with very ambitious ideas of how it will change industries and processes. However, much of this hype was idealistic and approached with a “boil the ocean” attitude.
Consequently, the vast majority of organisations attempting to realise these outlandish dreams simply encountered too many practical hurdles, and with investors losing faith and not seeing any signs of a return on their investment, many of the runners and riders in the blockchain adoption race diminished almost as quickly as they appeared.
So, as the world learnt a lesson, and few proven use cases were commercially adopted, it was deemed a fad.
Yet, some of those companies who opted to focus on the commercial side of blockchain have actually managed to build successful technological solutions and reach product/market fit.
There are real companies out there that are effectively using the blockchain technology and gaining adoption from established corporates and organisations, who are already reaping the benefits of its integration (security, control and ownership of their data, transparency, and enhancement of processes enabling remote working). And while the majority of those early adopters are mainly motivated by the operational benefits blockchain offers, they’re also enjoying a bonus contribution to their ethos of ESG.
This means that wider adoption is already on the way but under the radar. Most successfully working uses cases have an ethical slant, and are certainly ticking the ESG boxes. Then, why don’t we already know/hear about them?...
Because those who use the technology tend to do just that and don’t “sell” it. They aren’t “blockchain” companies, just like online applications don’t class themselves as “internet” companies.
Instead, they sell applications that provide customers with the inherent benefits that blockchain enables.
To conclude, blockchain goes far beyond Crypto and Bitcoin, and it can certainly be a good thing as already proven by the numerous ESG enablers in the form of blockchain-empowered regulatory and compliance solutions like Cygnetise.
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