On Wednesday, cryptocurrency exchange platform Coinbase listed on a traditional stock exchange. It was a watershed moment.
The company’s public debut marked the welcome of Bitcoin, Ethereum, and other digital currencies to the traditional financial scene. Investors, many of whom have resolutely ignored the rise (and fall, and rise, and fall, and rise) of cryptocurrencies, are starting to pay attention.
Cryptocurrency boomed once before, in 2017. Back then, ESG was further down on the agenda of most institutional investors; cryptocurrency, a footnote. But the picture has changed.
In January, BlackRock filed with the US Securities and Exchange Commission for two of its funds to invest in bitcoin futures. Yesterday, City AM reported that institutional investors now account for 6.76% of total bitcoin supply. That includes investments from hedge funds, family offices, private firms, as well as major publicly traded companies, such as Tesla and MicroStrategy.
At the same time, investing with a sustainable lens has gone from a nice-to-have to a must-have—at least in European markets, with the US catching up. By 2025, PwC predicts all global assets will be managed with thought to environmental and social impact.
How do you reconcile the two trends? By all accounts, they’re on a collision course.
“A reminder,” came a gentle headline from the New York Times on the back of Coinbase’s listing. “Cryptocurrencies use a lot of energy.” Blockchain has astonishing environmental costs. Estimates suggest that the process of mining cryptocurrencies uses more electricity than do entire countries such as Argentina. One bitcoin transaction, meanwhile, requires the same amount of energy as 500,000 Visa transactions.
Unsurprisingly, our analysis of Coinbase bears that out. The company scores a -43% on SDG 13: Climate action, thanks to its “significant impact on the energy production system and global warming.”
But emissions aren’t Coinbase’s only, or even biggest, problem. And an issue for Coinbase is an issue for cryptocurrencies, as well as those who invest in them.
The company scores a -70% on SDG 16: Peace, justice and strong institutions. Tax evasion, fraud, money laundering, bribery, organised crime, even terrorism: the list of indicators reads like an asset management compliance team’s worst nightmare. An inherent risk for all cryptocurrencies, money laundering in particular has garnered media attention thanks to the advent of non-fungible tokens, or NFTs, which seem to serve little purpose beyond operating as a vehicle for financial speculation.
But it isn’t all bad. On SDG 8: Decent work and economic growth, Coinbase scores +43%; on SDG 9: Industry, innovation and infrastructure, it scores +25%. For both categories, the company’s positive impact boils down to its association with innovation and financial inclusion. On SDG 17: Partnership for the goals, it scores relatively well thanks to its potential in international trade.
In the last week, a vast number of column inches have been dedicated to the devastating effect of cryptocurrencies on the climate. It should give us all pause. But so too should the fact that cryptocurrency companies demonstrate a positive impact on innovation, inclusion, and partnership for the goals.
While they come from orthogonal directions, sustainable finance and digital finance tribes are united by their common belief that the traditional way of doing ‘finance’ is outdated. There’s even room for the two to dovetail. Blockchain solves transactional trust and accountability, for instance: a virtue of which the ESG industry is in short supply in areas such as carbon offsetting.
Blockchain has two existential problems: its reliance on energy and function as a medium for dirty money. But if these can be resolved, perhaps the crypto and climate crowds can work together to reshape the world of finance.