Thu. Sep 19th, 2019

Planet Compliance

Innovation & Regulation in Finance

What Sustainable Finance means for Bitcoin and other Cryptocurrencies

6 min read

Do you remember the days when one Bitcoin was worth twenty grand? That’s 18 months ago when right before Christmas the leading cryptocurrency reached its all-time high. And it wasn’t only BTC that climbed such heights. Many other cryptocurrencies exploded in value during the ICO frenzy when anyone with a decent idea (or not) a whitepaper and a basic understanding of blockchain technology could seemingly raise millions in days. If you like many caught the crypto fever either around that time or earlier, you will also recall the painful realization that the rise of the cryptos wouldn’t continue indefinitely – at least not at this stage. Instead, Bitcoin lost up to 85% before it started climbing back to recover more than half of its value of December 2017. Will it return to the previous levels or rise even further? Will it fulfil the prophecies of those that believe that it can reach six digits in a few years? Who knows?!? Only time will tell.

Over the course of four days, more than 200 Million people voted the next European Parliament. The elections will be remembered for the two key discussion points: immigration and political extremism on one hand, and the importance of climate protection. Every Friday thousands of school students take to the streets to demand action from politicians against global warming. At the same time, many disregard the warnings nature sends us and some even flatly deny any truth in it. Thankfully, some people in power have understood the consequences of our doing as far as that the European Union has declared itself a champion of sustainable finance. Last year, the European Commission published an ambitious Action Plan on Financing Sustainable Growth where it declared to

  • reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth;
  • assess and manage relevant financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and
  • foster transparency and long-termism in financial and economic activity.

Many national authorities have followed suit with complementing or additional measures and financial institutions are well advised to prepare for the impact that sustainable finance will have on financial services compliance if they haven’t already done so.

What has the one to do with other though, you will ask. Well, as it happens the mining of cryptocurrencies, i.e. the validation of transactions, is an extremely energy consuming activity. Researchers from the Technical University of Munich and Massachusetts Institute of Technology found in a new study on The Carbon Footprint of Bitcoin  that the emissions produced by Bitcoin sit between the levels produced by the nations of Jordan and Sri Lanka, which is comparable to the level of Kansas City. Whereas these numbers might be mind-boggling, the effects of mining on the environment because of its energy consumption have been subject of discussion for some time: cities have already banned Bitcoin mining to preserve natural resources and reports as far back as 2013 claimed that the activity was a real-world environmental disaster. And now we are only talking about Bitcoin. Though some coins like Ethereum are working on moving towards less energy hungry models and while in some cases the use of renewable energy can offset the environmental impact to an extent at least in terms of energy consumption as in the case of mining operations in Iceland or close to hydro dams in China, in the best of situations it is a rather naïve assessment of the situation considering the economic benefits, it is in many cases coal that fuels the mining.

This post isn’t about the environmental impact of cryptocurrencies though – as much as it is worth thinking about it. This is more about the consequences of initiatives like the EU’s sustainable finance plan will have for cryptocurrencies.

While stakeholders in traditional financial services have already begun to prepare for the coming rules, it is probably much lower on the agenda of cryptocurrency players. However, they would do well to face these elements with some urgency as it will be the worst offenders that feel the wrath of rule makers the most. Certainly, cryptocurrencies might be less of a priority than other aspects of finance for regulators around the globe, but they shouldn’t underestimate the seriousness of the situation- Nor does the decentralized aspect of blockchain promise much relief – while some jurisdictions might be tempted to disregard the effects of climate change, they are seldom those that can provide the resources and infrastructure required.

Thus, a regulatory response is more than likely, the only question is about the when and not the if. Anyone serious in the industry therefore needs to take a strategic approach about the changes to come and answer a series of questions: What are the actual and potential impacts of climate-related risks? What are the opportunities? How do we need to amend our system of governance and control to address these risks appropriately? How will responsibilities be allocated across the organisations and where do gaps in the system exist? How can these gaps be filled and where can required expertise be acquired? In which way can these new processes be implemented, reviewed and adapted?

Traditional financial firms struggle with this new paradigm and still they are often much better prepared as their counterparts in FinTech companies. All the more this is true for the cryptocurrency industry where its members for too long had been suffering from the delusion of operating in an unlegislated area, immune from prosecution and enforcement.

So, the question is whether the industry has learned from passed mistakes. But as in the case of Bitcoin price predictions, only time will tell.

 

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