Does crypto belong to an ESG portfolio?

Doug Miller firmly believes in the power of technology to solve environmental problems.

As a master student at London Imperial College, the American orchestrated a field study on office workers and energy consumption. He found that the automation of light switches was more effective and cheaper than relying on the fact that the last person leaves a room to switch off the light.

In his current position in the global non-profit organization Energy Web, he has become even more high-tech: it has developed a certification system for digital assets that rely on clean energy. "I come in from an environmental point of view," he says. "Blockchain is an important part of the energy transition."

But asset managers with environmental, social and governance tasks could think differently. Blockchain is best known as the technology that underpins cryptocurrencies such as Bitcoin-assets, their CO2 footprint and benefits in illegal transactions beyond the ESG area. However, this can change because the blockchain penetrates into other areas of the economy thanks to the efforts of Miller and others.

cryptocurrencies owe their dubious call in the environment to the huge amounts of electricity that are often made from coal and need the computers to create them. And because they are not subject to government regulation, they are a popular medium of exchange for criminals and terrorists: the hackers who decommissioned the colonial pipeline in the USA in May received their ransom in Bitcoin.

The European Asset Manager Candriam said at the beginning of the year that "cryptocurrencies still have a long way to meet the ESG criteria" and referred to money laundering and the environmental impact of the "mining" of coins (by the complex calculations that they generate).

However,

Miller tries to emphasize the difference between speculative currencies and the technology, which not only supports this, but also other, more harmless digital assets - such as the allegedly advertising tickets that were sold for the 2018 World Cup. Central banks also use the technology.

"There is a risk that blockchain technology and crypto will merge," he says. "To help energy companies better manage their network is very different from [Cryptocurrency] Dogecoin." Such a network project operates Energy Web with an Australian electricity company.

Last month, UBS WEATH Management said that in addition to healthcare and sustainability, "the digital transformation of sectors that range from transport to production to financial services creates opportunities".

In a paper to evaluate cryptocurrency investments, the analysts of the asset manager recommended that "investors should concentrate on companies that are exposed to the development of distributed Ledger technology instead of dealing directly with cryptos".

distributed ledger - of which blockchain is a species - are systems that rely on the user's collective agreement to check transactions.

In recent times, the technology has developed so that the number of users that are required for approval of transactions is reduced, which means that these systems become more energy -efficient. A current study by the University of College London showed that some new distributed Ledger technologies-which use the so-called "Proof-of-Stake" protocol instead of the older "ProOF-OF-WORK" method-were up to three times more efficient than before.

"Our work shows the [Newer Blockchains]. Further impulses could come from the Crypto Climate Accord, which the decarbonization of the crypto industry has its goal by 2030 (and was significantly involved in the establishment of Miller).

crypto-in-ordinary also indicate that the CO2 footprint of the Bitcoin mining decreases, especially since China banned private cryptocurrencies this year and huge mining businesses.

Distributed-Ledger technologies can help combat climate change

The effects are already shown in the data. In May, the Cambridge Bitcoin Electricity Consumption Index estimated that the global electricity consumption of Bitcoin corresponded to the Sweden. This month it is at the level of Kyrgyzstan - a significantly lower level.

and conventional assets have their own problems. "You could argue that there is a much larger but more subtle problem with Fiat money if it affects the environment," said Deutsche Bank analysts in a recently published report. They argue that the Central Bank, argued, are "the ultimate instrument to accelerate the consumption of tomorrow to today", which refers to the ability of the national decision -makers to print money through quantitative loosening.

Nevertheless, there are considerable risks about cryptocurrencies, especially for responsible investors. The use of digital coins for illegal activities is still widespread. Chainalysis, a crypto surveillance company, says that Bitcoin for criminals "because of its pseudonymous nature and the lightness, with which users can send funds all over the world despite their transparent and understandable design".

Nevertheless, there are some hopeful signs of crypto fans. Chainalysis showed that in 2019 transfers worth around $ 21.4 billion were due to illegal activities, which corresponds to 2.1 percent of all cryptocurrency transactions. Last year such activities had dropped to transactions worth around $ 10 billion or $ 0.34 percent of the total volume.

Many continue to believe that cryptocurrencies will ultimately fade due to their speculative character and lack of inherent value after the crash and burning. Regulation and digital currencies of the central banks are also threats.

"Bitcoin is a video game," says Jan Kregel, economist and research director at the Levy Economics Institute of Bard College in New York of the FT. "There is the potential that the crypto world explodes and causes a larger crisis than subprime." However, the technology behind it will probably remain.