Crypto cannot simply be painted green

Can Krypto ever be green? Until recently, this question was primarily concerned. The crypto kids, which rose in Bitcoin a decade ago, were thus focused on stirping up a financial revolt against the establishment that they don't normally think too much about CO2 emissions.

The type of mainstream investors who are worried about environmental, social and governance questions today have previously avoided digital assets due to other types of dirt; As a report by Chainanalysis shows, plagues and cyber theft continue to be the ecosystem.

not anymore, not longer. At the beginning of 2022, even cumbersome assets such as Fidelity, crypto begin to create stock market -traded funds. And as Goldman Sachs emphasized in a research note this week, mainstream investors are increasingly taking up crypto in their portfolios in addition to gold.

In fact, Zach Pandl, Goldman's co-manager for global FX, Rates & Em Strategy estimates that Bitcoin is already 20 percent of the “value-placed sphere” (which mainly consists of Bitcoin and gold). He predicts that the Bitcoin price would double from its current level to $ 100,000 if this ratio rose to 50 percent.

However, as Pandl also notes, there is an “important obstacle”: physical dirt. To be more precise, the process of "mining" bitcoins (that is, creating a consensus via a common calculation book to create a digital asset) requires breathtaking amounts of electricity. In fact, Bitcoin mining seems to consume more electricity annually than Finland or Belgium, according to the Cambridge Bitcoin Electricity Consumption Index. For this reason, Kosovo has just banned it.

worse, most of the mining took place in the past in China, which is heavily dependent on coal. Hence this tricky question for mainstream investors who are worried about inflation in 2022: Can you deal with crypto without getting your hands dirty in the real world?

The short answer is "yes - but not easy". The good news first: In 2021, this once anarchic corner of the financial world began to organize itself in order to become greener. Above all, a coalition of around 200 crypto companies recently teamed up with the Rocky Mountain Institute, an environmental lobby based in Colorado, to create a crypto climate agreement.

The signatories of the agreement have apparently agreed to reduce the CO2 emissions from electricity consumption to Netto zero by 2030, partly through CO2 compensation, but also by switching the entire blockchain technology to renewable energy sources by 2025 and the use of energy tracking tools such as so-called green hashtags.

In the past month, the CCA took a step that would have been unimaginable five years ago. It created a serious 32-page template to carry out credible environmental crypto audits that could calm down a traditional pension fund. Yes, really: the (green) suits have arrived.

In the meantime, the pious promises of the CCA become stronger by two other industry trends. First, Beijings's decision to act against industry last year has forced many miners to move from China. This makes crypto less dependent on coal current, as many of the new mining companies opt for renewable energy sources.

Secondly, for reasons that go beyond “being green”,

secondly, for reasons that go beyond, a more energy -efficient technology. The main problem is that the so-called "Proof of Work" process that is used to create a Ledger consensus for Bitcoin is too cumbersome to carry out a large scale transactions. Many of the newer digital assets - such as Cardano or Solana - have therefore introduced a different process that was developed in 2012 and is known as "Proof of Stake".

Puristen argue that POS may be less secure than Pow. But it is also much less energy -intensive. And some digital assets like Chia have further reduced the energy consumption by using a "proof of space and time" algorithm. Together, these steps could further reduce the CO2 footprint of the sector, especially since Joe Lubin, a leading provider of Ethereum (the second largest digital asset) says that Ethereum will switch from Pow to POS in the coming months.

However, as Goldman says, there are obstacles. A big problem is that Bitcoin is still connected to the Pow consensus and that about half of the crypto universe is $ 2 trillion. In fact, based on data from 2017, the Sustainability Fund suggests that Bitcoin is now making most of the electricity consumption (e.g. 11 times the Ethereum).

A second problem is that the industry is so opaque that it remains to be seen how much transparency the CCA can really create, especially with non -signers. Or as the Sustainable Funds determines monitor: "Ultimately, the lack of transparency and the lack of data make it extremely difficult to point out that a currency is 'greener' than others." After all, basket products created by financial institutions could make the ESG challenge considerably worse by confusing assets.

Of course, a cynic (or a crypto enthusiast) could mock that this problem does not differ from that of other investment classes; For example, gold also has a dirty CO2 footprint. This is a fair point. But maybe the key message for investors is: yes, it could make sense to include crypto as inflation protection, but no, it does not offer free lunch. Digital gold may be mainstream, but it has not yet been freed from all dirt.

gillian.tet@ft.com