Over the past several years, the collective recognition of corporate investment’s impact on our environment, society, and governance (ESG) has gained remarkable traction. Yet, as cryptocurrencies like bitcoin come to the fore with equal momentum, ESG investors must first attempt to reconcile its economic appeal with its disastrous externalities.
Never before has the fund management industry focused so carefully on the external factors of portfolio compositions. Amid growing concerns surrounding climate change and social and racial justice in the past year alone, both institutional and retail investors are becoming ever ESG-conscious. According to a report by Deloitte, the total share of ESG assets in overall managed asset portfolios grew from 11% in 2012 to 26% in 2018 – and is projected to reach 50%, or $34.5 trillion, by 2025. As more funds are being reallocated towards industries and firms that uphold ESG values, the question arises as to how fund managers will be able to evaluate a new, unique asset class like cryptocurrency.
Bitcoin is the biggest and most mainstream player in the global crypto movement. During 2020 alone, its value more than tripled as the world’s largest cryptocurrency by market capitalization of some $1.5 trillion. For the uninitiated, bitcoin’s price – just shy of $50,000 per coin at the time of writing – may seem perplexing. But as the US dollar and other global standard fiat currencies waver in the wake of the Covid-19 pandemic, more investors are buying bitcoin as a digital store of value in pursuit of a so-called ‘democratisation of financial markets’. At first glance, bitcoin seems promising for ESG. Block-chain technology facilitates international monetary transfers via virtually costless remittance corridors as well as the security of anonymity of payments from more oppressive governments. However, bitcoin’s irreconcilable unsustainability puts into question its viability as part of an ESG portfolio.
Bitcoin is not produced by the mint of a central bank but rather by “mining”: the arduous process of peer-to-peer verification and securitisation of transactions through connecting to the bitcoin block-chain and solving computational equations. As a reward, the volunteer ‘miners’ receive bitcoin for their work. The problem is that, often like real mining, this complex production network pollutes the environment. The electricity required by the global series of powerful computers to mine is incredibly high – a report by the Cambridge Centre for Alternative Finance estimates that bitcoin’s annualised total energy consumption is over 119 TWh, on par with countries like the United Arab Emirates. Moreover, the majority of bitcoin mining occurs in China where 61.9% of electricity is sourced from coal which increases CO2 production. Bitcoin backers may colour Tesla’s recent pledge to adopt bitcoin as a payment method for its electric cars as an environmentally conscious move but this fails significantly in correcting the overall energy inefficiencies of a mining system that must exist for as long as its currency.
The double-edged sword for bitcoin’s social impacts is that its advantages of anonymity and ease of transfer may either be used for more nefarious means or remain unused altogether. Regarding the former, lack of regulation and formal centres of exchange provide a gateway to financial crimes such as tax evasion, money laundering, or other underground economic transaction. Indeed, bitcoin’s early popularity came partly from its role as means of payment for the Silk Road, a dark web platform that hosted the trading of illicit goods and services like narcotics. The latter point refers to the lost gains of those in developing countries who may indeed stand to benefit from frictionless remittances but lack the means to access them i.e. mobile phones or personal computers. So long as important tax revenues are being diverted away from governments and evading surveillance, governments and regulators are unlikely to embrace the cryptocurrency with open arms.
The strength of corporate governance in block-chain technological networks rests upon the extent of its decentralisation. The truth, as Martin C. W. Walker rightly notes, is that some form of governance centralisation permeates every facet of bitcoin operations. At the mining level, five Chinese entities contribute to half of the total global computing power on the network. At the other end of the production chain, sales processes are monopolised by Binance, an online cryptocurrency exchange with 66.1% of the global market share. The truth of the matter is that the security and value of bitcoin therefore rests almost entirely in the hands of a few actors who act as a de facto central party. In light of the disconnect between bitcoin’s promise of complete decentralisation and persistent, unchecked monopolies, and alongside its woeful environmental track record and social risks, ESG investors should think twice about bitcoin as a potential investment.