Sarson Funds, Inc.
Cryptocurrencies, in particular Bitcoin, have come under recent criticism for being environmentally unfriendly, specifically for the energy it takes to mine and transact with digital assets.
Most recently, Tesla founder Elon Musk triggered a wave of volatility in Bitcoin after he opined that the digital currency was not energy efficient.
However, those arguments are misguided, said Jahon Jamali, chief marketing officer for Sarson Funds, an asset manager and industry educational partner in the cryptocurrency and digital asset space, especially when one considers the energy expenditure of the traditional financial industry.
“I think there’s a lot of misinformation out there when we talk about Bitcoin energy sustainability,” said Jamali. “One of the biggest pieces of information is that Bitcoin is not environmentally friendly, but I think that’s a bit of a misnomer.”
Jamali refers to research comparing the energy consumption of Bitcoin miners and users to the consumption of the traditional financial sector, arguing that there’s certainly a good case to be made that Bitcoin and other cryptocurrencies can be—or already are—more energy efficient than traditional finance.
“If you look at their energy consumptions, you’ll always see a stark difference, but depending on how you slice it the traditional finance and banking infrastructure uses 400% of the energy that the Bitcoin network does,” said Jamali. “I think that a lot of folks kind of take for granted some of the components of what makes up the energy needs or demands of traditional banking and finance.”
Those include the energy needed to power traditional banks’ networks, their hundreds of thousands of branches and their millions of ATMs around the world.
There’s also been a movement towards cleaner cryptocurrencies within the digital assets space itself, with Ethereum and many other digital currencies moving from a “proof of work” model to a “proof of stake” model to confirm transactions.
Proof of work relies on large-scale computing power from “miners” to confirm transactions, said Jamali, while proof o stake spreads that responsibility out in a proportional manner between holders of the currency. This will work well for major tokens like ether, but could prove problematic for smaller and younger coins that have a smaller number of shareholders. Also, Bitcoin will never be able to change models, as proof of work is baked into its code.
“It poses the risk of someone gaining 51% of the token and thereby controlling consensus mechanisms,” said Jamali. “For established coins like Ethereum, it will reduce the energy expenditure required for transactions.”
On top of that, many energy-intensive digital asset operations, like Bitcoin miners, consciously choose locations with an energy and ecological advantage.
“Something like 78% of the power utilized for Bitcoin is derived from renewable energy sources,” said Jamali. “Bitcoin miners also have to have a reasonable understanding of how the power grids work to really maximize their efficiency. Energy producers typically produce more energy than they need to supply their typical customers and they have to burn off or shoot down into the ground the excess they produce. Mining operations can locate next to power generation plants to capture otherwise unused energy in an efficient manner.”
Similarly, to be more easily converted into cash for day-to-day use, Bitcoin or other crypto functionality can be added to existing banking infrastructure, like the near-ubiquitous ATM, at no net-added energy cost.
“Bitcoin ATMs already ride off the technology for traditional ATMs, they’re usually just an additional piece of software and new buttons on an ATM, and they do not take up much of the Bitcoin network,” said Jamali.
But the greatest possible positive ESG potential for digital assets is in global financial development. El Salvador, a small, developing Central American country, provides a great example of the ESG Potential of digital assets, said Jamali.
Last week, El Salvador became the first country in the world to make Bitcoin legal tender. Having no currency of its own, the country will accept Bitcoin in addition to the U.S. Dollar in hopes of increasing remittances from abroad.
“The demographic profile of El Salvador is very young, the average age is 27,” said Jamali. “A high percentage of them, a majority, actually, at 70%, don’t have access to traditional banking. With Bitcoin coming in as legal tender that will no longer be the case.”
More interesting to Jamali was a plan by Salvadoran President Nayib Bukele to create a state-owned bitcoin mining hub around the country’s geothermal energy industry, and offer citizenship to any person who could prove that they had invested in at least three bitcoins.
“It took a day and a half for El Salvador to start utilizing those renewable energy sources to power Bitcoin,” said Jamali.
El Salvador’s move will also expose other governments to the potential of launching their own central bank digital currencies, especially those in the developing world who may suffer from an unstable central currency.
“We’ve already seen serious discussions happening in neighboring countries like Panama and Guatemala,” said Jamali, who added that the idea has also been raised in Nigeria and Brazil. “Countries with a high proportion of their populations locked out of the traditional global financial system will be considering whether to follow El Salvador’s lead.”
Bitcoin may be far more volatile than the euro or the dollar, but it is relatively stable when compared to many emerging market currencies, said Jamali, especially in countries facing hyperinflation, like Zimbabwe.
In places like El Salvador, BItcoin may also serve to reshape the international order and disintermediate the lending and development efforts of the International Monetary Fund and the World Bank.
“At the least it will become something that these institutions will have to deal with,” said Jamali. “Until recently, the IMF was able to dictate terms for short-term remedies that were not terms that countries could easily satisfy. These institutions saddled many countries with loans, debts and obligations that they are simply not going to be able to repay.”
And while it won’t necessarily move the hand of developed countries, said Jamali, the adoption of Bitcoin as legal tender may pressure the U.S. to develop a digital dollar or see its dominance as a medium of exchange dissipate.
China is the closest to integrating a digital currency into its financial system, having already launched a digital yuan.
“If the euro and dollar don’t want to be left behind they will have to adjust,” said Jamali.
