Cryptocurrencies – the elephant in the room
This article looks at some of the environmental impacts associated with cryptocurrencies such as bitcoin.
Cryptocurrencies such as Bitcoin, Ethereum and Dogecoin, have been experiencing a boom in recent months. Cryptocurrencies are basically digital currencies that do not exist in tangible form and are transferred between parties online.
The cryptocurrency market is decentralised and unregulated which has prevented many individuals and organisations from entering it. In addition, the price of cryptocurrency is extremely volatile, which explains the speculative appeal for certain parties, but it is also one of the main reasons for others avoiding it.
However, there is another, bigger problem with cryptocurrencies in terms of the environmental impact of the energy they consume.
At a time when, globally, we are committing to increased action in our fight against climate change, this negative environmental impact is beginning to make the headlines. Recently, Elon Musk, reversed his earlier decision to accept Bitcoin as payment for his Tesla vehicles, citing the negative environmental effects as the reason for his change of heart.
But what is the scale of the environmental impact associated with cryptocurrencies?
The answer to that question lies in the very nature of these currencies. They are not physical items but instead are created through a process of mining which requires powerful computers and systems to solve complex mathematical problems. The energy consumed in this process is the equivalent of that consumed by an entire country, such as Kazakhstan. Add to this the energy needed for each individual transaction, significantly more than that needed for ordinary credit card transactions, and you can understand why environmentalists have historically opposed the rise of cryptocurrencies and the rationale behind Mr Musk’s revised position. Now, some economic institutions have also entered the debate. Recently, the European Central Bank raised concerns about the ‘exorbitant carbon footprint’ associated with cryptocurrencies.
Nevertheless, demand from consumers for cryptocurrencies continues to grow and many banks and financial institutions are keen to meet that demand. The question is whether a more energy efficient solution can be identified. While buying carbon credits to offset the emissions produced is a short-term fix, there is a need for a long-term solution. In fact, experts at the UN believe that cryptocurrencies, and the technology behind them, blockchain, can contribute towards sustainable development. Blockchain is recognised as a trusted and secure means of recording transactions, which is particularly important for organisations and jurisdictions susceptible to a high level of corruption. It might also serve as a means of instilling greater trust and transparency around how countries are performing in their actions to tackle climate change.
If cryptocurrencies and blockchain technology are expected to provide the solution to some of the challenges around trust and transparency, then the technology needs to be developed to create more energy efficient mining processes and the environmental implications and consequences of the current model need to be acknowledged and addressed.