What is ESG?
ESG refers to environmental, social and governance, which are a set of standards for virtual assets or cryptocurrencies used in the screening process by socially conscious investors. The environmental criteria consider the environmental sustainability and carbon footprint of a cryptocurrency’s protocol’s consensus model. The social criteria examines how a cryptocurrency demonstrates potential positive effects for people and communities involved. Governance refers to a cryptocurrency’s ability to expand the reach of capital markets through the decentralised and permissionless delivery of financial goods and services.
According to the Bitcoin Electricity Consumption Index, the global bitcoin network consumes 80 terawatt-hours of electricity a year. To put this into perspective, this amount of energy is produced by 23 coal-fired power plants or the same amount of energy consumed by Finland in a year.
As mainstream financial institutions begin showing interest and adopting virtual assets as an investable and tradable asset class, environmental, social and governance (ESG) concerns have been raised relating to the amount of energy expended in mining cryptocurrencies. Especially so for those that rely on a proof of work consensus model (e.g BTC and ETH) rather than proof of stake/proof of authority consensus models.
Given the increasing difficulty of the puzzles that need to be solved in proof-of-work (PoW) blockchain models, crypto miners tend to seek out the lowest-cost energy to power their ‘mining rigs’ required to gain an edge over the competition. As a result, bitcoin miners tend to be agnostic toward the energy consumption and emissions produced by the cheapest sources of power.
Addressing ESG Concerns for Cryptocurrencies
In light of this, renewable energies such as wind, solar and decentralised power generation will see localised and domestic clean energy hardware become more affordable. Currently, nearly 40% of cryptocurrency mining relies on renewable energy sources, as an increasing number of miners aim to reduce carbon emissions and meet ESG compliance and demands from investors. Miners can differentiate their ESG credentials by switching to or emphasising their use of sustainable energy sources, and other cryptocurrency market participants can consider taking steps to encourage the use of renewable energy in bitcoin mining.
Other cryptocurrencies have also begun searching for ways to move to more energy-efficient models, such as Ethereum’s transition to a proof-of-stake, as well as initiatives to incentivise the adoption of renewable energies via carbon offset tokens.
A key initiative to address ESG concerns is the Crypto Climate Accord, which aims to empower investors to pressure miners and cryptocurrency companies to source renewable energy. The goal of the accord is to decarbonise the cryptocurrency industry by 2030, with more than 45 companies from a plethora of industries already pledging to reach this goal.
How Regtank can Help?
As the cryptocurrency industry continues to evolve on a variety of frontiers, Regtank continues to stay committed in helping firms remain compliant with the latest regulatory laws, as well as keeping up the fight against ML/FT activities.
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