Mining for cryptocurrencies can be highly energy intensive, with bitcoin mining alone requiring the same amount of electricity as the Netherlands’ annual total power generation, or 0.5% of total global electricity consumption, Morgan Stanley said in a report entitled “ESG Considerations.”
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Environmental, social and governance (ESG) criteria are standards for a company’s operations that some investors use to screen potential investments.
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The bank notes that publicly listed bitcoin mining companies have begun to promote sustainability goals, and many buy carbon credits to offset their impact or aim to use cleaner forms of energy.
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Bitcoin and ether approve transactions in a highly energy intensive way known as proof-of-work (PoW). Proof-of-stake (PoS) is a more energy-efficient alternative to PoW, which could reduce the climate impact, the bank said.
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Ethereum hopes to move to PoS by late 2022, and while it requires much less energy than PoW, it brings its own challenges with risks of centralization, analysts led by Sheena Shah wrote on Tuesday.
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Morgan Stanley also sees a continued risk of governments restricting energy use for crypto mining, noting that as energy costs have risen, countries such as China and Kosova have banned mining, while others have restricted the activity.
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With respect to social considerations, cryptocurrencies are often viewed as a “means of supporting financial inclusion due to relatively low costs, low barriers to entry relative to the traditional banking system and relatively fast transaction times for cross border payments,” the bank said.
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But there is still the need for internet access, inherent volatility in fees and the cryptocurrencies themselves, and crypto doesn’t solve the key issue of unbanked individuals having insufficient money, it added.
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Governance of crypto applications will be an important topic, the report said, as it is becoming apparent these apps are not as decentralized as first promised.
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New regulations will likely change the rules of investing in crypto-related products, but are unlikely to change the “core of how the underlying crypto is run,” the bank noted. It also noted the emergence of decentralized autonomous organizations (DAO) as a new type of governance approach.
