Crypto revolution cannot ignore climate risk
Banks can lead the way in greening the crypto market
Supervisory bodies have made big strides in introducing regulations to incorporate cryptocurrency technology into the wider financial markets.
However, as banks forge ahead on the new crypto frontier, they must not do so to the detriment of their green transition plans and net zero emissions targets.
Despite attempts to green the blockchain, the underlying technology is far more energy-intensive compared to conventional computing, especially systems that rely on proof-of-work methods.
For instance, bitcoin mining uses 84TWh of energy a year, 1.8TWh more than the whole of Belgium, according to the Cambridge Bitcoin Electricity Consumption Index.
Bitcoin uses a proof-of-work consensus mechanism that requires a network of crypto miners to validate new parts of the blockchain, compounding the computational power — and energy — used to produce a coin.
There is a far less energy-intensive alternative in a proof-of-stake mechanism, but the take-up is small. Proof-of-work assets account for 80% of the total market, according to the European Central Bank.
Financial firms say they are working hard to green themselves. Many have signed pledges for net zero emissions by 2050, while bank green bond funding stretches across the capital stack.
However, the results of the ECB’s first climate stress test highlighted that there is a way to go. About 60% of the assessed banks do not have a climate risk stress test framework in place.
If banks are to start incorporating crypto technology into their investments and practices, they first need to factor it into their climate risk assessments. After all, the Basel Committee’s recent principles for managing climate risk would require banks to assess all their exposures and activities.
Banks should take this on board and understand they’re in a privileged position to guide not just the future of crypto technology but also its environmental outlook.
Through their size and financial clout, banks have the power to force change and lead the way. At the end of 2021, EU-headquartered credit institutions held €30tr of combined assets, up 3.2% from a year earlier. On Thursday, the total crypto market cap was €927bn.
Banks are often criticised for financing polluting companies, but they claim they cannot switch off funding for companies that can only green themselves slowly. The crypto sector is newer and still being formed. Banks must use their influence and involvement to make it a greener business from the start.