It is important for the sector to step up its game in terms of ESG for blockchain to achieve mainstream adoption without damaging the planet.
The crypto industry has been getting out of the realm of nerds and gaining traction amongst the masses for a while. Everyday, thousands of users are getting their first contact with the technology that is already shaping the future of our world, as many other technologies did before it.
A virtuous cycle is emerging as new and promising projects compete for unicorn status, getting more users and accordingly more investment, both in terms of funding projects in exchange of tokens or equity, and in the form of retail and institutional investment in so-called blue-chip crypto assets.
However Environmental, Sustainability and Governance (ESG) criteria for investment firms are ever more stringent, and they also apply to the crypto industry. It is time to leverage ESG for blockchain investment.
ESG for blockchain investment
While a lot of money is being poured into the industry and investment flows are growing at astonishing rates, firms that are subject to strict ESG criteria remain out of reach for crypto projects. That is why it is important that the industry moves fast towards fulfilling those requirements in order to reach the next level of financing and investment capacity.
When carbon budgets started to be drawn, no one could foresee the evolution of the energy-intensive blockchain industry. Today, the crypto world is unintentionally distorting those budgets, while facing closed doors from firms that can’t invest in industries that are not “clean”.
We are now in a very delicate situation, in which the blockchain industry has the resources to bring in thousands of users even though ESG matters are not entirely solved. This is affecting the momentum of the virtuous cycle mentioned above.
SuperBowl ads about crypto and climate
Let’s take the example of this year’s SuperBowl, where three prominent players of the crypto exchange industry jumped into the olympus of advertisers. Considering that a single bitcoin transaction emits one ton of CO2 to the atmosphere (according to Digiconomist), encouraging the SuperBowl’s millions of viewers to join the crypto revolution goes against global climate goals, particularly since both of the top coins in terms of market capitalization lack in environmental consciousness.
Ethereum’s footprint is not as harmful as Bitcoin’s, but a single transaction still emits 124.4 kg of Co2. Additionally, that figure grows in correlation with the energy consumption of the equipment needed to validate transactions and mine new units of the coin, as it happens with Bitcoin. Ethereum plans to change its working mechanism so that energy intensive equipment won’t be needed anymore; this would reduce its energy consumption by 99.95%, but it’s unclear when such a change would happen, since the process is highly complex and has already been delayed a few times.
In effect, the SuperBowl ads have encouraged millions of people to contribute to increasing the world’s carbon footprint – something we simply cannot afford. It’s time for blockchain to help solve the problem, not to make it bigger.
First good practices in the crypto industry
The first innovative initiatives to solve this problem in the blockchain industry are beginning to sprout. For instance, the alliance between ClimateTrade and Algorand has been described as the first green governance initiative in the blockchain space.
Any blockchain network can become carbon-neutral thanks to ESG-driven policies, such as the ClimateTrade and Algorand’s Green Treasury initiative.
By calculating carbon impact across the Algorand ecosystem and enabling immediate offsets through ClimateTrade’s blockchain-based marketplace, the Green Treasury allows Algorand to offset its own carbon impact, while seamlessly integrating the same offsetting capabilities across its ecosystem, including NFT marketplaces, payment solutions, regulated digital assets, and new economic models.
The custodian opportunity
Institutional investors did not enter the crypto world until it offered well developed and secure custody services to relieve them from the high responsibility of custodying digital assets and managing the security threats that are inextricably linked to crypto asset possession.
Bunkers have been built with military grade physical security and the strictest cyber security banking industry standards to prevent the theft of crypto assets from servers. Inside those bunkers, which are blocked from all internet connectivity, hardware security modules generate, store and protect private keys, with a very limited number of people carrying out manual management of transactions. But this is only the most basic (and necessary) layer of service to secure the funds – it is definitely not enough.
Any entity subjected to ESG reporting that is willing to hold digital assets needs to go the extra mile and turn their holdings into an asset that is not only secured but also complies with ESG standards. Here lies the opportunity for custodians to provide a value-added service, not only to ensure that crypto holdings are safe but also that they have offset their CO2 emissions to fulfill ESG criteria. This would ensure the traceable application of ESG for blockchain, opening the door for more clients to be able to jump onto the crypto-investment train.
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