Since its debut in 2009, Bitcoin and other cryptocurrencies have seen explosive growth and dramatic downturns.
Cryptocurrencies now occupy an increasingly important niche in the global financial landscape, offering “hobby” opportunities for young investors, channeling donations to Ukraine’s war effort or simply provide cheaper and faster alternatives to traditional banking services.
In Aotearoa, New Zealand, the Reserve Bank recently decided to investigate crypto part of a larger conversation about how New Zealanders will pay and save in the future.
So far, crypto has benefited from light regulation in New Zealand, but it is essential that we have a clear picture of all the pros and cons, including the risk of criminal behavior and the impacts of climate change.
Cryptocurrencies offer a variety of investment and trading benefits, but concerns about the dangers are also growing. Crypto’s volatile track record presents significant risk to investors (as well as significant reward) and the relative anonymity of Bitcoin, Ethereum and others proves attractive to organized crime, money laundering and tax evasion.
To date, crypto has largely avoided the traditional forms of financial regulation faced by banks and capitalized on its ability to avoid territorial boundaries, being everywhere and nowhere at the same time.
As calls for effective regulation grow louder and major markets in the US, EU and Asia seek to subject cryptography to greater scrutinyit is particularly important to highlight the growing but often hidden environmental impact of crypto.
Bitcoin uses more energy than most countries
How do companies with only virtual assets contribute to environmental damage? The answer is data mining.
Cryptocurrencies and assets use blockchain technology. Essentially, transactions are verified and recorded on a blockchain, a public digital ledger that contains information about all transactions.
Blockchain technology guarantees the integrity of crypto transactions, but it does so using huge amounts of electricity. Bitcoin’s annual electricity consumption is greater than three times that of New Zealand. This is due to the distributed nature of the blockchain and the use of cryptography and complex processing, which require considerable computing power.
Verification of transactions, or mining, is so energy-intensive that it has raised concerns about the resilience of some countries’ electricity supplies. Earlier this year, Kazakhstan cut crypto miners due to the country’s energy crisis.
When the electricity used by crypto comes from fossil fuels, the link to climate change becomes clearer. Recent developments in the United States set a worrying trend. Crypto’s colossal energy needs could be met by electricity from coal-fired power plants, at a time when the energy sector is expected to pivot to renewables.
In Kentucky, a new crypto »blockchain farm» is being built near four coal-fired power stations, for an easy energy supply. Meanwhile, another coal-fired power plant in Montana was brought back from the brink of shutdown after agreeing to be the sole electricity supplier to a Bitcoin mining company, Marathon, adding hundreds of thousands of tons of carbon dioxide to the atmosphere.
Cryptocurrencies and climate change
The need to act decisively on climate change has never been more urgent. Last year, New Zealand announced its new Nationally Determined Contribution for reduce emissions by 50% to 2005 levels by 2030 as part of collective efforts to limit global temperature increase to 1.5℃ above pre-industrial levels.
This is an improvement from the previous pledge, but Climate Action Tracker still rates New Zealand’s overall contribution to climate change mitigation as “very insufficient“.
The last report of the Intergovernmental Panel on Climate Change (IPCC), published last month, details the impacts of exceeding the 1.5℃ target. For Australasia, these include increased heat-related death and illness to people and wildlife, loss of livelihoods and lower income from agriculture and loss of areas low-lying coastlines due to rising sea levels. Failure to act on climate change now will have serious consequences, including close to home.
According to a recent investigation, most New Zealanders accept the need for action on climate change. But too often, people’s lifestyle decisions still seem disconnected from their environmental impacts. Confusion remains about what people can do in a meaningful way to bring about positive change.
When it comes to crypto, to make informed and responsible choices, New Zealanders need a clear picture of how our consumption and investment decisions affect the planet. Both public and private sectors should explore more environmentally friendly blockchain technology based on “proof of stake” which consumes less power due to less processing requirements.
Indeed, the European Parliament has considered banning the more power-hungry “proof-of-work” mechanism that Bitcoin and other popular cryptocurrencies use. Although he backed down the proposal, cryptocurrencies will likely be face closer scrutiny as the EU tries to tackle the climate crisis.
Aotearoa also needs a forward-looking regulatory framework to limit the use of power-intensive encryption and support a more secure and sustainable model for consumers and the planet.
/ Courtesy of The Conversation. This material from the original organization/authors may be ad hoc in nature, edited for clarity, style and length. The views and opinions expressed are those of the authors.