Can Crypto be Green?

Energy-intensive and unregulated, institutional investors are proving reluctant to back the rapidly growing asset class.

When Elon Musk tweeted in May that Tesla would no longer accept vehicle payments made using Bitcoin due to the “rapidly increasing use of fossil fuels for Bitcoin mining and transactions”, the debate around the environmental sustainability of cryptocurrencies reignited.

This and other media frenzies surrounding cryptocurrencies have temporarily stayed the hands of many institutional investors, despite rising valuations. But other aspects of their growing ubiquity demand continued attention.

Cryptocurrencies enable a digital form of value exchange in which transactions are verified and maintained by a decentralised system using cryptography, rather than a centralised authority. They can be transferred immediately between users globally without incurring additional charges from an intermediary, and are very difficult to counterfeit due to the blockchain distributed ledger. On paper at least, cryptocurrencies appear to be the future of finance.

Organisations such as Facebook, Visa and Mastercard have expressed interest in cryptocurrencies. Asset managers, too, are confirming that they are considering launching investment products holding crypto.

“A firming regulatory framework, deepening liquidity, availability of products and growing investor interest – especially among institutional investors – have coalesced”, with cryptocurrencies now reaching the threshold of becoming an investable asset class that can “play a role in diversified investment portfolios”, according to a report by Morgan Stanley Wealth Management.

However, Bitcoin alone is estimated to consume as much electricity as the Netherlands, with a carbon footprint equal to New Zealand. Further, it harbours negative social and governance risks for investors, according to Chris Clothier, Fund Manager at CG Asset Management. The anonymity of using crypto means it is providing a “safe space” for criminal activity. On the governance side, the lack of central register means that an investor has nowhere to turn if their Bitcoin is lost or stolen.

“Bitcoin is capable of reform but its decentralised nature makes change cumbersome. Whether it is able to reform while retaining its appeal among its proponents remains to be seen. For the time being, investors with any consideration for ESG principles should avoid it,” Clothier says.

While most institutional investors are largely wary of investing in the asset class at this stage, some are proving willing to test the waters. Last month, the Houston Firefighters’ Relief and Retirement Fund, which has USD 5.5 billion in AUM and serves 6,600 end-beneficiaries, bought USD 25 million worth of Bitcoin and crypto platform Ethereum.

“The rise of sustainability and cryptocurrencies are the two dominant investment themes of our time, and they have to be compatible,” says Matthew Cannon, Co-Founder of Singapore-based Modular Asset Management. Through increased dialogues with platform users, developers, researchers, and investors, Cannon anticipates that new ESG-related measures will be introduced to improve the sustainability of blockchain technologies and cryptocurrencies.

With the threat of climate change increasingly tangible, the environmental risks associated with crypto are at the forefront of investors’ minds.

Clean energy-powered crypto 

The phenomenal growth of cryptocurrencies means the sector already offers considerable choice. Bitcoin is far from the only crypto out there, and risk-averse investors don’t have to involve themselves in the asset class so directly.

Funds are already offering investors exposure to sustainability-focused crypto miners and infrastructure. Crypto miners create new crypto coins by solving complex mathematical equations. The first to solve the specific problem is paid a fraction of the transaction as a fee for their efforts and gets to keep those coins.

Investing in miners means that investors can buy into the rapidly growing asset class, which now exceeds USD 3 trillion, while ensuring they are funding sustainable operations and reducing their exposure to potential market volatility.

One such example is the Viridi Cleaner Energy Crypto-Mining and Semiconductor ETF (RIGZ), launched by ethical investment advisor Viridi Funds in July.

“The ETF was launched in order to introduce investors to crypto through a more environmental lens,” says David Khalif, Head of Operations at Viridi Funds. It invests in crypto miners and semiconductor companies that already use clean energy sources or have pledged to transition in the near future.

Khalif and his fellow co-founders – Ethan Vera and Wes Fulford – recognised that crypto mining companies implementing clean energy solutions and operations will be more attractive to responsible investors.

“They both previously worked in the crypto mining space, so have a deep understanding of how these companies operate, including their energy requirements and how they can be improved through renewable alternatives,” Khalif tells ESG Investor. Khalif himself worked in investor relations at Microsoft.

RIGZ has 19 holdings, many of which are also held by the Amplify Transformational Data Sharing ETF (BLOK), which has over US$1 billion in AUM.

But by holding only clean energy-focused or transitioning companies in the crypto space, RIGZ has almost doubled the returns of BLOK, helping it to surpass US$10 million in AUM last month. For example, Hut 8 Mining, one of RIGZ’s main holdings, gained 124% over a three-month period.

Reworking crypto’s energy mix 

As wholly digital assets, the environmental impacts of crypto are primarily confined to two areas, according to a report by Sarson Funds, an independent provider of blockchain technology and crypto educational services. These are energy consumption and energy mix.

“Energy consumption refers to the absolute amount of electricity expended to maintain a given blockchain network. Energy mix is more nuanced, as it refers to the blend of energy sources powering the network,” the report said.

Progress by cryptocurrencies and their ecosystems towards net zero operations across both of these areas remains varied.

Digiconomist has calculated that one single Ethereum transaction produces 90.93 kgCO2, which is the equivalent carbon footprint of 201,532 VISA transactions. In comparison, it is estimated that the blockchain-based crypto platform Algorand produces 0.0000004 kgCO2 per every non-fungible token. Digiconomist is a platform that works to expose the unintended consequences of digital trends, such as economic impact.

Of course, fiat currencies – such as the pound sterling, euro and US dollar – are not exactly carbon neutral. Physical currency contributes to deforestation, and then there are the emissions produced during the printing process to consider. Nonetheless, organisations such as Louisenthal, a manufacturer of banknotes and security paper, are running initiatives to make sure the whole lifecycle of a banknote is more sustainable.

“Through our ETF, we are trying to prove that investors can back clean energy-powered miners in the market – that have low carbon footprints and energy output – and maintain a high return profile, exceeding those from miners using coal or other carbon-intensive energy supplies,” says Khalif.

Hut 8 Mining is using clean energy such as wind to power operations. It is also a member of the Bitcoin Mining Council, which is a voluntary open forum for crypto miners to promote energy usage transparency and encourage the transition to renewable energy sources.

Khalif adds that some crypto mining companies are looking into ways to utilise the heat produced from mining computers, recycling it into additional energy. “As a technology-based industry, it’s always going to be innovating,” he says.

Responsible investors can also look to signatories of the Crypto Climate Accord (CCA) for investment opportunities. The accord, inspired by the Paris Agreement, is a private sector-led initiative investigating ways for the industry to decarbonise as soon as possible. Signatories must make a public commitment to achieving net zero greenhouse gas (GHG) emissions for all electricity consumption associated with crypto-related operations by 2030.

The CCA also has ambitions to develop 100% renewably-powered blockchains by COP30 in 2025.

Crypto wallet and payments platform, Zumo, published a report exploring how to reduce the carbon footprint of cryptocurrencies. It includes input from the Cambridge University Centre for Alternative Finance, Digiconomist and the Green Bitcoin Project.

Because it can switch fairly easily to renewable electricity, the crypto sector has “a relatively easy decarbonisation path ahead of it” compared to many other sectors, asserts Kirsteen Harrison, Environmental Consultant at Zumo. “There are no complex supply chains, no deeply entrenched ways of working, and we have a clear understanding of where the impacts are.”

While a number of crypto miners are committing to the use of renewable energy, Modular AM’s Cannon warns that, as with any asset class, there is always a risk of greenwashing. And it is very difficult to audit where and how power used during the crypto mining process has been generated.

“We don’t subscribe to the widely-held view that an energy-inefficient blockchain platform can become green because it might eventually be powered by renewable energy. In our view, while the world still relies on fossil fuels, the unnecessary use of any energy – renewable or not – should be avoided,” he says.

The more the crypto industry grows, the more energy its miners will require, Khalif acknowledges. Whether using renewable or carbon-intensive energy sources, this is going to put strain on utilities, which also require increased investment to ensure infrastructures can handle demand.

Industry mobility

Nearly 60% of crypto mining has been done in China, where coal is still a major source of power, according to the Morgan Stanley report. Although China has pledged to start phasing out coal usage from 2026, its daily output is still around 12 million tonnes.

China technically banned crypto mining and transactions in 2019 – a ban which was reinforced in September, with banks and payment platforms told to stop facilitating such transactions. The reminder caused the price of Bitcoin to fall by more than US$2,000.

It has led to many crypto miners relocating to the US, which is now having to contend with the increased pressure placed on its electricity utilities as well as the rising demand for regulation from the industry itself.

But regulation in the US is uncertain, says Khalif. “We’re now facing a hurdle where the US Securities and Exchange Commission (SEC) and other regulatory bodies are educating themselves on crypto and ascertaining what kind of regulation is needed,” he notes.

“Regulation isn’t a negative for the industry,” Khalif adds. “We want investors to funnel capital into sustainability-minded crypto-associated companies with confidence and increased regulation would allow that to happen.”

President Joe Biden signed the US$1.2 trillion bipartisan infrastructure bill into law this month, which included tax reporting provisions for digital assets. However, there has yet to be country-wide regulation on the disclosure or measurement of the environmental impacts of cryptocurrencies.

In the interim, investors have a lot of influence to enact positive change by investing in and engaging with the industry, Khalif insists. As an actively-managed fund, Viridi can vote on proxy filings at investee company meetings, making sure to hold them accountable on ESG-related issues, such as the mitigation of climate change.

“Over time, hopefully more responsible institutional investors will exert a positive influence on crypto,” says Khalif. “But that won’t be before they test the waters through smaller allocations. By investing in sustainability-focused crypto mining and semiconductor companies, they could make a huge difference.”

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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