Opinion: Will Bitcoin and crypto ever escape anti-ESG and illicit use myths?
Having come from a cryptocurrency background, I am often surprised by the debunked myths that persist around Bitcoin and cryptocurrencies in general.
There is a slew of these myths that I could elaborate on, but in the interest of time and word count, I will try my best to address just three of them — a lack of institutional interest, Bitcoin mining being detrimental to the environment, and cryptocurrency’s use for illegal activities.
INSTITUTIONAL INTEREST
The first, and probably the easiest to debunk, is that asset owners such as pension funds and sovereign wealth funds are not interested in this new asset class or view it as a passing fad.
Logically, to say that institutional investors are not closely watching an emerging asset like Bitcoin, which has grown in value from its initial trading price of nine cents in July 2010 to an all-time high of $68,789.63 in November last year, is laughable.
Even at its current value of around $20,000 per BTC — after it fell hard along with all major equity indexes this year — its price represents an increase of over 9,000,000% in just over 10 years.
Factually, it is just untrue and there are several publications of gold-standard research that confirm this fact.
A CFA Institute report published in April found that more than 69% of the 220 sovereign wealth funds surveyed were invested in cryptocurrencies.
Additionally, of the 300 corporate-defined benefit plan sponsors surveyed, 62% were invested in crypto. While the sample size for state or government pension plan sponsors included just 50 funds, 94% of them responded that they too were invested in cryptocurrency.
It is fair and necessary to step back here and say that not all funds are convinced of cryptocurrency’s investment potential, and the findings of the survey do not mean the SWFs investing are directly buying Bitcoin and Ethereum coins.
However, global investment houses have increasingly shown interest in the asset class, with the likes of Abrdn, BlackRock and Charles Schwab entering the digital assets market last month.
“The things that are attractive about digital currencies are quite real and are likely to be durable,” a senior representative at a global asset manager told AsianInvestor.
“I expect that it’s something we will absolutely be dealing with in the future, but it's a little bit challenging for institutions right now for a variety of reasons. The mechanics of investing in and holding Bitcoin, but that's something that will get resolved. And I think that the attractive investment elements of cryptocurrency are pretty enduring.”
PoW IS ANTI ESG
Environmental, social and governance (ESG) trends in investing have been gaining traction over the past two decades, with the majority of the investment industry viewing ESG criteria as a must.
One of the unfounded criticisms I end up confronting the most is whether Bitcoin is an environmental catastrophe. As ESG is an ever-growing priority for institutions, the energy cost of Proof of Work (PoW) mining —the consensus mechanism of Bitcoin’s blockchain — has been an easy target. While I have many theories as to why this argument persists, I have no desire to put on my tin foil hat right now and will stick to the facts.
PoW is energy-intensive, that is true, but a large part of that energy is increasingly moving towards renewables. In the last year, Bitcoin mining used about 120 terawatt-hours of electricity, which equates to 0.5% of the total global grid consumption.
Renewable energy currently makes up around 29% of the world’s electricity, but estimates for the percentage of energy used for Bitcoin mining coming from renewable sources ranges from 40% to 75%.
Bitcoin miners turn to renewable energy for pragmatic reasons.
“If you're a Bitcoin miner, there are only two things that matter, one is that you have the best hardware available, and secondly, that you have the cheapest source of power,” Charlie Morris, managing partner at CMCC Global, a crypto venture capitalist firm, told AsianInvestor.
“A lot of the cheapest power in the world is renewable energy. So much of the power is generated from hydroelectric dams, excess energy of power grids, and other incredibly cheap sources such as solar. Bitcoin miners, they really pride themselves on that,” he said.
Miners reconcile their needs for cheap power supply with investors' aspirations, particularly in the public markets, for excellent ESG performance, with the help of organisations like the Crypto Climate Accords, making Bitcoin a role model for sustainable energy use.
Essentially, the correlation between Bitcoin mining and renewable energy reportedly makes Bitcoin mining “more renewables-driven than almost every other large-scale industry in the world.”
CRYPTO IS FOR CRIMINALS
Ever since Bitcoin’s inception, its reputation has been marred by its association with the Silk Road dark web marketplace—where people could use the cryptocurrency to buy anything from weapons to drugs.
However, as Silk Road founder Ross Ulbricht has since discovered, by leveraging Bitcoin’s transparent blockchain ledger, the scale of the illicit transactions on the site was soon tracked and did not help his sentencing when he was arrested. With the growing use of the Bitcoin network, which now has over 81 million Bitcoin wallets and counting — it is becoming increasingly easier to track transactions on public blockchains.
According to Chainalysis, in total cybercriminals have laundered over $33 billion worth of cryptocurrency since 2017, with most of the total over time moving to centralised exchanges.
By comparison, the UN Office of Drugs and Crime estimates that between $800 billion and $2 trillion of fiat currency is laundered each year which represents as much as 5% of global GDP.
Money laundering accounted for just 0.05% of all cryptocurrency transaction volume in 2021, according to Chainalysis, which used the numbers to point out the amount of money laundering activity that could potentially move to cryptocurrency as adoption increases.
To indulge in a little “what aboutism” — which my therapist says is very unhealthy (but I am quite sure he doesn’t read my stories) — private banking institutions are still able to transact suspicious movements in plain sight and to this day are responsible for facilitating the majority of money laundering activities.
In September of 2020, a leaked trove of official Financial Crimes Enforcement Network (FinCEN) documents revealed that suspicious transactions passed through five major banks – Deutsche Bank, HSBC, JP Morgan, BNY Mellon, and Standard Chartered Bank.
The FinCEN documents disclosed that more than $2 trillion worth of transactions had been flagged as suspicious activities (such as money laundering or sanctions violations) by financial institutions.
It should be noted that these documents are not necessarily evidence of any criminal conduct—the reality is that the documents indicate the banks did report on the suspicious activity as required by FinCEN.
But one could argue that the reporting obligation itself is far from optimal as it simply means that banks are required to report suspicious transactions and that is where their accountability ends.
The same standards aren't applied to Bitcoin and other cryptocurrencies, which simply do not deserve their myths-based bad rep.