Bitcoin and ESG Reviews: Benefits Worth Increasing Energy Consumption

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(Slavko Sereda / Getty Images)

The promise of a decentralized financial system is worth a moderate increase in energy consumption.

The environmental, social and governance (ESG) movement is coming for Bitcoin and a host of other cryptocurrencies. This latest iteration of the corporate responsibility movement has succeeded in capturing state-owned enterprises and forced a shift in priorities from shareholder value to a set of amorphous standards that too often serve as mere proxies for progressive political goals. If crypto falls under ESG pressure, it will crush much of its global benefits for individuals around the world.

The main ESG complaint about Bitcoin is its energy consumption. Wall Street and other ESGers view Bitcoin’s energy consumption as waste and filth. Bitcoin currently consumes the energy equivalent of the Netherlands, whose residents make up 0.22% of the world’s population, according to an estimate.

So, nonprofits and the business press want to solve the crypto industry’s supposed social and governance issues by imposing top-down control through ESG bureaucracy as they have done with state-owned companies.

Leading crypto publication Coindesk recently explored Bitcoin angst in How the Bitcoin Industry Responds to Wall Street’s ESG Concerns. The response from the Bitcoin industry has been to appease. Ark Financial and Jack Dorsey’s Square published a white paper with promises of clean Bitcoin through renewable energy. Elon Musk has joined us. Others advocate carbon neutrality, carbon credits, etc.

It would be interesting to know what Bitcoin creator Satoshi Nakamoto would think (if he’s still alive). The opening sentence of Bitcoin’s whitepaper summary discusses the possibility for people to bypass financial institutions to eliminate middlemen in financial transactions. Bitcoin’s genesis block refers to bank failures and bailouts, so it seems unlikely that Nakamoto cared much about Wall Street concerns.

In fact, Nakamoto could have offered a vigorous defense of Bitcoin’s power-hungry consensus mechanism (a set of rules that verifies new transaction blocks and maintains the integrity of the blockchain) as the necessary design compromise for a decentralized currency. Instead of a central authority, many people and entities maintain the blockchain through various nodes in a system without trust. These nodes validate transactions and maintain the network. To keep accurate ledger history and link new blocks of transactions, powerful computers compete to solve mathematical puzzles, a system called mining. The winning mining node receives newly created Bitcoins, other nodes verify the winner, and then the process restarts. Bitcoin’s mining system activates its consensus mechanism called “proof of work”. And that consumes a lot of energy.

The consensus mechanism forces decentralization as the dispersed nodes interact. Blockchain does not have a single point of attack and is therefore essentially hack proof. Computer scientists have been trying to make decentralized, hack-resistant, and irreplicable internet money for decades. Nakamoto did this and spurred a new emerging internet known as Web 3.0 that is changing the world.

The benefits of Nakamoto’s decentralized view of people transacting outside of centralized institutions are everywhere. Even the worst tyrannical regimes cannot stop Bitcoin transactions because they can do cash or credit card transactions. As such, Bitcoin provides lifelines for dissidents battling the persecution from Hong Kong, Russia, Belarus, Nigeria, and Iran, among others. It provides a store of value in grossly mismanaged countries like Venezuela. More banally, it facilitates cross-border payments, bypassing the current bureaucratic quagmire. Nakamoto would likely agree to the trade-off of inordinate energy consumption equivalent to 0.22% of the world’s population in exchange for the potential release of the 53% of people controlled by oppressive regimes.

Yet Bitcoin as freedom money is just the start. A future web could decentralize more than just financial transactions. Open source and unauthorized protocols could rework every economic transaction. This could change the power imbalance between individuals and institutions (private sector or government). This could reverse the tech and political stack by allowing people to control their data and sell it on their own terms (or not at all) instead of allowing tech companies to monetize it (in exchange for free services). This doesn’t bode well for big tech companies today.

Imagine a future in which everyone can control their data and online identity, sharing it only with who they want, on their own terms. If you want someone’s time or attention, you trade and buy it with cryptocurrency. Without a central authority acting as a data bottleneck, the ability of social media companies to remove user-posted content, like tweets or Facebook posts, could disappear, as blockchain records are permanent. In fact, anyone could take their digital life and their application networks to application or from blockchain to blockchain. It could make anyone instantly, without permission from a centralized authority, a lender or borrower of money, a journalist, a content creator, a venture capitalist, a freedom activist – all of them. catalyzed and encouraged by decentralized blockchains, smart contracts and cryptocurrencies.

Web 3.0 also has the potential to destabilize our cultural, financial and political elite in other ways. Federal Reserve financial authorities and global standards bodies want to ban or restrict crypto by replacing it with government-run central bank digital currencies (CBDCs). The authorities surround the CBDCs in platitudes about public goods, “financial inclusion”, effective monetary policy and the fight against bad actors such as online bandits or terrorists. But digital versions of fiat currencies lack the advantages that Bitcoin and other cryptocurrencies offer in pseudonym form: the absence of government controls and decentralization.

Current internet titans and ESG promoters aren’t seeking crypto abolition; they want control. They promoted a different consensus mechanism called “Proof of Stake” as an alternative to Bitcoin’s “Proof of Work”, which consumes a lot of energy. Proof of stake allows anyone with enough cash to buy a stake in the currency of a blockchain, validate transactions, and ultimately gain influence over governance decisions. Ethereum, the second largest cryptocurrency, is currently moving from proof of work to proof of stake. According to one estimate, 57% of cryptocurrencies are now using proof of work and the number is declining.

Unfortunately, Proof of Stake has a major weakness in that it allows centralization, which potentially threatens the best attributes of Web 3.0. Centralization provides an opening for ESG advocates to produce a crypto bureaucracy that can indirectly control the crypto ecosystem as it does with state-owned companies. For example, concerns about energy consumption could turn into other important ESG concerns such as lack of diversity, prohibition of hate speech, censorship and control by Silicon Valley companies over the social media platforms they created and managed.

ESG advocates could also attack the exchanges where crypto is sold by seeking to ban non-ESG tokens. Some exchanges are already public companies subject to ESG pressure. And the new chairman of the Securities and Exchange Commission, Gary Gensler, is concerned about regulating all exchanges.

Time will tell how successful these efforts will be. Maybe technological advancements will overtake people’s ability to control it. But it is naive to assume that these government and cultural interests will step aside and let individuals do what they want. The promise of Bitcoin and indeed all of Web 3.0 as a user-centric, people-centric world is still in beta mode. Just know that despite the rhetoric about the public interest or about not leaving people behind, those seeking control have their own best interests in mind.

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