Sustainability issues a hurdle to crypto enthusiasts

Elon Musk, founder of Tesla, recently christened himself "techno-king", or king of tech. A better moniker might be "Wizard of Oz". The entrepreneur possesses a startling ability to tug the strings of the crypto world.

In February, bitcoin prices leapt when Musk revealed that the company had bought $1.5 billion worth of the cryptocurrency. So did the price of dogecoin following similar Delphic tweets.

But last weekend dogecoin tumbled when Musk admitted on an American comedy show that the asset might be a “hustle”. And now bitcoin has tumbled too after yet another tweet, this time one revealing that Tesla will no longer accept bitcoin for purchases of electric cars.

"We are concerned about rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal," Musk said.

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Activists and journalists have, of course, been highlighting this issue for months. Two striking statistics encapsulate the problem.

First, it seems that two-thirds of bitcoin to date has been mined – created through computing algorithms – in China, using data centres reliant on electricity generated by coal.

Indeed, bitcoin's link with the black stuff is so tight that Alex Lipton, a crypto expert, notes that bitcoin prices move whenever accidents occur in Chinese coal mines.

Second, the $2 trillion crypto market has expanded so fast that it is gobbling up vast quantities of energy. Mining bitcoin, which accounts for half of all crypto, currently uses the same amount of energy annually as the Netherlands did in 2019. Scientists warn this threatens the Paris climate goals.

Bitcoin enthusiasts such as the entrepreneur Anthony Scaramucci point out that statistics need context and that traditional finance is energy-intensive too.

So are other types of technology. As a paper co-authored by a former researcher from Google's artificial intelligence ethics unit notes, some of the AI processes behind Google search are "estimated to require as much energy as a trans-American flight".

Carbon footprint

Even with such caveats, the fact is that bitcoin's carbon footprint is embarrassing, not just for Tesla but for millennial crypto investors who care about green issues. And that in turn highlights three big lessons for all investors.

First, nobody can afford to ignore environmental, social and governance concerns today, even in stocks labelled as ESG (environmental, social and corporate governance). Tesla is featured in many ESG funds because investors have focused on the electric-car point and ignored other issues.

However, digital transparency is now enabling activists to monitor companies’ activities more effectively than ever before. This means that investors need lateral vision when they value companies, since ESG risks are rarely static or binary and often involve trade-offs that constantly shift.

Second – and leading from this – investors need to watch the debate around tech’s carbon footprint as an example of this shifting landscape. A scramble is under way to tackle bitcoin’s carbon issues.

The Rocky Mountain Institute, a clean-energy non-profit, recently joined forces with United Nations officials and fintech leaders to explore solutions. One might entail changes to the computing processes around crypto to cut energy consumption; last week a "green" cryptocurrency which uses less processing power, called chia, was launched.

Another option is to use green electricity sources, for instance by switching Chinese coal for Icelandic hydroelectric power. Enthusiasts such as Scaramucci think this could solve the issue if there was a registry that enabled investors to track the provenance of bitcoins.

Unregulated sector

Which idea might work is unclear. But the debate probably explains why Musk dispatched his tweet. And why the veteran investor Stanley Druckenmiller said this week that it is unclear which cryptocurrency will eventually dominate (assuming you think, as Druckenmiller does and I do, that crypto is here to stay). Few people predicted 15 years ago that Facebook, not MySpace, would come to dominate social media.

The third point is about regulation. The reason Musk can act like the Wizard of Oz of crypto, with impunity, is that the sector is opaque and largely unregulated.

Financial policymakers are now threatening a crackdown. But as a report from the Bank for International Settlements notes, “the vast majority of jurisdictions in the world” have not implemented controls to stop money-laundering, let alone market manipulation. Plus there is “significant variability in the definition of the regulatory perimeter across jurisdictions”. In plain English, oversight is a mess.

Libertarians like it this way. So might Musk. But if crypto is going to become more mainstream – with whatever token – it badly needs more accountability and transparency.

Maybe that will be impossible to achieve given crypto’s anti-establishment origins. But the fight over green standards might, just possibly, start this process by providing a cause for young crypto-enthusiasts to rally around.

If so, that could turn out to be the most consequential impact of Musk’s tweet and a reason for investors and regulators to conduct some belated scrutiny of the Chinese mines, both of the coal and computing variety. – Copyright The Financial Times Limited 2021