The ESG Case for Crypto
First, let’s state the obvious: Bitcoin mining uses a lot of electricity, so it’s bad for the environment. Anyone who claims otherwise is either a salesperson or a fool. Arguing that mining is good for the environment because it encourages investment in renewables is like arguing that smoking saves lives by driving cancer research. All of the energy comparisons to the traditional banking system are also foolish. There are various nuances to this debate, but none change the fact that Bitcoin has a significant carbon footprint.
But so do a lot of things. Tellingly, none are as controversial. What’s the carbon footprint of people cranking the AC, ordering takeout and watching Netflix? Significant, but seldom debated. Every kind of human activity impacts the environment, and plenty of mundane activities use “more power than some countries” when measured in aggregate. Deciding which ones are worthwhile requires an objective cost-benefit analysis and comparison to similar activities. Bitcoin mining is rather unique, but for the sake of argument, let’s compare it to the US military.
Like Bitcoin, the US military uses more energy than some countries. Also like Bitcoin, a big reason why is to secure the purchasing power of a currency. But unlike Bitcoin, the military does this in a roundabout way, protecting unsavory regimes who price their exports in dollars and dropping the occasional bomb. The relationship between money and power is almost as old as money itself, with those issuing the former often utilizing the latter to keep their currency on top. Bitcoin’s clever contribution is to make this previously implicit relationship explicit. People trust its coins because they require a lot of power to produce.
The ESG case for crypto starts with the recognition that the power consumption of coins like Bitocin and Ether is a feature and not a bug, the most important component of a novel security mechanism that achieves something remarkable: a global monetary system that is independent of any corporation or government, and strictly opt-in. There are no exclusive legal tender laws, capital controls or naval fleets that force people to trust Bitcoin. And yet, hundreds of millions do, perhaps for that very reason.
Crypto has no coercion. It uses transparency, math and economic incentives to build trust where it wouldn’t otherwise exist. Crypto is meritocratic. Anyone can do anything — from mining to using to saving — and lots of people all over the world do. Like Lady Justice herself, crypto is blind. It doesn’t care (or even know about) anyone’s nationality, race, age, gender or sexual orientation. It’s the first electronic payment system that is accessible to anyone anywhere, from undcoumented workers in Western countries to women in Islamists ones to dissidents fighting dictators. The environmental impact is therefore offset by the social benefits, a negative E in exchange for a positive S.
That tradeoff is worth it, thanks to the increasingly tragic failures of the traditional monetary system. Not in terms of devaluation and inflation — though that may come later — but in terms of access. Over one and a half billion global unbanked, most of them poor, undocumented, minority and innocent. That last adjective is important, because the exclusionary nature of our existing financial system is no accident. It’s a direct consequence of a system built on a presumption of guilt.
As proof, consider the simple fact that opening up a bank account is often more intrusive than having open-heart surgery. Your doctor doesn’t have to collect a bunch of legal documents and perform a background check before doing her job, but your banker does. Most industries operate on a presumption of innocence. They accept anyone as a customer until individual behavior or law enforcement gives them a reason not to. Banking works on the opposite principle. Everyone is a potential terrorist or money launderer until they prove otherwise.
This presumption of guilt is a minor nuisance for the affluent, but an existential threat to the underprivileged. It’s one reason why poor neighborhoods feature more pseudo-financial services like check cashers and pawn chops than bank branches, even in rich countries. It’s also a contributor to the growing wealth gap. Those who have the least amount of money pay the highest fees, keeping them ensconced in poverty. It’s not that banks don’t want to serve these communities. It’s that so-called anti-money laundering (AML) know-your-client (KYC) & sanctions regulations make it too hard or too expensive for them to do so.
Bitcoin itself may not be the solution to this problem, but the tokenized financial system that it represents can, because it’s built on a presumption of innocence. Unlike banks and Fintechs who have no choice but to rely on legal identity — the kind that 10 million undocumented workers in America don’t have — tokens rely on cryptographic identity. Math doesn’t discriminate, so anyone who wants to access a blockchain network — to transfer Bitcoins, dollars or any other store of value — is able to. It goes without saying that the vast majority won’t be doing anything illegal. They’ll order goods online or send money back home, without having to pay exorbitant fees.
Here the crypto critics chime in with the now-cliched canard about illicit use. They claim that a financial system as open to undcoumented Mexicans as it is to affluent Americans will be rife with criminal activity. The inherent racism and classism of this argument aside, it fails a basic smell test. It would be one thing if the existing financial system, for all of its exclusionary tendencies, actually prevented crime. But the numbers indicate otherwise.
According to the World Economic Forum, an estimated 2 to 5 percent of global GDP — some two trillion dollars per year — is laundered through the banking system. There is $30b a year in credit card fraud, and according to acclaimed economist Kenneth Rogoff, up to a third of all hundred dollar bills are used in illegal activity. The most reliable estimate for the amount of Bitcoins used in illicit activity in 2020 — as published by Chainalysis, the leading government contractor in this domain — is only ten billion dollars, equal to the amount of money-laundering related fines global banks paid in the same period.
If the existing approach was remotely successful at keeping out the bad guys, then we could have a debate about whether the social costs were worth it. But guilty until proven innocent has failed on both fronts, so it’s time for a new approach, one that shifts the focus from keeping out bad actors to isolating bad money — know your token as opposed to know your client. Here the transparency and immutability of blockchain networks come in handy. Unlike duffel bags full of cash or structured wire transfers, tokens leave a perfect audit trail, one that is increasingly used to solve crimes.
The social benefits of crypto don’t end there. Tempting as it might be to shift the ESG debate away from speculative bitcoin to less power hungry platforms or central bank digital currencies, we should not shortchange what Bitcoin itself has achieved, which is to appreciate significantly. Skeptics love to complain about its volatility, despite the fact that it has always resolved to the upside. This critique can even be heard on Wall Street, where lots of things — including credit default swaps, Tesla stock and negatively priced oil futures — are also volatile. The inconsistency might have something to do with who has benefited.
Bitcoin has made a lot of poor, foreign, minority and young people rich, even when factoring in the recent decline. This is in stark contrast to other high flying investments such as venture capital, private equity or real estate, access to which is restricted. Before Bitcoin, a majority of people had no access to the majority of assets — a socioeconomic failure so astonishing that it’s worth repeating: poor people don’t get to invest in most things, due to a nasty combination of misguided laws, high minimum entry prices, lack of infrastructure in poor countries and KYC regulations in rich ones. According to the FDIC, up to a third of all African Americans remain underbanked, and people who have a hard time getting bank accounts have an even harder time opening brokerage ones. But anyone could have bought bitcoin at any time, and even a few dollars invested five years ago would be worth thousands today.
But that’s not how crypto investing is presented. Tellingly, the only time when investment luminaries like Warren Buffet or central bankers like Neel Kashkari comment on the investment potential of Bitcoin is to criticize it — “rat poison squared” according to Buffett and “burning garbage” per Kashkari. Their ignorance of what Bitcoin has achieved for ordinary people brings us to the final ESG argument for crypto, its superior governance.
Crypto governance is egalitarian. Anyone can contribute, and lots of people all over the world do, by holding tokens, validating transactions, hosting nodes or submitting code. Crypto governance is also meritocratic. There are no politically appointed positions, entrenched incumbents or captured regulators. Some of the most important participants are pseudonymous, because the community doesn’t care where someone comes from or what school they attended.
All that matters is their contribution, the ultimate embodiment of Emerson’s “doing well as a result of doing good.”
This is in stark contrast to traditional governance, where power is usually shared by a small group of people who attend the same schools, work at the same companies and exist in the same power circles. No wonder then that Mr. Kashkari (Republican, Wharton MBA, former Goldman banker) and Mr Buffett (Democrat, Wharton MBA, former Goldman shareholder) share a disdain for crypto. If traditional governance was more like crypto governance, then Mr. Kahkari, chief architect of the U.S. government’s TARP program, would have never been able to engineer the taxpayer funded bailouts that disproportionately benefited Warren Buffet’s investment portfolio, almost half of which was in financial stocks at the dawn of the 2008 crisis. Despite his poor judgement at that time, Mr. Buffett is now only richer for the experience. The countless people who lost their home or their job in the same crisis are not.
Perhaps more than anything, the ESG case for crypto begins and ends with what it isn’t, which is the old way of doing things.
The ideas represented here are strictly my own and not that of any client, employer or associate. Nothing said here should be construed as investment advice.