Monetary Policy

Bitcoin Gets ESG’d

(SlavkoSereda/Getty Images)
The promise of a decentralized financial system is worth a moderate increase in energy consumption.

The Environmental, Social, Governance (ESG) movement is coming for Bitcoin and a host of other cryptocurrencies. This latest iteration of the corporate-responsibility movement has successfully captured public companies and forced a shift of priorities away from shareholder value toward a set of amorphous standards that too often serve as mere proxies for progressive policy goals. If crypto falls to ESG pressure, that will crush much of its global benefit to individuals worldwide.

The main ESG complaint about Bitcoin is its energy consumption. Wall Street and other ESGers see Bitcoin’s energy consumption as wasteful and dirty. Bitcoin currently consumes energy equivalent to the Netherlands, whose residents account for 0.22 percent of the global population, according to estimates.

So nonprofits and the trade press want to “solve” the crypto industry’s alleged “social” and “governance” issues by imposing top-down control via an ESG bureaucracy the way they have with public companies.

Leading crypto publication Coindesk recently explored Bitcoin angst in “How the Bitcoin Industry Is Responding to Wall Street’s ESG Concerns.” The “Bitcoin industry” response has been to placate. Ark Financial and Jack Dorsey’s Square published a white paper with promises of “clean” Bitcoins through renewable energy. Elon Musk joined in. Others are pushing carbon neutrality, carbon credits, and so on.

It would be interesting to know what Bitcoin creator Satoshi Nakamoto would think (if he is still alive). The opening sentence of Bitcoin’s white-paper abstract discusses enabling people to circumvent financial institutions — to cut out the middleman in financial transactions.  Bitcoin’s genesis block famously references bank failures and bailouts, so it seems unlikely Nakamoto would have cared much for Wall Street’s concerns.

In fact, Nakamoto might have offered a vigorous defense of Bitcoin’s energy-intensive consensus mechanism (a set of rules that verifies new transaction blocks and maintains blockchain integrity) as a necessary design tradeoff for a decentralized currency. Instead of a central authority, many people and entities maintain the blockchain through various nodes in a trustless system. These nodes validate transactions and maintain the network. To maintain an accurate ledger history and link new transaction blocks, powerful computers compete to solve mathematical puzzles, a system called mining. The mining node that wins receives newly minted Bitcoins, other nodes verify the winner, and then the process restarts. Bitcoin’s mining system enables its consensus mechanism called “Proof of Work.” And it consumes lots of energy.

The consensus mechanism forces decentralization as dispersed nodes interact. The blockchain has no single point of attack, and thus is essentially hack proof. Computer scientists tried to make decentralized, hack-resistant, irreplicable internet money for decades. Nakamoto did it and spurred an emerging new internet known loosely as Web 3.0 that is changing the world.

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

Yet Bitcoin as “freedom money” is only the start. A future web could decentralize more than just financial transactions. Open-source, permissionless protocols could rework every economic transaction. It could change the power imbalance between individuals and institutions (private sector or government). It could reverse the technological and political “stack” by enabling 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). That won’t bode well for today’s Big Tech companies.

Imagine a future in which everyone can control his online data and identity, sharing it only with whom he wants, on his own terms. If you want someone’s time or attention, you negotiate and purchase it with cryptocurrency. Without a central authority acting as a data chokepoint, the ability of social-media companies to delete user-posted content, such as tweets or Facebook posts, could vanish, because blockchain records are permanent. In fact, everyone could carry their digital lives and networks with them from app to app or blockchain to blockchain. It could make everyone instantly, without permission of any centralized authority, a lender or borrower of money, a journalist, a content creator, a venture capitalist, a freedom activist — all catalyzed and incentivized by decentralized interlocking blockchains, smart contracts, and cryptocurrencies.

Web 3.0 has the potential to unsettle our cultural, financial, and political elite in other ways, too. Financial authorities at the Federal Reserve and global standard-setting bodies want to ban or curtail crypto by replacing it with government-run central-bank digital currencies (CBDC). Authorities wrap CBDCs in platitudes about public goods, “financial inclusion,” efficient monetary policy, and combating bad actors such as online bandits or terrorists. But digital versions of fiat currencies lack the benefits Bitcoin and other crypto provide in pseudonymity: freedom from government controls, and decentralization.

The current internet titans and ESG promoters don’t seek crypto’s abolition; they want control. They have promoted a different consensus mechanism called “Proof of Stake” as an alternative to Bitcoin’s energy-heavy “Proof of Work.” Proof of Stake allows anyone with enough money to buy stake in a blockchain’s currency, validate transactions, and ultimately gain influence in governance decisions. Ethereum, the second-biggest cryptocurrency, is currently switching from Proof of Work to Proof of Stake. By one estimate, 57 percent of cryptocurrencies now use Proof of Work and the number is shrinking.

Unfortunately, Proof of Stake has a major weakness in that it enables centralization, which potentially threatens Web 3.0’s best attributes. Centralization provides an opening for ESG advocates to produce a crypto bureaucracy that can control, indirectly, the crypto ecosystem in the way it does with public companies. For instance, concerns over energy consumption could morph into other prominent ESG concerns such as lack of diversity, banning hate speech, censorship, and the control Silicon Valley companies have on social-media platforms they built and run.

ESG advocates could also attack the exchanges where crypto is sold by seeking bans on ESG-noncompliant tokens. Some exchanges are already public companies subject to ESG pressure. And new Securities and Exchange Commission chair Gary Gensler is anxious to regulate all exchanges.

Time will tell how successful these endeavors will be. Perhaps technology advances will outpace the ability of people to control it. But it is naïve to suppose these governmental and cultural interests will stand down and let individuals do what they want. The promise of Bitcoin and indeed all of Web 3.0 as a user-driven, individual-centered world is still in beta-mode. Just know that despite rhetoric about the public interest or not “leaving people behind,” the people seeking control have their own self-interest in mind.

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