Cryptoactive and ESG – do they go together?

The two crypto-experts and specialist book authors Martin Leinweber and Jörg Willig have addressed the question of the extent to which crypto-assets and ESG fit together, addressing the two core aspects of security and transparency.

There are two currents when assessing the sustainability of investments. With conventional systems, every detail is taken into account. In the case of cryptocurrencies, on the other hand, interest often ceases when looking at the energy consumption of the Bitcoin network. This does not do justice to the diversity of digital assets or their positive social and managerial balances.

Security has its price

Due to the energy consumption of the Bitcoin network, digital assets are often classified as environmentally questionable overall. But this judgment is based on an incomplete approach. The energy consumption of the Bitcoin network stems from its procedure for writing valid transactions on the blockchain, which is based on proof of computer power (“proof-of-work”). However, this approach is not a general feature of all cryptocurrencies. The best-known alternative, the “proof-of-stake” approach used by many projects, can reduce energy consumption by more than 99 percent.

If you only want to look at Bitcoin, the question arises as to how high its energy consumption is compared to conventional payment networks. A few data centers and mobile computer pools are sufficient to power the Bitcoin network. Neither buildings nor staff are required to a significant extent. A serious comparison of decentralized and classic payment networks must therefore take into account the entire process chain, including all service providers involved.

If you want to get a serious classification of the best known cryptoactive, you should also not ignore the energy sources used. A useful first step would therefore be not to gather all the crypto assets in one pot.

Open-minded and open

Access to the existing financial system and to the centralized online services is not free. Users must pay fees, pass on personal data and risk being temporarily or permanently excluded from the systems by a central entity.

On the other hand, decentralized applications based on open blockchains (“unauthorized blockchains”) operate independently of central coordination and control. Anyone can use the network, no one is forced to use it. This neutrality guarantees maximum equality and freedom.

Not everyone likes it – and critics point in particular to the risk of money laundering, which can go hand in hand with openness. According to research from the research house Chainalysis, the share of bitcoin transactions potentially related to illegal activities was around $ 10 billion by 2020. If this number worries you, we recommend taking a look at Deloitte’s “Anti-Money Laundering Preparedness Survey Report 2020 “. The company estimates that the annual amount of money laundering worldwide is between 800 billion and 2 trillion US dollars. Crypto-assets are clearly not one of the most pressing issues in global money laundering. This criticism is therefore a weak argument against decentralized, free and accessible global payment and information networks for all.

Permanent transparency

Good leadership in terms of sustainability is ethical leadership and corporate culture. This factor is often underestimated. This is remarkable because some large companies have also been hit by corporate governance errors in the past.

Like operational organizations, decentralized krypton networks are based on defined rules and processes. These are specified by the respective implemented protocol. Any changes to these protocols are made through transparent governance structures. The informal structures known from the business world are not found in this segment.

The permanent traceability of all transactions on the blockchain completes the picture of management. The immutability of transaction history and the associated possibilities for downstream analysis have significant consequences for those responsible. The same goes for the immediate irreversibility of every transaction on the blockchain. This means clear accountability for those initiating transactions. Procedures often referred to by the trivial term “cheating” can be avoided in this way.

Conclusion

Assessments of the sustainability of cryptocurrencies are often premature. For a meaningful classification, there is often a lack of elementary knowledge about the functionality and possibilities of digital assets. Not least, it shows the emotionally charged discussion about the Bitcoin network’s energy consumption.

There is more to the cryptocurrency universe than Bitcoin, and the criteria for assessing the sustainability of an investment include more than just “E”. Decentralized payment and information networks are robust and enable a new management quality by creating fully transparent processes. At the societal level, the open structures without social, regional or economic access restrictions mean an unprecedented degree of participation for many people.

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The experts

Martin Leinweber

Martin Leinweber has been a portfolio manager in asset management for equities, bonds and alternative investments for more than 17 years. He has worked for both quantitative and fundamental houses in Frankfurt and Munich and thus has many years of experience in managing institutional assets for banks, insurance companies and pension funds.

Jorg Willig Jorg Willig

Jörg Willig is a portfolio manager and developer of systematic investment approaches. He designs and implements rule-based allocation strategies for institutional investors, develops approaches to integrating digital assets into diversified reactive portfolios, and works on smart contract-based autonomous trading programs.

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