Crypto-assets need Environmental Regulation

In a run towards more digitalization and search for modern ways of economic transactions, the rise of digital currencies and virtual assets popularly known as crypto assets are at the forefront. These crypto-assets are generated using complex mathematical calculations and encryption algorithms and are introduced in the market that provides an alternative medium of exchange. It has lured  investors as these currencies are unregulated, resistant to inflation, and are easily portable. The rising popularity and use of crypto-assets poses a challenge for India’s  policymakers to design a policy framework that should take care of its multifaceted impact on the  economy and society. Industry estimates suggest there are some 15 to 20 million crypto-investors in  the country with total crypto-holdings of roughly $6 billion. These investors are either lured by advertisements or the inflated prices of cryptocurrencies, which can provide high-risk returns. The major problem faced by sovereign states is the unregulated nature of cryptocurrencies. Apart from high potential risk for consumers and investors, crypto-assets can contribute significantly to the climate crisis.

While the Swedish Financial Supervisory Authority has outlined consumer risks of crypto-assets (terrorist financing, money laundering, and ransomware payments), the Swedish Environmental Protection Agency highlights the impact of crypto mining. Increased carbon emissions and an even greater threat to global warming must be factored in to policy discussions and frameworks.

India is currently weighing the risks associated with cryptocurrencies and looking into different sectoral implications of launching an official digital currency. In this analysis, India should follow a multifaceted approach for regulating crypto-assets, and needs to design a crypto policy that is mindful of environmental implications.

Mining of Cryptocurrencies

To understand the energy requirements of cryptocurrencies it is important to understand the  methodology of cryptocurrency generation. Cryptocurrency transactions are based on a public key  encryption, also known as asymmetric encryption. Cryptocurrencies use a decentralized ledger known as blockchain, which is essentially a series of chained data blocks that contain key pieces of data, including cryptographic hashes. The creation of blockchain requires: 

• The existence of nodes (individual devices that exist within the blockchain);  

• Hashes (one-way cryptographic functions used by nodes to verify the legitimacy of transactions, which are generated by combining the header data from the previous blockchain block with a nonce); 

• Miners (specific nodes that verify or solve unconfirmed blocks in the blockchain by verifying the hashes;  

• Transactions (separate transactions are bundled and form a list that gets added to an unconfirmed block); 

• A consensus algorithm (a protocol within blockchain which helps different nodes come to an  agreement whilst verifying data – Proof of Work and blocks. Blocks are individual sections that contain a list of completed transactions – a block that was verified cannot be later modified).

One must determine how many sums are performed every second in order to answer the riddles.  Then calculate how much electricity is required to do each calculation in terms of hashes.

Environmental Impact of Cryptocurrencies

The adoption of Bitcoin as an official currency by El Salvador manifests the beginning of the legalization of cryptocurrencies as an official method of payment. The Government of India also proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23 for a more efficient and cheaper currency management system. Therefore, the assessment of environmental impacts of this new form of money and investment asset has become increasingly important.

Considering cryptocurrency mining’s negative impact on the environment there is only limited existing research to evaluate the extent of its growing energy consumption problem. Most studies focus on the electricity consumption and CO2 emission issues of Bitcoin, but there are more than 4000 cryptocurrencies available on the market with different underlying technologies. The electricity consumption of Bitcoin itself has increased from 4.8 TWh to 73.12 TWh over the  years, 2017 to 2019. As for the carbon footprint of Bitcoin transactions, each Bitcoin transaction can contribute 619 Kwt to the carbon footprint, which is equal to 350,000 bank card transactions or the energy consumption of an average US family over 20.92 days.

In August 2018, a Princeton University associate professor, expert in cryptocurrency, testified at a hearing of the US Senate Committee on Energy and Natural Resources. The testimony said that bitcoin mining accounts for nearly 5 gigawatts — or about 1% of the world’s energy use. That is slightly higher than what is used by the entire state of Ohio. One big source of concern among environmentalists is that when the price of bitcoin rises, mining becomes less efficient. In the case of bitcoin, the mathematical problems  required to generate blocks become increasingly complex as the price rises, while transaction throughout remains constant. This means that as time goes on, the network will require more computing power and energy to handle the same amount of transactions. Hence, the trade-off between the number of transactions and prices of crypto-currencies will determine the complexity of the algorithm and thereby its adverse effect on CO2 emissions and the environment. 

Way Forward 

With the adverse environmental impact of cryptocurrencies being well established, developers around the world are researching more eco-friendly options when it comes to digital currencies. Hence, sustainability  is the new emerging factor that started to cause a shift in the creation of digital assets. An interesting study compiled by TRG Datacenters, based in Houston, Texas, has highlighted the most eco-friendly cryptocurrency options, ranking them by the amount of energy required to power each  transaction: 

Currency	Kilowatt-hour (KWh) consumed per  transaction*
IOTA	0.00011
XRP	0.0079
Chia	0.023
Dogecoin	0.12
Cardano	0.5479
Litecoin	18.522
Bitcoin Cash	18.957
Ethereum	62.56
Bitcoin	707

From the above table, it is evident that options such as IOTA and XRP will have a limited impact on  transactions and are thus gaining popularity in the field of eco-friendly cryptocurrencies. IOTA uses an alternative to blockchain called the ‘Tangle’ which essentially removes the need for miners.  Instead, the network is maintained by smaller devices and uses calculations that require less power and thus consume less energy per transaction. These analyses provide a substantial ground for India to consider other technologies such as ‘Tangle’ and ‘Open Representative Voting (ORV)’ apart from the blockchain for launching its Central Bank Digital Currency (CBDC) to limit its environmental impact and CO2 emissions. 

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