ESG Transparency In Crypto

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ESG Transparency In Crypto

With blockchain technology making rapid advancements, and more and more companies investing, utilizing, or advocating for crypto, there have been growing concerns over the sustainability of the entire industry, particularly in regard to the Proof-of-Work (PoW) consensus mechanism.

Bitcoin, the original and most popular cryptocurrency, still operates on a PoW basis. For every Bitcoin that is mined, miners must use an ever-increasing amount of computational power to compete against other miners so that they can verify the transaction first. This computational power is used for solving complex but arbitrary puzzles that help to provide security for the network.

While the PoW consensus was purposely designed to be energy intensive – to add security and value to the network – it is clear that it’s unsustainable in the long run. One Bitcoin transaction expends more than 2,188 KWH, compared to the 148 KWH for 100,000 VISA transactions. It’s estimated that in an entire year, Bitcoin uses more electricity than the entire country of Norway.

But there are some positives.

A Sustainable Future for Crypto

As the issues above have been raised to the crypto community, there have been concerted efforts to make changes. Ethereum is in the process of switching from the outdated and energy-intensive Proof-of-Work model to the slightly less decentralized, but much more sustainable, Proof-of-Stake consensus mechanism. This should be achieved before the end of 2022 and is expected to decrease energy consumption by more than 99.9% on the Ethereum network.

Likewise, Bitcoin miners have opted for more sustainable methods of mining. In fact, according to Bitcoin Magazine, “Bitcoin mining is now estimated to receive 56% of its energy needs from sustainable sources (solar, wind, hydro, nuclear, geothermal and other “renewables”).”

The question now is: how do we verify this?

ESG Provenance

There are entire consortiums like the EnergyWeb-led Crypto Climate Accord and Sustainable Bitcoin Protocol(SBP) that intend to make Bitcoin mining climate positive by following this exact method. By using a modified consensus mechanism – Proof-of-Sustainable-Work – they will financially reward minerswho use clean energy sources. Once approved, miners will be added to the Verified Green Miner registry, which will be fully open and auditable by external sources. SBS is crafting an approach backed by climate science in an effort to transform the crypto-mining industry. 

An ESG or green score encourages miners to make the switch to renewable energy, but it will also increase stakeholders’ trust and respect for institutional investors that have sourced their Bitcoin from reliable, transparent, and clean energy sources.

“Bitcoin is the most powerful financial innovation in modern history, but the exponential increase in energy consumption is a risk to the network. Therefore, it is imperative that we create incentives to use clean energy sources. In many regards,  SBP is the first-ever on-chain, multi-stakeholder sustainability effort. The organization endeavors to help Bitcoin become our planet’s most sustainable asset class. SBP is a bridge between miners using verified clean energy sources and investors.”

– Bradford Van Voorhees, Co-Founder of SBP

Sustainable BTC is not the only crypto miner determined to make the switch to green energy. Other mining pools are self-declaring their clean energy, but how will financial institutions ingest and apply this data? 

Sustainability Commitments

Environmental worries have led to many large institutions delaying plans to roll out investment services for Bitcoin and other cryptocurrencies. They are legally accountable for their sustainable investments, so they must ensure, beyond all doubt, that their Bitcoin is mined responsibly before getting involved in the space. A tool that can universally verify green energy used in mining could very well soothe the apprehensions of sustainability groups within banks and other large financial institutions.

Future Proof Compliance

Going beyond traditional AML expectations, Ospree’s vision for the future includes incorporating data gathering around energy to build a more complete picture of financial crime. 

Ospree’s compliance integration hub is gearing up to enhance our onchain monitoring by integrating ESG scores that will make certain that banks, asset managers, and institutional clients will be able to confidently invest in Bitcoin and other cryptocurrencies in a responsible manner that’s fitting with the environmental, social, and governance policies laid out by the Paris Climate Accords. 

This ESG or “green” score will be added to addresses and transaction hashes so that each transaction can be tracked and checked to see the type of energy consumed to mine the associated block. This will help the entire Bitcoin community remain more conscious of their energy sources, and incentivize miners to pursue sustainable mining practices.

Creating transparency around the mining industry by providing incentives to use renewable energy can also help to prevent financial crime. 

“When miners are volunteering to be audited on their energy usage they are also telling the world they have nothing else to hide. In the past sanctioned countries have been able to avoid oversight and enforcement through BTC mining, and miners have even fallen under scrutiny for electricity theft. Paying more attention to how your crypto was mined and by whom will have a large impact on facilitating mass adoption.”

– Anne Winston, Co-Founder of Ospree

Ospree is partnering with verified and auditable ESG scoring models that tackle this problem, opening the door to institutional investors on a larger scale. Not only will this prevent further climate damage, but it will provide a boost to the development of blockchain technology as it starts to overcome one of its most limiting features. 

Reach out to sales@ospree.io for additional information. 

Part of Ospree’s digital asset compliance suite is an on-chain monitoring module that provides an AML score. Coming up in the next several months, we will introduce an ESG score that enables institutional investors to rest assured that their Bitcoin investment is responsibly mined, and give them the ability to comply with global and local sustainable investing agreements.