These are uncertain times for cryptocurrencies. The asset class experienced major volatility over the second week of May, with Bitcoin, the most popular cryptocurrency in the world, losing almost 50% of its total value in the meltdown. June has been equally tumultuous for the cryptocurrency, with prices falling below the $30,000 level for the first time since the year began.
One of the reasons attributed to the spectacular fall in the price of cryptocurrencies is tech- entrepreneur Elon Musk’s decision to suspend the acceptance of Bitcoin as a form of payment at his electric vehicle and clean energy company, Tesla Inc. Musk’s decision came in the wake of concerns surrounding the environmental impact of mining Bitcoins, with the one-time enthusiast suggesting that his company will look for sustainable alternatives.
The general scepticism surrounding cryptocurrencies’ status as an unsustainable asset comes at an interesting time for India. Reports suggest that the Indian government intends to set up a panel of experts that will study the prospect of regulating cryptocurrencies, with the Reserve Bank of India recently clarifying the possibility of crypto transactions being scrutinized under extant money laundering and foreign exchange laws. Amid the speculation surrounding the enactment of an enabling regulatory framework for dealing in cryptocurrencies in India, this article will argue that such regulation must account for mechanisms that monitor their environmental impact.
Cryptocurrency is a form of digital currency that largely allows users to perform the same functions as paper money. Transactions involving cryptocurrencies are usually peer-to-peer, with details of each transaction recorded on a public ledger known as blockchain. The process of verifying and adding such transactions to the blockchain is known as mining. Simply put, mining involves solving a series of increasingly complex math problems using highly specialized equipment, to add and modify the existing ledger of transactions available to a cryptocurrency network.
The concerns shared by Musk and other sustainability scholars revolve around the energy- intensive nature of cryptocurrency mining. The Cambridge Centre for Alternative Finance estimates that, at 93.92 TWh, the Bitcoin network annually consumes more electricity than the countries of Kazakhstan and the Philippines. Research has also cautioned against the substantial e-waste generated in the process of mining Bitcoin, with one estimate indicating that each transaction on the Bitcoin network generates an average e-waste footprint of 134.5g. To put that in perspective – one burns through four 60W bulbs before they generate as much e-waste as a single Bitcoin transaction.
In India, the onerous ecological effects of cryptocurrency mining were first highlighted by an inter-ministerial committee report focused on developing a framework to regulate cryptocurrencies. The Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies would caution against diverting resources to mine virtual currencies in India, observing that such mining may incur unfavourable economic costs. The report would further link cryptocurrency mining to the developing regulatory consensus on the mandatory storage of certain kinds of personal data in India, noting that the coupling of crypto-mining and mandatory data storage could exacerbate energy scarcity in a “power- starved” India.
The concerns highlighted by the Report merit renewed scrutiny in light of India’s perceptive policy shift on cryptocurrencies. As ideation begins on a possible framework for ‘regulating’ cryptocurrencies, regulators must look to not only mitigate the adverse environmental impact of cryptocurrencies but also understand how decision-making surrounding sustainability rendered the market for cryptocurrencies extremely vulnerable. The presence of regulatory mechanisms to monitor cryptocurrencies for environmental impact can guard against such vulnerabilities, ensuring that influential investors like Musk may not pull out of crypto- commitments citing sustainability as a reason.
In essence, effective monitoring mechanisms can prioritize long-term sustainability for cryptocurrencies and minimize disruption caused by speculation on the same.
Designing the ideal monitoring mechanism is a secondary concern. For this, regulation may commit to adapting the environmental principles outlined in the National Guidelines on Responsible Business Conduct, 2018 (‘Guidelines’) to cryptocurrencies. The Guidelines embrace organizational openness – laying down a business responsibility reporting framework focused on resource use, resource minimization and adherence to extant standards on sustainability. Further, regulators may look at the Business Responsibility and Sustainability Report framework issued by the Securities and Exchange Board of India, for guidance on operationalizing the principles contained in the Guidelines.
Admittedly, the framework may be difficult to enforce on participants that escape the scrutiny of regulators, but a sustained effort towards adapting it to cryptocurrencies at the point-of-sale may illuminate pathways for assessing their environmental impact.
The primary concern remains the creation of a regulatory framework that envisages instituting mechanisms to monitor the environmental credentials of cryptocurrencies and devises strategies to communicate such information to investors. It is hoped that greater eco- transparency will nudge players into designing greener cryptocurrencies, built on sustainable transaction-validation mechanisms and environment-friendly operating practices.
This article was originally published in Economic Times on 20 July 2021 Written by: KS Roshan Menon, Research Scholar. Click here for original article
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