ESG attacks Bitcoin
The Environmental, Social, Governance (ESG) movement is coming for Bitcoin and the entire crypto marketplace. This latest foray into corporate responsibility has captured public companies and shifted 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.
ESG promoters complain Bitcoin uses too much energy.. Wall Street and other ESGers see Bitcoin’s energy needs as wasteful and dirty. Bitcoin currently consumes energy equivalent to the Netherlands, whose residents account for .22 percent of 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 do 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.
Bitcoin founder Satoshi Nakamoto did not care about Wall Street
If he is still alive, it would be interesting to know what Bitcoin creator Satoshi Nakamoto would think. The opening sentence of Bitcoin’s white paper abstract discusses enabling people to circumvent financial institutions –. Bitcoin’s genesis block famously references bank 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 because Bitcoin is decentralized. Instead of a central authority, many people and entities maintain the blockchain through various nodes in a trustless system. To preserve an accurate ledger history and link new transaction blocks, powerful computers compete to solve mathematical puzzles, a system called mining. The winning mining node 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, thus is essentially hack-proof. Computer scientists tried to make decentralized, hacker-resistant, unique internet money for decades. Nakamoto did it and spurred an emerging new internet known loosely as Web 3.0 that is changing the world.
Nakamoto consensus gives Bitcoin its power
The benefits of Nakamoto’s decentralized vision of people transacting outside centralized institutions are everywhere. Even the worst tyrannical regimes cannot stop Bitcoin transactions like they can cash or credit card transactions. As such, Bitcoin payments provide succor to dissidents fighting persecution from Hong Kong, Russia, Belarus, Nigeria, and Iran, among others. It provides a store of value in grossly mismanaged countries like 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 .22 percent of the world’s population in exchange for the potential liberation of the 53 percent of people languishing under oppressive regimes.
Yet Bitcoin as “freedom money,” is only the start. The future web could decentralize more than just financial transactions. Open source, permissionless protocols could rework every human 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 companies to monetize it (in exchange for free services). That won’t bode well for Big Tech.
Imagine a future in which everyone controls their online data and identity, shares it only with who they want, on their own terms. If you want someone’s time, attention, or access to their following, you negotiate and purchase it with cryptocurrency. Raging debates about online ‘cancel culture’ will subside with blockchain decentralization and permeance. In fact, everyone could carry their online digital lives and followings with them from app to app or blockchain to blockchain.
ESG attacks Bitcoin because it is dangerous to our tech overseers
The current internet titans and ESG promoters don’t seek crypto 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 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 centralizes governance , 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 like 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 would-be overseers. But it is naïve to suppose these governmental and cultural interests will stand down and let individuals roam free.
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.
By Jossey PLLC
A version of this article ran in National Review on July 27, 2021