ESG versus crypto: Regulation must change to solve clash of two titans

Large investment banks are offering crypto within pension funds while simultaneously touting their ESG credentials

Regulators are overlooking the environmentally damaging aspects of cryptocurrencies even as they push for a greener financial system, according to new research.

In its report Cryptopia: Regulation and Crypto on a Cliff Edge, regtech provider CUBE argued that, despite a greater regulatory focus on cryptocurrencies, sustainability is not forming part of the conversation.

In fact, discussions around digital assets and sustainability have made up less than 0.1% of regulatory issuances in 2022 so far, even though there has been more than a 7,000% uplift in crypto-related regulatory messaging globally over the past four years.

CUBE’s research noted large investment banks are also embracing crypto and offer it within pension funds while simultaneously touting their ESG credentials.

It acknowledged however, that firms face a quandary as they must prioritise both ESG and digital assets in future if they are to remain relevant.

The cryptocurrency space is a notorious polluter. Crypto mining (the process of creating new crypto coins) produces a huge amount of carbon emissions – it is estimated that crypto mining has the same annual carbon footprint as Belgium or Chile.

The report explored how regulators will manage the fine balance between regulating for the climate and regulating for crypto.

“Perhaps it will instead take the form of an investor-led revolution, much like we see across financial services today. Or perhaps VASPs [Virtual Asset Service Providers] themselves will endeavour to make crypto greener in order to gain a competitive advantage,” it said.

CUBE argued regulators must increase their focus on the crypto space to give firms better guidance and incentives to curb the environmental risks associated with digital assets.

They must also act because crypto now has enough retail access to warrant regulation, and it is large enough to cause financial stability issues, the report stated.

“As society and traditional financial services move towards welcoming cryptocurrencies into the mainstream, regulators are moving fast to create new regulations or broaden existing parameters to protect consumers and the wider economy,” said CUBE Global’s CEO Ben Richmond.

“However, it’s clear from the data that the issue of sustainability within crypto has been overlooked. In order to solve the conflict between cryptocurrencies and climate risk, global regulators will need to drive forward regulation to ensure that both can thrive without undermining the other.

“Already there are aspects of ESG and crypto that do work in tandem, socially. It supports the unbanked, giving people without accounts access to digital wallets that can break the cycle of financial exclusion.

“Despite this, failing to address the environmental impacts will lead to an inevitable clash of two titans that could set the trajectory of the modern financial world back significantly.”