Rise Debates: Crypto

Digital assets could be positive for society
In financial services, digital assets offer three key benefits:

Access and inclusion
Digital assets provide a way to give everyone in the world access to the financial services many of us take for granted. Blockchain technology has enabled fintech entrepreneurs to create new financial products that don’t need intermediaries, such as traditional banks.

So all previous barriers – like credit scoring, identification and verification – become more open and inclusive. All anyone needs is a smartphone and an internet connection.

Trust
The financial services industry ranks as one of the least trusted, due largely to memories of the financial crisis. In the Edelman Trust Barometer, finance gets 56 points, whereas Facebook gets 70. (You know you’re doing something wrong if people trust a social network more than the custodian of their savings.)

Blockchain gives us a way to establish trust, especially between people who don’t trust each other. It’s a digital ledger that records transactions permanently, and can be traced – so we get rid of the middleman and don’t have to trust one person or organisation.

Freedom of ownership
Digital assets give people the freedom that comes with truly owning the things they own. For example, in some countries, a corrupt government can duplicate land-ownership records, making it difficult to prove who owns what. But if the record is on a public blockchain, it’s open for everybody to check.

So people are in control of their wealth. And this control means they can monetise things they previously could not – for example, artists can now make money from their art without fearing that someone might duplicate it, and sell it under another name. The power of their creation is entirely in their hands.

But there are environmental concerns
A common argument against digital assets is their carbon footprint. A University of Cambridge website tracks the energy demand of the bitcoin network, and it’s currently just under 120 terabyte hours per year – more than the whole of Denmark or Finland.

Also, the computing power required in the mining process produces an incredible amount of e-waste. It’s estimated that, every 12-18 months, computing power has to double – and at that point, all the mining equipment becomes obsolete. You can’t create any new bitcoins with it (or not enough to be profitable), so it all goes to waste. In this sense, mainstream adoption – at least of these types of crypto assets – could be catastrophic environmentally.

There are solutions out there, or in the pipeline, that might be able to bring the energy consumption down from terrible to acceptable. Ethereum, for example, is planning to switch from a proof-of-work system, which is really energy-intensive, to a proof-of-stake system. (Read more about proof-of-work and proof-of-stake.) This will reduce its energy consumption by over 90%, but it will still consume considerably more energy per transaction than the Visa network.

A recent study, published by UCL Centre for Blockchain Technologies, found that proof-of-stake systems vary widely in energy consumption – so the cryptocurrencies that adopt them could still be big users.

And even if proof-of-stake systems eventually solve the energy issue – and the e-waste issue, because they need less computing power – we have another problem to face. Proof-of-stake systems give participants with larger cryptocurrency holdings more influence in transaction validation. The more wealth they have, the more influence they have.

This is at odds with the argument that blockchain democratises finance; this potential environmental solution could compromise any supposed equal-opportunity benefits. People with more resources could end up dominating networks.

Regulatory problems
Some digital assets have no legal entity behind them. There’s no one for regulators to enforce laws on, or to hold accountable. So those that get involved can avoid regulation but also forgo it’s protections. For example, with Know Your Customer, many businesses never really wanted to know who their customers were, so they’ve taken the opportunity to break free from the obligation.

Now there are even privacy coins, designed specifically to avoid detection, using special techniques like ring signatures. And even without these techniques, it's extremely hard to track money that goes into crypto markets. The anonymity many systems offer creates the perfect conditions for money laundering and other criminal activities, such as terrorism financing, ransom demands, human trafficking, moving drug money, and fraud. Of course, these things also happen in traditional financial systems, but crypto makes them much easier and less risky for criminals.

Maybe we’ll work out how to enforce regulations on digital assets. But if we do this, will they lose their edge? Will they no longer be faster, cheaper, and generally more attractive than traditional alternatives? For example, transferring money abroad isn’t necessarily expensive because of technological inefficiencies, but because of governance mechanisms and regulatory requirements. It will be interesting to see if crypto can find a solution that doesn’t take away too many benefits.

Maybe we're not ready
The mainstream adoption of digital assets today, in their current state, would harm the environment, and overwhelm regulators. There are problems to solve before digital assets can be good for society – and in the meantime, we need to question the view that they offer financial inclusion and the democratisation of finance, over and above the current system.

Do renewable energy sources solve the problem?
Better, and more affordable, renewable sources of energy would help mitigate the carbon footprint issue, as the wider adoption of digital assets creates the need for more and more computing power. Many nations are moving towards renewable energy, which should become cheaper as more governments start to subsidise it.

Remember, bitcoin isn’t the biggest user of energy 
Energy consumption is a common argument against crypto assets, but maybe it’s a lazy argument. You only have to look at other digital phenomena – for example, how much energy use does YouTube give rise to across the world? Far more than bitcoin. And many other innovations are hungry for energy. Like electric vehicles – they might be good for the environment in some ways, but they’re adding significantly to the world’s energy use. So replacing traditional banking with digital currencies might not have the environmental impact many seem to fear.

It isn’t all about blockchain
Maybe we’re too focused on digitalising assets as the only way to open up access to financial services. Perhaps we can do it without such complexity, in a way that’s regulated and therefore safer, and possibly more scalable. Can we solve the problems using existing infrastructure? Services such as M-Pesa and Paytm have helped a lot of people who were previously outside the banking system, so maybe we don’t need to wait for blockchain and crypto to provide financial inclusion. There are other technologies that could address many of the problems we’re looking to blockchain to solve. Although there’s still potential for blockchain, we need to think about whether it’s the right technology for all aspects of inclusion.

So we can argue quite convincingly that digital assets in general – and blockchain in particular – can benefit society globally. But we can also argue that some serious environmental and regulatory concerns need to be addressed before any widespread implementation can take place. Most importantly, perhaps, we could take a broader view of the problems we want blockchain to solve. Are there other ways to solve them? Ways that are easier, safer and less disruptive?

Want to know more?
To find out more about the issues raised in our debates, read our Decrypting Crypto Rise Insights Report

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