The Banking Executive Magazine - May 2022 Issue

Cryptocurrencies and Blockchain Technology emerged to provide professional se- curity services, but investors are still not sure of these new wallets. Another obstacle to Cryptocurrencies is low transaction volume. Current cryptocurrency networks process a much smaller fraction of the transac- tions handled by Visa, Mastercard and PayPal (Figure 2). Consequently, Cryptocurrencies’ face different limi- tations as mediums of exchange. In the case of Bitcoin, the nature of its “proof of work” verification structure imposes a physical limit on the pace of transactions. Other verification processes, used by the Cardano Blockchain, for example, such as the “proof of stake” structure have the potential to be faster. Yet, the speed in transactions implies a more cen- tralized network but less secure than Bitcoin. As a result, the designs of cryptocurrency security network and verification processes moves in op- posite direction with transaction speeds. THE ESG EFFECTS OF CRYPTOCURRENCIES Cryptocurrencies also have consider- able disadvantage from an ESG per- spectives. Energy consumption is one concern. Bitcoin’s annual electricity use is nearly equal to Sweden’s (Fig- ure 3). This is due to Bitcoin’s valida- tion structure, through which miners compete to create the latest block in the Blockchain by solving complex computational problems. The tour- nament, repeated every period of time, in which only one of thousands of competitors wins in each repeti- tion and rewards the winner a new mined bitcoin. This contest requires computing power and thus lots of electricity. For Instance, power con- sumption is one of the reasons for China’s recently introduced restric- tions on cryptocurrency mining, which have led to a significant de- cline in bitcoin mining. However, some Blockchain’s use an- other method, as Cardano which it use “proof-of-stake” validation. This means that miners are allocated min- ing power in proportion to the coins they post as collateral, a method with less energy consumption. Other methods that would consume less energy are possible, but they would be subject to high security threats. Therefore Bitcoin’s verification process rely extremely on energy consumptions. In addition to environmental obsta- cles related to electricity, governance issues remain also a barrier. In partic- ular, Cryptocurrencies have been widely used in financing illegal trans- actions. For example, the ledger technology stores the history of each user’s transactions, so while users may be anonymous, tokens previ- ously involved in illicit activity could be identified and then disqualified from future use. Finally, from a social perspective, Cryptocurrencies appear to be more inclusive and accessible than hard currencies. They are permissionless and resistant, preventing any govern- ment or organization from blocking transactions. In countries suffering from hyperinflation or underdevel- oped banking of payment systems, Cryptocurrencies could have utility as a medium of exchange. However, the distribution of cryptocurrency wealth is likely just as unequal as the distribution of conventional wealth, and, in a very new industry, con- sumer protections need to be en- hanced. ISSUE 161 MAY 2022 the BANKING EXECUTIVE 37