In the last two years, the issue of environmental contamination caused by cryptocurrencies is on the agenda especially from when Bitcoin exploded and its mines moved out of China.
Some governments, humanitarian organizations or big entrepreneurs took sides against Bitcoin and in particular against its protocol Proof of Work (PoW). Bitcoin mines, especially as they were conceived, leave no room for the idea that there can be sustainable growth.
This is because since the market demand for a digital currency increases, its production and the validation of transactions will also increase.
But the consumption of electricity is not the only determining factor. We must remember that in order for a cryptocurrency exists, the use of electronic equipment and raw materials in general is necessary. The extraction of these and the disposal of the components, for example, is part of the sustainability cycle.
FIAT coins and cryptocurrencies: sustainable growth
To define which of the two currencies has the least impact on the environment, we need to understand what sustainable growth means. Speaking of Europe in particular, we can rely on the Sustainable Development Goals (SDGs) which should be the starting point for all countries that are part of the EU and the United Nations.
Speaking of sustainable growth we therefore refer to a service that does not impact on third countries economically, socially and environmentally.
FIAT coins and cryptocurrencies: the life cycle of money
Whether it’s digital coins or FIAT coins, the money making process is very complex like its exchange. The two fundamental differences between cryptocurrencies and common money are two:
- decentralized finance that does not involve any intermediary in the case of cryptocurrencies and centralized finance in the second case. Here new institutions come into play such as banks, which validate transactions;
- cryptocurrencies are not tangible money while in the case of FIAT coins we find banknotes and coins. The production process of both will begin from a software but only in the second case it will be necessary to print and produce tangible coins.
These two important differences make that the chain of production, distribution and transfer of money is totally separate; only when we carry out online transactions of FIAT coins do we get very close to the common exchange of cryptocurrencies.
FIAT coins and cryptocurrencies: the impact of physical coins
With this premise, if we think about the entire cycle of FIAT coins, we should consider their environmental impact in all aspects: the production of physical money, the consumption of electricity, paper and water of the banks, the carbon footprint of the financial market and the energy cost of transactions.
This “energy calculation” should also include more factors; small that added up worldwide would boost our results. These are, for example, the environmental impact generated by the sum of the employees of the banks, the maritime and air trade and the equipment inside the banks themselves.
A calculation that comes close to our theme was made by Galaxy Digital last year: a team of researchers assessed the impact of banks compared to that of bitcoins, in their boom.
The study is based on the estimated energy consumption of the main banking infrastructure: the debit and credit card network, ATMs, branches and Data Centers. The data obviously collected are not public and many banks have refused to disclose their details.
FIAT coins and cryptocurrencies: the impact of digital coins
The same indicators were used to measure the energy impact of Bitcoin, which is not that of none of the other cryptocurrencies has been added up. Again the data are estimates since according to the calculations of some researchers the annual consumption of the production and exchange of bitcoin is much higher than that officially declared.
Bitcoin was the reference cryptocurrency because it is the most ancient and the one that generates the greatest impact. Calculate the exact value of Bitcoin consumption is really complicated since we should calculate the energy consumption of every bitcoin miner in the world.
There is currently no study that has verified the total percentage of renewable or non-renewable energy used by both banks and cryptocurrencies.
FIAT coins and cryptocurrencies: the Galaxy Digital study
Without this comparison we could never judge the Bitcoin system from the point of view of the energy contamination it generates.
This study set as a goal the comparison of two parallel worlds, and one of the biggest errors in this case is to choose non-inter-related indicators. In fact to define the utility of the banking system based on its energy consumption is reductive because the advantages of the transfer of large quantities would be neglected.
While it may seem practical to compare the banking system and Bitcoin on the number of transactions they process, the two have very different scaling. The banking system adapts to counting transactions, requiring additional infrastructure as it grows. Meanwhile, Bitcoin’s power consumption does not increase based on the transaction count, but based on the economy of the network.
FIAT coins and cryptocurrencies: Bitcoin’s prospects
Still according to Galaxy Digital, the Bitcoin system scenarios have three characteristics:
- Bitcoin is not part of the global economy. This definition implies that even the slightest consumption of this cryptocurrency is not accepted;
- Bitcoin will work in parallel with the current financial system (similar to gold). The research team believes that Bitcoin’s energy consumption is justified only in case markets and regulation help determine its appropriate level;
- Bitcoin will be a global monetary standard. Bitcoin’s energy impact will be dictated by market demand and despite the limited number of digital coins in circulation, transactions will continue to be a source of contamination.
Read also: Swiss Bitcoin plan: Lugano is the European capital of cryptocurrencies
FIAT coins and cryptocurrencies: results and future prospects
According to the results of the study by Galaxy Digital, the international banking system consumes more twice as much as Bitcoin. We are talking about the approximation of the hundred most important banks in the world against a single cryptocurrency. Adding up all the cryptocurrencies that exist obviously the results would be opposite.
The best perspective probable of the future is that everything will become virtual. What is currently missing is solid regulation and increased security and protection against scams and the inappropriate use of cryptocurrencies for illegal markets.
