Bitcoin: is it Ungovernable?

Bitcoin
mining
is
a
heavily
energy-intensive
enterprise. Some
estimating the
process
uses
as
much
energy
as
countries
like
the
Netherlands
or
the
Philippines.

As
climate
change
periodically
wreaks
havoc
across
the
world
and
the
stakes
get
higher
and
higher
for
countries
to
reduce
carbon
emissions,
the
increasing
popularity
of
Bitcoin,
which
in
turn
pushes
demand
to
mine
the
digital
asset,
complicates
the
green
transition.  

In
particular,
Bitcoin
mining’s
energy
intensity
comes
from
its
proof
of
work
(PoW)
process,
which
involves
hundreds
of
computers
guessing
random
numbers
until
they
choose
the right
one. 

But
that
is
not
the
only
concern.

Bitcoin
and
Crypto:
Why
The
Noise?

So
says professor
Hilary
J.
Allen,
a
professor
of
law and
associate
dean
for
scholarship
at
the
American
University
Washington
College
of
Law. 

“There
were
a
bunch
of
stories
that
came
out
last
year
about
the
noise
pollution
in
places
where
there
are high concentrations
of
Bitcoin
miners,
and
how
loud
it
is
for
the
surrounding
communities,”
she
says.

“There were
also stories
of
people
in
upstate
New
York
who
had
their
electricity
costs go
through
the
roof because
there
was
so
much
demand
on
the
grid
from
Bitcoin
miners. 
It
has
spillover effects for
prices
for
everyday
people.” 

Not
all
cryptocurrencies
use
the
energy-intensive
proof
of
work
method,
however.
Last
year,
Ethereum
shifted
to
proof
of
stake
(PoS),
a
different
type
of
consensus
mechanism
for validating transactions.
Will
Bitcoin
do
the
same
thing?
Unlikely.

“It’s
quite
clear
Bitcoin
has
no
intention
of
shifting
to
proof
of
stake.
The
only
way
to
avoid
these
environmental
costs
would
be
to
shift
to
a
different
consensus
mechanism
and
I
do
not
think
they are
ever
going
to
do
it,”
she
said.  

Martin
Vezer,
ESG
associate
director
at
Morningstar
Sustainalytics, is
more
confident
Bitcoin
will
follow
Ethereum’s
switch.  

“Ethereum’s
switch
from PoW to PoS last
year eliminated the
need
for
mining
Ether
and
reduced
its
energy
intensity
by
more
than
99%.
Some
academic
research
suggests
these
types
of
advances
could
eventually
make
distributed
ledgers
less
energy
intensive
than
traditional
central
payment
systems,”
he
said. 

Vezer
also
says
crypto
mining only
has
a
significant
carbon
footprint
when
drawing
on
non-renewable
sources
of
power.

“Some
Bitcoin
miners
are
strategically located in
places
with
access
to
low-carbon
energy
sources,
such
as
hydro,”
he
says.

“Also,
in
colder
climates,
energy
used
in
crypto
mining
can
be
upcycled
to
heat
buildings
and
potentially
recover
over
90%
of
the
energy
used.”

He
then
points
to
other
environmental
concerns
stemming
from
the
production
of
hardware
that
supports
the
crypto
market,
with
a
particular
focus
on
the
manufacture
of
semiconductors,
whose
construction
is
water
intensive
and
causes
e-waste.

‘Better
Off
With
Cash’

Another
hot
issue
for
Bitcoin
is
regulation,
or
lack
thereof,
which
for
many
retail
investors
is
rightly
a
red
flag.
Europe
is
ahead
of
the
pack
on
the
UK
here.

The
European
Union
has
already
introduced
introducing
“MiCA”,
or
Markets
in
Crypto
Assets
regulation, a
framework
for
issuers
and
service
providers
of
cryptocurrencies,
which
covers utility tokens,
“stablecoins”
and
even
the
wallets
where crypto
assets are
held.

Ian
Horne
is
watching
this
unfold
in
Europe
from
the
UK.
He
is
head
of
content
for
the
continent
for
Money
20/20,
but
is
also
the
author
of Why
DeFi
Matters:
What
Cryptoassets,
Web3
and
the
Metaverse
Really
Mean
for
Finance.
He
welcomes attempts to
regulate
Bitcoin
but
believes
there
are
still
considerable obstacles
to
overcome. 

“The
reason
there
is
a
challenge
to
regulate
crypto
assets
is
they
exist
on
a
blockchain,
which validates itself.
And
with
a
lot
of
things
like
Bitcoin,
you
cannot
reverse
a
transaction.
Once
it
is
done
it
is
done,
and
you
cannot
always identify who
is
using
it,”
he
says.  

This
is
where
things
get
criminal.
Bitcoin has
been
branded
the
“criminal
currency”
due
to
its
popularity
among
organised
criminals
and
dark
web
actors.
But
Horne
says
most
people
misunderstand
how
transparent
this
process
truly
is.

“It
used
to
be
used
by
criminals but now if
you
wanted
to
do
it,
it
leaves
a
permanent
audit
trail.
So
if people
can
find
out
who
owns
the wallet,
you’re
in
hot
water.
A
lot
was
coming
out that Hamas,
for
instance,
was
using
crypto
for
much
of
its
funding.

“It
later transpired
a
very
small portion of
its
funding
comes
from cryptocurrency because
it
is
not
actually
effective.
If
you
are
going
to
commit
a
crime,
you
are
better
off
using
cash.”

Is DeFi
Really
Decentralised?

For
Allen,
the
fall
of
Sam
Bankman-Fried
and
the
collapse
of
FTX
speak
to
the
abject
failures
of
governance around
crypto
currency
and
the
need
for
law
to
curtail
abuses.  

“When
you
have
all
these
entities
that
are
not
regulated
at
all,
it
is
not
surprising
that
they
are
poorly
run,”
she
says.

“FTX did
not
have
people
in
key
roles
in
the
C-Suites.
People
were
employing
their
girlfriends.
What
was
really
shocking
was
that
venture
capital
firms
were
willing
to
give
money
to
an
institution
like
FTX
that
was
so
completely
lacking
in
even
the
most
basic
governance
foundations.”

Allen
argues
the
crux
of
the
matter
is
the
contradiction
between
Bitcoin
and
other
cryptocurrencies:
centralisation
versus
decentralisation.

Although, cryptocurrency’s
cheerleaders
have
championed
themselves
as
pioneers
of
decentralisation
by
using
blockchain
to
transfer
control
and
decision
making
from
centralised
groups,
FTX
and
other
exchanges
are
inherently
centralised.

“Processing transactions using
blockchain
is
inherently
inefficient,”
she
says.

“It
will
never
be
as
efficient
as
a
more-centralised
intermediary.
So
they
go
to
all
this
expense
to
have
decentralised
technology,
but
then
they
have economic
centralisation
that basically
undoes a
lot
of
those
benefits.”

And
that,
for
her
at
least,
is
the
rub. 

“The
competitive
advantage
as
I
see
it
is
this:
so
far
using
this
technology
has
allowed
players
in
the
crypto
industry
to
avoid
a
lot
of
regulation
because they’ve convinced
the
regulators
this
is
something
new
and
different
that
does
not
fall
under
traditional
regulatory
schemes,”
she
says.

“By
evading
oversight they
evade
a
lot
of
compliance
costs
and
that
is
part
of
the
business
model.”

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