Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

How Digital Assets will Impact Financial Inclusion and Energy Consumption

| Aug. 10, 2021

When people look at the viability of digital assets from cryptocurrency to stablecoins to central bank digital currencies (CBDCs), they cite a number ofadvantages and disadvantages for their widespread adoption. While there are certainly some who fear the creation of a centralized ledger or the hidden movement of “dark” money from illicit transactions as the result of this technology, a massive component of the “pro” argument for their use is the potential of extending financial inclusion. Financial inclusion can be defined as individuals and businesses having access to useful and affordable financial products and services that meet their needs. This includes transactions, payments, savings, credit and insurance delivered in a responsible and sustainable way.

Built into the design of digital asset platforms are aspects of equity that have simply not been part of the traditional banking system. This is the central facet of an argument for the adoption of digital assets because it boasts a cascading waterfall of advantages for an economy. Since economic empowerment often comes from the ability to build credit, hold a savings account, and increase buying power of consumers and businesses, it only follows that greater financial inclusion would boost these abilities.

The Virtues of Digital Assets

The future of digital assets is fundamentally tied to more inclusion in the banking sector. When looking at the modern ecosystem of banking and holding value, digital assets seem to hold great potential for expanding the reach of financial institutions. As long as an economy holds strong to the balance of privacy and inclusion when thinking about the future of the financial system, then this potential seems likely to be fulfilled. Though some may hold that the emergence of digital currencies is simply an opportunity for governments to take back power from the citizenry, it’s useful to think about a recent example of the inadequacy of current systems and the need to modernize.

When the Coronavirus pandemic hit the United States in March 2020, the US government attempted a pivot to emergency stimulus payments to repair the economic damage. As we wrote about in the late spring months of 2020, these payments were moved out quickly, but lacked the structure necessary to get to the ones that needed them most. Over 6% of American adults are unbanked, did not receive a direct deposit, and likely had trouble receiving any written checks from the US Federal Reserve. In our piece released on April 22, 2020, we discussed many of the advantages associated with a digital currency launch in the United States. From the promises of greater financial inclusion and faster payments in time of crisis, we gather that economies would have far greater capacity to build businesses and empower individuals with digital financial systems. The increased equity promised with digital assets is a critical feature of its future adoption.

The Energy Use Debate in Cryptocurrencies

Ethereum and Bitcoin have long held the world’s leading positions in the digital asset race, with values fluctuating up to 10x what they held at the same time last year. Though many do not understand the concepts of decentralized ledgers and cryptocurrencies, they have become early adopters of the assets with the idea of rapid appreciation and short-term gains. While many have seen success with this strategy and both cryptocurrencies reached their all-time highs in early 2021, pullbacks following the peak have been associated with increased central government regulations and a concern over energy usage. The coin mining structure and support of the blockchain for Bitcoin specifically uses enough energy worldwide to be considered as a “top 30” energy spender (if it were a country itself). This statistic was brought to the fore when Elon Musk (a pronounced holder of cryptocurrencies) released a statement on May 12, 2021, saying that Tesla had suspended the use of Bitcoin for vehicle purchases due to concerns over the use of fossil fuels in Bitcoin mining.

This debate has ignited concern over the viability of digital assets for widespread adoption in future financial systems and conflict with “green energy” policies. However, a more nuanced approach allows one to see that Bitcoin is simply one of many cryptocurrencies and has a more energy intensive approach to its mining/blockchain process than others. Beyond this fact, many also fail to remember that the operation of the current banking system and gold mining operations worldwide combine to account for a far greater amount of energy usage. This means that a partial replacement of the current banking system with the use of digital assets may end up creating a “discount” on energy expenditure for financial systems, while increasing speed/efficiency.

When it comes to the numbers on energy expenditure, it turns out that the Bitcoin network actually “consumes less than half the energy consumed by the banking or gold industries.” The Bitcoin network consumes ~113 terawatt hours/year (TWh/yr), while the banking industry consumes ~263 TWh/yr, and the gold industry consumes ~240 TWh/yr. The Ethereum 2.0 network, on the other hand, is expected to operate at a significant energy discount to Bitcoin’s current expenditure. As noted by Business Insider’s Shivam Vahia,“The new update to the blockchain includes radical innovations such as an entirely new concept of issuing coins, faster transactions, and reduction in energy requirement by 99%.” This is directly in line with other recent initiatives to keep things clean in investment, such as the launch of Viridi Funds’s “actively managed ETF, which will be the first clean energy crypto mining product in the US.”

Mining Bitcoin is currently a very carbon intensive process and it is estimated that “one Bitcoin transaction takes 1,544 kWh to complete, or the equivalent of approximately 53 days of power for the average US household.” Since many of these transactions occur in places where coal fired power is still prominent, the carbon footprint of mining Bitcoin is significant. For example, energy consumption of the Bitcoin blockchain in China is expected to exceed the total annualized greenhouse gas emission output of the Czech Republic and Qatar by 2024 due to their coal intensive electric grid. The Ethereum 2.0 network and “Proof of Stake” technology offer promising alternatives to carbon intensive Bitcoin mining processes for crypto use.

Though there has been much discussion about how to reduce the energy consumption of Bitcoin mining or how to power the blockchain’s operation with renewable energy sources, this problem will remain for years to come. There will likely be a greater adoption of sustainable, less carbon intensive energy sources to power cryptocurrencies, but the future lies in a “Ethereum 2.0” vision that doesn’t require as much energy input to begin with. “Sustainability” requires long term planning and innovative designs rather than band-aids for an ever-mounting problem like energy consumption.

Long Story Short

The literature on digital assets is ever expanding with ideas of where our global financial system is headed. Though no one knows for certain, we do know that there are several problems that need to be addressed in the next iteration of digital finance:

1. There is currently a correspondent banking problem where people are denied bank access overseas. An approach to this requires Know Your Customer and regulatory guidelines built in that ensure beneficial ownership and decrease dark money flows.

2. Some central governments are opting for more surveillance-heavy banking and payment processes, while others are holding their ground for privacy. The values of a particular digital system need to be hashed out in detail before they are released, or people will find themselves entrenched in a system that is launched before consequences are fully thought through.

3. There needs to be more financial inclusion built into the structure to empower individuals as well as business owners. More access to banking and holding stores of wealth leads to a more empowered economy that is complete with higher levels of entrepreneurship. Financial inclusion can be an incredible economic catalyst for communities and small businesses by giving them the ability to see stored wealth and plan for the future.

4. Money laundering and dark money flows need to be further curtailed.

5. There needs to be a less expensive option for sending cross border remittances.

6. There is a gap in digital financial literacy. Consumers need to have protection when using digitally-enabled financial systems – but that begins with their general understanding of how the system operates.

7. There is a problem with carbon intensive processes for digital currency operation.

When looking at each of these challenges, we can see that digital assets have a great role to play in the next evolution of the global economy. Whether it is cryptocurrencies, stablecoins, CBDCs, or a basket of all three, they can each play a key role in financial inclusion. While China leads other authoritarian governments toward a world that operates around intense citizen surveillance in payments systems, the US must continue to champion the empowerment of the individuals in its economy with financial inclusion. This can lead to longer term economic growth and faster recovery in the time of emergency situations like COVID-19.

Statements and views expressed in this commentary are solely those of the authors and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

Michael B. Greenwald is Director at Tiedemann Advisors and Director for Digital Asset Education. He was the first US Treasury attaché to Qatar and Kuwait, acting as the principal liaison to the banking sector in those nations, while serving in two presidential administrations and under three treasury secretaries from 2010-2017. He is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs, a Senior Fellow at the Atlantic Council Geoeconomics Center, and Adjunct Senior Fellow at Center for New American Security. 

This article is supported by research advisor Logan Weber. Weber is a graduate of Harvard University and graduate student at Texas A&M University studying International Affairs. 

For more information on this publication: Belfer Communications Office
For Academic Citation: Greenwald, Michael.“How Digital Assets will Impact Financial Inclusion and Energy Consumption.” Belfer Center for Science and International Affairs, Harvard Kennedy School, August 10, 2021.

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