In its recent risk analysis report released on the 1st, the European Securities and Markets Authority (ESMA) mentioned the possible risks associated with cryptocurrencies and their potentially damaging impact on the environment.
The EU financial regulator ESMA released its second Trends, Risks and Vulnerabilities (TRV) Report of 2021 on the 1st. The report mentioned the innovative capabilities of cryptocurrencies, however, the report showed concerns over its environmental impact as well as its speculative nature.
This is the second time the TRV report has been published since the beginning of 2021. In its section under Structural developments in Financial innovation, the 110-paged report explored the volatility of crypto-assets and the growing popularity of stablecoins. It also touched upon the prevalence of CBDCs and DeFi and their risks over the real economy.
The report noted:
“Innovation can support sustainability by addressing ESG (environmental, social and corporate governance) information gaps through green financial technology (FinTech) solutions, but the environmental cost of one particular innovation – cryptocurrencies – is soaring…
This issue is becoming increasingly relevant with the soaring environmental costs of Bitcoin mining, which could consume as much energy as Italy and Saudi Arabia combined by 2024 if not contained. Estimates vary but they agree that the carbon footprint of cryptocurrencies is far from negligible. “
It mentioned that mining cryptocurrencies such as Bitcoin via PoW (Proof of Work) algorithms consume generous amounts of electricity and emits carbon.
The paper also pointed out the magnitude of the volatility (price fluctuation) of cryptos and analyzed that this is partly due to the increasing participation of individual investors.
One of the major factors behind the increase in personal trading is the widespread use of tools that give consumers easy access to online and mobile trading platforms.
In the EU as well as the United States, the number of transaction platforms that offer no fees is increasing, as well as the increasing occurrence of “games” that make it easy to participate in the investment.
With respect to the rising prominence of DeFi and CBDCs, the paper wrote:
“DeFi holds the same benefits as [the] blockchain technology on which it is built – namely, disintermediation, round-the-clock availability and censorship resistance. It also faces similar challenges and risks, including in relation to operational resilience, scalability and governance.
Likewise, the potential introduction of Central Bank Digital Currencies (CBDCs) and the increasing use of stablecoins as well as the increased interest on CAs by institutional investors is making more porous the boundaries between the traditional CeFi system and DeFi more porous, increasing the risks of potential spillover of DeFi risks to the real economy.”