In recent years, in light of the growing attention given to climate change and environmental concerns, insurance companies worldwide have been increasingly focused on ESG (Environmental, Social, and Governance) objectives. Indeed, according to a survey conducted by PricewaterhouseCoopers in 2022, 85% of global insurers believe that ESG will impact all functions of their business in the years to come.
Bitcoin on the other hand, is often denounced to be “terrible for the environment” and a “contributor to climate degradation”. Media outlets oftentimes quote statistics such as:
It’s estimated that Bitcoin consumes electricity at an annualized rate of 127 terawatt-hours (TWh). That usage exceeds the entire annual electricity consumption of Norway. In fact, Bitcoin uses 707 kilowatt-hours (kWh) of electricity per transaction, which is 11 times that of Ethereum.
The general population, therefore, still believes that Bitcoin is a climate killer and too many people wrongly believe that other cryptocurrencies, like Ethereum, alleviate this shortcoming by using less energy-intensive validation mechanisms.
However, the reality is the exact opposite. As surprising as it may be to some: Bitcoin could be the missing factor to achieve the transition to renewable energy that is needed to prevent a further increase of global temperatures. In this article, I will attempt to explain why that is the case and what implications this has for the insurance industry.
What Is ESG All About?
The term ‘ESG’ typically represents a set of criteria that investors and businesses use to evaluate the ethical and sustainability aspects of an investment or a company’s operations. Let’s quickly break down what each of these components means:
- Environmental: This aspect focuses on a company’s environmental impact, including its efforts to reduce carbon emissions, manage waste, conserve resources, and promote sustainability. Environmental criteria consider how a company’s activities affect the planet and its ecosystems.
- Social: The social dimension of ESG takes into account how a company manages its relationships with its employees, customers, suppliers, and the communities in which it operates. It assesses factors like labor practices, diversity and inclusion, community engagement, and product safety.
- Governance: Governance evaluates the way a company is managed and governed. It looks at factors such as board diversity, executive compensation, shareholder rights, and the overall transparency and accountability of the company’s leadership.
Now that we have a clearer understanding of ESG, let’s now explore why the Bitcoin protocol requires energy – and why that isn’t a bad thing per se.
Why Is Bitcoin’s Energy Consumption Important?
Information stored digitally can be duplicated very easily, without any difference whatsoever between the original information and the copy. When trying to create digital money, this fact creates a problem known as the ‘double-spend problem‘, which means that digital money could be copied and hence spent multiple times. This form of digital money would be inherently worthless, because anyone could create as much of it as they wanted.
Satoshi Nakamoto, the mysterious creator of Bitcoin, worked out this problem. Bitcoin uses a mechanism called ‘proof of work‘ to solve the double-spend problem. Bitcoin miners need to use a lot of computational power, and therefore also a lot of electricity, to find new valid blocks in the Bitcoin blockchain.
There are thousands of competing miners in the world, and the Bitcoin blockchain automatically adjusts the difficulty with which new valid blocks can be found according to the competing computing power in the network. This creates an incredibly secure network! If one party wanted to change the Bitcoin blockchain, for example to steal or to double-spend Bitcoin, this one party would require more than 50% of the computing power in the Bitcoin network. This has become extremely unlikely in recent years, due to increasing computing power in the Bitcoin network.
In other words, Bitcoin manages to ensure real scarcity in the digital realm, by using electricity in the physical world. This sounds trivial, but it is the only digital asset that manages to do this in a truly decentralized, really secure and fully trustless manner!
In terms of Bitcoin’s energy consumption, we can therefore conclude that Bitcoin does not use too much energy. It uses exactly as much energy as is needed to secure a network that creates real value to its users. As such, the electricity consumption of Bitcoin is not a waste. It is as justified – if not more – as the energy consumption of Google’s data warehouses, the sum of all fridges in the world, or electric cars, for example.
How Can Bitcoin Impact ESG Goals?
After we have established that Bitcoin does not waste energy, but merely needs energy to secure its network which provides real value, let’s now take a look at the impact Bitcoin has on ESG factors.
1. Environment
Grid Balancing
As electricity is naturally difficult to store, electrical grids constantly need to balance the energy supply and demand. Fossil fuels offer a simple way to balance the production of electricity, for example by burning more or less coal according to the demand. In contrast, many renewable energy sources, like solar or wind energy, rely on natural weather phenomenon that are not controllable. Furthermore, renewable energy facilities often need to operate at their full capacity in order to meet their contractual obligations. This can result in facilities having an excess surplus of electricity and negative electricity prices. This means that the operator of a renewable electricity facility pays another party to consume their surplus electricity.
Bitcoin mining can utilize this surplus of electricity in a valuable manner. As a ‘buyer of last resort’ in times when the electricity demand is too low, Bitcoin mining can therefore improve the business case and economics of renewable energy facilities, by providing an additional revenue stream through the mining rewards. As such, it incentivizes an increased integration of renewable energy sources into the electricity grid.
ℹ️ What this means for insurers: Many insurance companies invest in renewable energy facilities like wind or solar parks.1 To fulfil ESG goals, such types of investments are likely to grow in coming years. Incorporating Bitcoin mining opportunities into the business cases of these investmends can increase their calculcated ROI and hence further incentivize such endeveaours. Furthermore, energy facilities with integrated Bitcoin mining require specialized risk coverage that can be offered by insurance companies.
Recycled Heat
Bitcoin miners use specialized hardware, so called ‘application-specific integrated circuit’ or ‘ASIC’ computers. This type of hardware transforms the electrical energy input into heat when in use. As such, Bitcoin mining rigs could be considered sophisticated electrical heaters, with the lucrative add-on of also mining Bitcoin.
The heat from these mining rigs can then be recycled for various use cases, such as heating homes, temporary shelters, offices, commercial buildings, greenhouses, swimming pools and so on. Another creative idea is to use the heat to regulate the temperature of algae tanks that not only filter CO2 from the air, but can also be used for nutrition or as a biofuel.
There are already a number of companies working on such use cases. The Canadian startup MintGreen, for example, uses miners to warm water for a whiskey distillery, and the Austrian startup 21ENERGY offers customized Bitcoin mining heaters for home or office usage.
ℹ️ What this means for insurers: When investing into renewable energy facilities, insurers could look at the potential of recycling the produced heat in innovative ways, for exampling by operating a green house or algae farm nearby. Furthermore, insurance companies could consider using Bitcoin mining rigs to replace carbon based heating solutions to heat up office spaces, or to incentivize the usage of such heating solution in the area of buildings insurance.
Methane Reduction
When we talk about climate change and the greenhouse effect, we often talk about Carbon Dioxide (CO2). Other greenhouse gases are frequently overlooked. Methane (CH4) is an 80 times more potent greenhouse gas than CO2 over a 20 years time frame and accounts for roughly 30% of global warming impacts.
Methane is frequently burned in oil and gas fields. During this reaction, it turns into CO2 and water (H2O). Since CO2 is less potent than Methane, this process, also known as gas flaring, is considered to be less harmful to the environment compared to releasing Methane itself into the atmosphere. However, the heat released during flaring is oftentimes being wasted. This wasted heat could be monetized, by transforming it into electricity used for Bitcoin mining. One startup already working on this is Crusoe Energy. This company builds infrastructure to utilize the energy from flaring activities to operate mobile data centers, that can be used for different purposes, such as mining Bitcoin.
Another source for direct release of methane into the atmosphere are landfills around the globe. This methane can also be turned into electricity for Bitcoin mining, which would reduce the negative environmental impact of such facilities. Vespene Energy is a startup that is trying to turn this idea into reality. They have entered into a partnership with a renewable natural gas provider, for an initial project aimed at fueling on-site data Bitcoin mining at a municipal landfill.
ℹ️ What this means for insurers: For insurers, the reduction of methane emissions through innovative approaches such as utilizing waste energy for Bitcoin mining presents opportunities to invest in environmentally sustainable projects. By supporting methane reduction initiatives and partnering with innovative startups in this space, insurers can align with global sustainability goals while also exploring new revenue streams.
2. Social
Inclusive Insurance
Inclusion is one of the main social goals of ESG and it includes financial inclusion. According to the World Bank, financial inclusion means that “individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”
However, many people in economically underprivileged countries still lack the access to the traditional financial system. They don’t have bank accounts, they cannot get loans, they cannot save and invest money easily, and they do not enjoy insurance coverage for life’s perils.
As outlined in our article Microinsurance Unleashed – the Potential of Bitcoin and Lightning, Bitcoin and the Lightning network offer several ways to boost the adoption of inclusive insurance, such as their permissionless nature, low transaction fees and highly automated policies.
ℹ️ What this means for insurers: For insurers, the rise of Bitcoin and the Lightning Network as tools for financial inclusion provides an exciting avenue for innovation and expansion into new markets. The permissionless nature of these technologies enables insurers to reach populations that have historically been excluded from the financial system, without the need for intermediaries or traditional banking infrastructure. This democratization of financial services can open up a vast new customer base that is in need of affordable and accessible insurance products.
Minigrid Electricity
According to the International Energy Agency, almost 775 million people worldwide lack access to electricity. This sets the world behind the United Nation’s Sustainable Development Goals (SDG 7) and hinders human and economic development. One of the driving forces is the lack of energy infrastructure and conventional electricity grids in developing regions, especially in rural and remote areas.
One way to alleviate this problem are so called ‘minigrids‘, which are small electricity grids that work independent of conventional main grids. Such mini can be developed and operated by state utilities, private companies, communities, non-governmental organizations, or a mix of different players. An example for a simple minigrid could be a collection of solar panels in a remote village whose electricity is consumed directly by local residents.
One challenge for the adoption of minigrids are the initial costs for the infrastructure setup, as well as the frequent mismatching of demand and supply. According to a report by the International Energy Agency, a majority of firms in the off-grid industry indicate they risk bankruptcy in the next three years.
As already described above, Bitcoin mining could help to solve this problem. Bitcoin miners can co-locate themselves within a minigrid and monetize electricity in times of oversupply, thereby incentivizing investments into such minigrids. Consequently, this leads to a more stable and cost-effective power supply to local residents, by enhancing the efficiency of the minigrid.
Gridless, a startup backed by Twitter founder and Bitcoin advocate Jack Dorsey, is already doing that. They build minigrids with renewable energy generation in rural communities in East Africa, and use unneeded electricity for Bitcoin mining. By doing that, they report to have reduced electricity prices for locals from 35 cents to 25 cents per KWh.
ℹ️ What this means for insurers: Insurers have a significant role to play in supporting the development and expansion of minigrids in underserved regions. By investing in projects that use Bitcoin mining to enhance the viability of these mini electricity grids, insurance companies can contribute to greater energy access in remote areas. Moreover, insurance products can be designed to cover risks associated with the setup and operation of minigrids, such as damage to infrastructure, or business interruption due to system failure or natural disasters. This would make investments in minigrid projects more appealing to potential stakeholders by reducing their perceived risks.
Remittance Payments & Donations
Another way in which Bitcoin can contribute towards the social aspect of ESG goals, is by facilitating international remittance payments.
Remittance payments typically describe money transfers made by a foreign worker for household income in their home country. The annual volume of remittance is estimated to be more than $600bn, which is roughly equivalent to the gross domestic product of countries such as Sweden or Argentina. According to the World Bank, the global average for such remittance payments is around 6.25%, more than double of the United Nation’s Sustainable Development Goal (SDG 10c) of remittance costs of 3%. In Sub-Saharan Africa, the average is 8.35%, and for some countries, remittance costs can take up to 30% of the transfer amount.
Historically, transaction fees average between $0.50 – $2.50. If we take the average of $1.50 fee per transaction, this means that a remittance amount of just $30 would equal to a fee of 5% when done in Bitcoin – which is substantially lower than the global average. In the case of a transfer of $100 the Bitcoin fee would only represent 1.5%. Sending on-chain Bitcoin to one’s family would therefore already be beneficial for migrant workers.
However, with the Lightning network, it gets even better. The median cost of sending value across the Lightning Network is a negligible 0.0029% with a base fee of just 1 Sat.2 This makes sending money to any place in the world unprecedentedly cheap and can directly enhance the life of billions of people in the world who are dependent on such remittance payments.
A similar benefit arises for donations made into catastrophic regions or for charitable causes. Traditional donation platforms often come with administrative costs and transaction fees that can eat into the amount actually received by the beneficiaries. With Bitcoin and especially the Lightning Network, these fees can be reduced to almost negligible amounts, ensuring that more of the donated funds actually reach those in need.
ℹ️ What this means for insurers: Insurance companies with a global workforce could encourage or even facilitate the use of Bitcoin and Lightning for employees wishing to send remittance payments. This could manifest as an employee benefit or service, making the remittance process easier, faster, and less costly for their international staff. Moreover, insurance companies frequently engage in philanthropic activities, particularly in responding to catastrophic events where rapid and efficient financial assistance is crucial. Utilizing Bitcoin could substantially reduce the administrative overhead and transaction fees associated with such donations. By leveraging this technology, insurers could ensure that a significantly larger percentage of their charitable contributions go directly to aid those in immediate need, rather than being diluted by operational costs.
3. Governance
As we have seen, Bitcoin can have a direct, measurable and positive impact on environmental and social factors, and help insurers to reach their ESG goals. When it comes to governance, the positive influence of Bitcoin is a bit more subtle and indirect. Nevertheless, I believe that Bitcoin posses a set of core design rules that can act as a role model or blueprint for traditional organizations and companies. These core design rules are:
- Transparency: Bitcoin’s blockchain operates on a decentralized, open ledger that records all transactions, providing complete transparency. Furthermore, the code that defines the Bitcoin protocol is open source and can be checked by anyone. This transparency can inspire traditional organizations and companies to adopt more open and accountable practices in their governance, fostering trust among stakeholders and demonstrating their commitment to ethical operations.
- Immutability: Bitcoin’s blockchain is extremely resistant to changes, ensuring the integrity of the historical data recorded. In the realm of governance, this principle encourages organizations to maintain consistency and stability in their policies, making them more reliable and less susceptible to arbitrary shifts that may harm stakeholders.
- Equality: Bitcoin operates on the principle of decentralization, where no single entity has undue control. This aspect can encourage traditional organizations to adopt more inclusive and democratic governance models, giving a greater voice to various stakeholders and fostering a fairer decision-making process.
By considering these principles inspired by Bitcoin, traditional organizations, such as insurance companies, can better align with ESG objectives, especially in the realm of governance, by promoting transparency, immutability, and equality in their operations.
Summary
In summary, Bitcoin presents an unexpected but promising avenue for insurance companies striving to meet ESG (Environmental, Social, and Governance) objectives. Contrary to its reputation as an energy drain, Bitcoin mining can actually support renewable energy adoption by balancing the electrical grid and providing new revenue streams. It can also recycle waste heat and reduce potent methane emissions.
On the social front, Bitcoin and the Lightning Network offer game-changing possibilities for financial inclusion and remittance payments, widening insurers’ potential customer base and reducing transaction costs. Minigrid projects supported by Bitcoin mining can also foster sustainable development in underprivileged regions, providing both environmental and social benefits.
As for governance, Bitcoin’s core principles of transparency, immutability, and equality serve as a model for companies to align their governance practices with ESG goals.
Overall, Bitcoin is not only compatible with ESG objectives, it offers innovative pathways to achieve them. For insurers committed to sustainability and social responsibility, it may be time to look past the negative headlines and consider the unique opportunities that Bitcoin presents.