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Journals & Magazines >IEEE Access >Volume: 9
THE ECONOMIC AND ENVIRONMENTAL IMPACT OF BITCOIN
Publisher: IEEE
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Liana Badea; Mariana Claudia Mungiu-Pupӑzan
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Abstract
Document Sections
* I.
Introduction
* II.
The Economic Impact of Bitcoin
* III.
The Environmental Impact of Bitcoin
* IV.
Bitcoin Regulation
* V.
Conclusion
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This article aims to provide an overview of the literature dedicated to
Bitcoin’s economic and environmental impact, as well as its regulation, which is
very important fo...View more
Abstract:The controversies surrounding Bitcoin, one of the most frequently used
and advertised cryptocurrency, are focused on identifying its qualities, the
advantages and disadva...View more
Metadata
Abstract:
The controversies surrounding Bitcoin, one of the most frequently used and
advertised cryptocurrency, are focused on identifying its qualities, the
advantages and disadvantages of using it and, last but not least, its ability to
survive over time and become a viable alternative to the traditional currency,
taking into account the effects on the environment of the technology used to
extract and trade it. Based on such considerations, this article aims to provide
an overview of this cryptocurrency, from the perspective of conducting a
systematic review of the literature dedicated to the economic and environmental
impact of Bitcoin. Using peer-reviewed articles collected from academic
databases, we aimed at synthesizing and critically evaluating the points of view
in the scientific literature regarding the doctrinal source of the emergence of
Bitcoin, the identity of this cryptocurrency from an economic point of view,
following its implications on the economic and social environment. Subsequently,
this research offers the opportunity of evaluating the level of knowledge
considering the impact of Bitcoin mining process on the environment from the
perspective of the energy consumption and CO 2 emissions, in order to finally
analyze Bitcoin regulation and identify possible solutions to reduce the
negative impact on the environment and beyond. The findings suggest that,
despite high energy consumption and adverse environmental impact, Bitcoin
continues to be an instrument used in the economic environment for a variety of
purposes. Moreover, the trend of regulating it in various countries shows that
the use of Bitcoin is beginning to gain some legitimacy, despite criticism
against this cryptocurrency.
Published in: IEEE Access ( Volume: 9)
Page(s): 48091 - 48104
Date of Publication: 24 March 2021
Electronic ISSN: 2169-3536
INSPEC Accession Number: 20965795
DOI: 10.1109/ACCESS.2021.3068636
Publisher: IEEE
This article aims to provide an overview of the literature dedicated to
Bitcoin’s economic and environmental impact, as well as its regulation, which is
very important fo...View more
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Contents
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CCBY - IEEE is not the copyright holder of this material. Please follow the
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SECTION I.
INTRODUCTION
The last decade has been marked by the evolution of cryptocurrencies, which have
captured the interest of the public through the offered opportunities and the
feeling of freedom, resulting from decentralization and lack of authority to
oversee how cryptocurrency transactions are conducted. The most popular
cryptocurrency so far, Bitcoin, was put into circulation in the early 2009 by an
anonymous entity, working under the pseudonym “Satoshi Nakamoto”, after in 2008
the same entity presented the concept in a paper, stating that “a purely
peer-to-peer version of electronic cash would allow online payments to be sent
directly from one party to another without going through a financial
institution.” Reference [1] Bitcoin uses a database, making use of nodes,
working “all at once with little coordination” in a peer-to-peer network for the
purpose of inventorying transactions [1]. The purpose of using cryptography in
the process of using Bitcoin is to provide the basic security features - Bitcoin
can only be spent by the owner and this can be done only once [1]. Precisely
because the existence and circulation of such a coin are closely linked to the
existence and proper functioning of a network and of special devices, the issue
of its impact on the environment has also recently arisen, especially in the
context of discussions about sustainable development and the application of its
specific objectives. Nowadays, sustainable development and climate change are
among the major challenges that humanity is facing. Information and
communication technology is a key factor in addressing these challenges, giving
rise through its products to very serious controversies in both academia and
business. While, on the one hand, technology can help reduce energy and resource
consumption, on the other hand, its increasing use induces an increase in the
demand for energy and resources, generating all kinds of emissions into the
atmosphere, in the context of the energy transition to a low-carbon society is
on the agenda of decision-makers in the European Union [2] and beyond.
In this context, the growing interest in various cryptocurrencies has generated
controversy in academia from debating what cryptocurrency actually is to issues
related to the sustainability of the technology used to mine various
cryptocurrencies. Articles written on this topic were dedicated to establishing
the economic identity of Bitcoin [3]–[4][5], analyzing the factors that
influence its volatility [6], the efficiency of Bitcoin [7], establishing the
identity of its doctrinal affiliation and its advantages [8], [9] etc.
At present, the number of issues that can be discussed regarding Bitcoin is
significant - from the issue of the parallel use of the official currency and
the cryptocurrency, to the sustainability of the banking system compared to that
of the cryptocurrency. The increase in the number of articles published on
cryptocurrencies is visible. However, the number of articles dedicated to the
economic and environmental impact of cryptocurrency and implicitly of Bitcoin is
not impressive, as can be seen in table no. 1.
TABLE 1 Number of Articles Containing the Terms “Bitcoin” Plus “Environmental
Impact”, “Economic Impact” and “Regulation” in the Scopus and Web of Science
Databases in the Period 2016-2020
TABLE 2 Swot Analysis of Bitcoin Using in Economy
Based on such considerations, this article aims to provide an overview of the
literature dedicated to Bitcoin’s economic and environmental impact, as well as
its regulation, which is very important for Bitcoin’s present and future use.
The need for this kind of research arise from the scarceness of existing studies
that explore in a multidisciplinary way the issue of Bitcoin, starting from its
doctrinal framework, highlighting the economic identity, presenting the impact
on the environment and analyzing its legal implications, as one may notice in
Figure 1.
FIGURE 1.
The impact of Bitcoin Source: author’s processing.
Show All
In order to conduct this research we have systematically reviewed articles in
the growing academic literature on a popular cryptocurrency - Bitcoin, and
summarized the findings in three parallel lines of inquiry for scholars:
economics, environment, and law. We used a two-step approach to identify the
articles to be analyzed in order to answer the research question: What is the
economic and environmental impact of Bitcoin?
In the first stage, the appropriate search terms were chosen to identify
relevant online articles, book chapters and reports from international
organizations. In the second stage, we used specific criteria to determine the
inclusion in the analysis of articles, book chapters and reports. The selection
of keywords was based on a preliminary review of the available literature. We
initially did a Google Scholar search for the words “economic and environmental
impact of Bitcoin”, and the first 20 studies were briefly revised to identify
other terms. Based on the review, it was established the need for separate
searches for the “Bitcoin economic impact”, the “Bitcoin environmental impact”,
as also the “Bitcoin regulation”. To organize relevant research, we limited our
search to those documents that were classified as articles from peer-reviewed
journals, book chapters from prestigious publishing houses. There were also used
reports and official documents from competent international bodies. We also
applied an inclusion criterion for the language of publication and took into
account only those documents published in English.
Section 2 provides a synthesis and critical evaluation of the points of view in
the scientific literature on the doctrinal source of the emergence of Bitcoin
and the establishment of the economic identity of this cryptocurrency, following
the implications it has on the economic and social environment. Section 3
presents the impact on the environment of Bitcoin mining, targeting specific
aspects of sustainability, as well as the implications that the use of
Blockchain technology has on the business environment. In Section 4 the Bitcoin
regulation is analyzed, in order to identify the geographical area in which
Bitcoin can be legally used, but also to identify potential legal solutions to
reduce its impact on the environment and beyond. The last section is dedicated
to the conclusions.
SECTION II.
THE ECONOMIC IMPACT OF BITCOIN
Since ancient times, philosophers such as Xenophon, Plato and Aristotle have
tried to discern essential aspects of the value, form, functions and way in
which money circulates in the market [8]. Studies have advanced with the times.
No matter how much the dimensions or the terms of economic exchanges modify, the
appearance and evolution of money reveal elements characteristic of the stages
of human development. Thus, the issue of private money is brought back into
public debate. Some schools of economic thought addressed the problem of private
money, especially since the second half of the nineteenth century. Controversies
related to money and currency clearly reflect the need, opportunity, but also
the possibility of monetary competition, which would ensure, from the
perspective of entrepreneurs, the production of the most suitable money
according to the expectations of the preferences of economic agents.
Historically, it has been shown that humans have the ability to discover ways in
which they can “avoid” prohibitions of various kinds, being able, including in
the case of currency, to find alternatives to what the state offers (examples:
TEM, Sano, M-PESA, QQ etc.) [8]. History shows us that human ingenuity has been
decisive in providing an alternative and drawing competition between the
official and private currencies, regardless of the level of education of
individuals.
At the academic level, the problem of using private money has been raised since
the nineteenth century, when Carl Menger showed that the origin of private money
can be found in the behavior of the individual guided in economic actions of his
own interest. Carl Menger pointed out that the exercise of monopoly over the
management and issuance of currency was based on the alleged historical priority
of the state, but also on legal-official confusion, as the exercise of money
functions brought together economic, psychological and administrative interests
[9].
Following the footsteps of the Austrian school of economic thought, we identify
Friedrich August von Hayek, who in Denationalization of Money: The Argument
Refined” introduced the controversial idea that free competition between private
currency producers is the best way to obtain a healthy currency [10].
Moreover, F.A. von Hayek pointed out that the existence of a private currency
can bring with it a number of advantages, which over time have been ignored,
such as: “(a) a money generally expected to preserve its purchasing power
approximately constant would be in continuous demand so long as the people were
free to use it, (b) with such a continuing demand depending on success in
keeping the value of the currency constant one could trust the issuing hanks to
make every effort to achieve this better than would any monopolist who runs no
risk by depreciating his money, (c) the issuing institution could achieve this
result by regulating the quantity of its issue, (d) such a regulation of the
quantity of each currency would constitute the best of all practicable methods
of regulating the quantity of media of exchange for all possible purposes” [10].
Hayek’s conviction has generated and still gives rise to serious criticism in
academia.
Practically, in the history of economic thought of the last three centuries,
there have been three recognized directions in approaching the problem of
private money: the first seeks its origin in the behavior of the individual who
is guided in his economic actions of his own interest (Carl Menger, Friedrich
August von Hayek and other representatives of the Austrian school of economic
thought), the second associates private money with the extension of the
individual freedom of initiative (Milton Friedman), while the third establish
private money as a privilege of a private bank (George Selgin) [9]. The last
century has brought a new element - that of cryptocurrency, whose status can
still not be underlined with certainty to fall into the category of private
money, scientists still debating what it is from a doctrinal and economical
point of view.
Fernandez-Villaverde started from contradicting Hayek and shows that private
monetary agreements will not be, except in some special cases, socially optimal
and cannot address any issue cheaper and better than in the case of use of money
issued by the government. The preference for a private or public monetary
arrangement will depend on the comparison of two relative evils: an inefficient
market mechanism over an incompetent government [11]. Rahman also states that a
purely private arrangement of digital currencies will not provide a socially
efficient allocation [12].
There is a large debate in the literature about the nature of cryptocurrencies
and their functions. If in ancient times, the coin was made of precious metals,
and people trusted its intrinsic value, nowadays most countries use fiat money,
which is backed by government guarantees. In contrast, in the case of
cryptocurrencies, where the value is established by algorithms and verified by
electronic data transfer, all transactions players are anonymous and the
guarantee is not offered by any authority. In the case of fiat currency,
everything around it is subjected to regulation and even if there is a security
breach, the parties involved will be held liable and fiat currency users will
receive compensation [13]. On the other hand, in the case of cryptocurrency,
security is mainly of IT nature, the cryptocurrency market being a very dynamic
one and subjected to the influences of several types of factors.
In 2018, there were over 1800 different types of cryptocurrencies in circulation
[14]. According to the site coinmarketcap.com, on August 13, 2020 there were
6442 cryptocurrencies in circulation [15]. Some of the new cryptocurrencies
manage to survive, others disappear after only a few days. The different
characteristics of each cryptocurrency influence their prices and stability, as
well as the relationships between them. Factors, such as market uncertainty,
investor expectations can lead to significant fluctuations.
From an economic point of view, there are a number of controversies about what
Bitcoin really is and what its functions are. Thus, some authors treat Bitcoin
as a medium of exchange, others as a speculative investment. Corbet et al. start
from the identification of cryptocurrencies as a financial asset [16]. Frisby
emphasized that Bitcoin seems to possess the characteristics of money and even
works better than the traditional currency [17]. Thus, durability, divisibility,
portability, high liquidity and lower transaction costs make it attractive.
Dyhrberg shows that we can treat Bitcoin from the perspective of gold, which can
even be seen as a hybrid between a currency and a commodity [18]. If we want to
look at Bitcoin as a currency, then we need to start with the generally accepted
functions for money. The history of economic thought shows us that, even in this
sense, over time, economists have not agreed on the number of functions that
money performs. Jevons in his 1875 book “Money and the Mechanism of Exchange”
identifies four fundamental functions for money: exchange environment, common
measure of value, standard of value, store of value [19]. Currently, economic
theory is adapted to the evolution of modern times, therefore the functions of
money have been updated. Kubát indicates, in addition to the classical
functions, the informational function, the investment function, etc. [3]. Graham
(1940) recognizes only two main functions of money: the unit of accounting and
the bearer of options, showing that all other functions come from these primary
function [20]. Based on these considerations, Kubát concludes that Bitcoin does
not qualify to be considered money [3].
However, history shows that over time the most diverse elements have been used
as money. In some religious communities in Catalonia, Valencia and the Balearic
Islands (Spain), tokens called “pellofes” circulated between the fourteenth and
nineteenth centuries as a means of payment. During the 19th century, in the
United Kingdom, many communities far from major financial centers did not have
enough gold coins or banknotes from the Bank of England [11]. A common response
was the distribution of copper tokens with almost zero value, which circulated
as money, even when His Majesty’s government did not accept them for the payment
of taxes. Later, during the Great Depression, so many local currencies emerged
in the United States and Germany that they aroused great interest in famous
economists such as Irving Fisher [11]. Similar to such tokens, cryptocurrencies
can be seen as intrinsically worthless tokens, adopted by social convention,
used as a memory of transactions. In fact, they are even more worthless than
private banknotes, because a cryptocurrency is an electronic collection of
digits like zero and one, not even having the residual value of the paper on
which the banknotes are printed [11].
The European Central Bank considers Bitcoin to be a digital representation of
value, which is not issued by a central bank, but can serve as a substitute for
banknotes, coins, demand deposits and electronic money [21].
Some authors even claim that Bitcoin has the ability to become a universal
currency [22]. On the other hand, the possibility of a new type of dual currency
is introduced by Hong et al. [23], which mentions the coexistence of a digital
currency without any intrinsic value and a fiat currency issued by the
government. Dual currency regimes are often observed in emerging economies,
where a foreign currency is officially used as a substitute for the internal one
and it is often not easy to stimulate market participants to hold the national
currency [23]. Lutz [24] discuss the pressure on central banks due to the
existence of cryptocurrency, especially in times when central banks suffer from
an image deficit, postulating that one currency cannot exist without the other
and therefore cryptocurrencies and fiat currency will be uniform [24].
Seetharaman et al. [25] argue that Bitcoin will not be a coexisting currency in
the long run due to regulatory hurdles, even if it has the ability to positively
influence the world’s currencies. Van Alstyne argues that in order to have
value, Bitcoin must be supported by the government [26].
Selgin suggested that a digital currency can be created using an algorithm that
replicates all the monetary rules specific to the economic literature [27].
However, Ammous demonstrated that a cryptocurrency cannot play the role of
conventional money, although it can be successfully used as a means of exchange,
but cannot be used as a unit of account due to the lack of a central authority
to manage it, a fluctuating demand and an inflexible supply [22].
Yermack starts by showing that Bitcoin is not a currency since all
cryptocurrencies have no intrinsic value [28]. Instead, Woo et al. show that
Bitcoin can be considered as having the specific value of money thanks to its
function as a mediator of exchange and keeper of value [29]. Ammous shows that a
cryptocurrency can only gain credibility if it has the ability to prove to its
users that supply will not grow surprisingly fast and will lead to the
devaluation of the cryptocurrency [22].
It seems that so far Bitcoin has been the only such cryptocurrency capable of
demonstrating low growth rates of the supply and controlling potential inflation
[22]. Regarding Bitcoin, it is well known that it can be extracted in limited
quantities, the extraction not following a logistical distribution, but a
logarithmic increase [30].
According to specialized sites, in the second quarter of 2020, there were 18.42
million Bitcoins circulating, as one may notice in Figure 2. However, one must
take into account the fact that not all of those 18.42 million of Bitcoins were
really used, as in some cases, as related in the press (see, for examples
articles from The New York Times, Wall Street Journal etc.), some of the users
lost their private keys to the digital wallet.
FIGURE 2.
The amount of extracted Bitcoins Source: blockchain.info.
Show All
Vlasov sees Bitcoin as the next stage in the process of money evolution - an
electronic currency in no way connected to the objects of the material world
[31]. Others argue that Bitcoin has been turned into an element of speculation
rather than functioning as money [32]. Bal shows that Bitcoin does not currently
fulfill the specific functions of money in the classical economic sense, but
that it has the potential to turn into money in the future [5]. Dyhrberg argues
that Bitcoin is somewhere between a currency and a commodity, due to its
decentralized nature and limited market size, which does not mean that Bitcoin
is less useful than current market assets [18]. As one may notice, the
controversies are surrounding the economic nature of this cryptocurrency. In the
academic world and even in the legal one, this subject still needs
clarifications. For instance, there is another way to look at Bitcoin. Because
it has an economic value, it can be considered a “digital asset” in which the
computing power is the one that determines the rarity and market value [33].
Selgin showed that the acceptance rate of Bitcoin has been constantly
increasing, due to the involvement of traders, who have accepted the payment of
products or services in cryptocurrency. As early as 2014, more than 75,000 U.S.
merchants, including the largest, accepted Bitcoin, which also proved to be a
preferred medium for remittances from workers abroad [27]. Selgin underlined the
fact that in 2012, “the number of Bitcoin accepting merchants then had reached
about one thousand, and that it was likely to reach ten thousand in another
year.” [27] He tried to emphasize the rhythm of the growing number of the
merchants accepting this cryptocurrency. Nowadays, according to specialized
sites, as 99bitcoins.com, one may observe the fact that 36% of small and medium
businesses in the United States of America accepted payments with Bitcoin in
2020. The same site (http://www.99bitcoins.com) enumerates among those accepting
Bitcoin some very well-known major companies such as: Microsoft, Burger-King,
AT&T, Wikipedia, KFC, PizzaHut, Overstock etc., emphasizing that “today it’s
possible to buy almost anything with Bitcoin through the use of Bitcoin debit
cards”, which are issued by Visa or Mastercard. There are some cases in which
Bitcoin payments are accepted directly and others in which are indirectly
accepted.
The list may be completed by adding Wordpress.com, Reddit, Dell, Target,
Expedia, Bloomberg, PayPal, and Tesla Motors. Dell accepts direct Bitcoin
payments, but Amazon instead offers digital gift cards, which can be purchased
with Bitcoin and then used to purchase goods from their website [34]. Moreover,
in Cyprus, Canada, Romania, etc. ATMs have been installed, through which real
currency can be converted into Bitcoin [8]. A research conducted in 2018
indicated the existence of a number of 2098 Bitcoin ATMs and altcoins in 62
countries [35]. Compared to the total number of ATMs existing on the Globe
(according to The World Bank– more than 3.5 million in 2020), 2098 does not
represent a significant amount, but it shows that even in this segment the
existence and use of cryptocurrencies is starting to be visible. Almost 60% of
these ATMs were located in the USA, while 96% of all ATMs are in North America
and Europe [35]. The number of ATMs in Asia is only 2.4% [36].
Kristoufek shows that, despite the general opinion that the Bitcoin market is
chaotic and irrational, the Bitcoin system behaves like a standard market in
which market forces are normally manifested [37].
A series of research aimed at establishing the possibility of Bitcoin to survive
in the long run, start from identifying the advantages and disadvantages of
Bitcoin [8] or from conducting a SWOT analysis [9]. If we look closely at the
table below, we will see that both the advantages and disadvantages deserve
further study.
Demir et al. [38] examine the relationship between Bitcoin and the uncertainty
index of economic policy and conclude that it can be used as a tool to protect
against uncertainty. At the same time, some papers point out that speculative
bubbles and the low intrinsic value of cryptocurrencies bring uncertainty and
reduce price stability. Glaser et al. consider that media reports also play an
important role in influencing the volatility of cryptocurrency prices [39].
Regarding stability, it seems that there are authors who claim that the lack of
a central bank to manage the supply of cryptocurrency is a real disadvantage,
depriving cryptocurrency of stability [22]. Bitcoin exchange rate volatility is
a challenge, along with lack of liquidity, functioning in an informal market
with high security risks, lack of market regulations and government control
[27].
As one may notice in Figure 3, the evolution of the Bitcoin – USD exchange rate
shows us that it is a very fluctuating one. If on March 15, 2020 one Bitcoin was
worth 5355 USD, on April 15, 2020 it was quoted at 6887 USD, on July 15 9260
USD, and on August 15 it was 11752 USD [40].
FIGURE 3.
The evolution of the Bitcoin - USD exchange rate Source: coindesk.com.
Show All
FIGURE 4.
Legality of Bitcoin Source: [101].
Show All
When Malone and O’Dwyer address the issue of Bitcoin, they start by examining
its profitability and come to the conclusion that while the Bitcoin exchange
rate is decided by those who use it, it is also related to the price of
electricity and how it is used [41]. It counts the competition in the system,
which targets not only the visible part of transactions, but also the problem of
developing more energy-efficient hardware to be financially viable [41].
Corbet et al. examine the relationship between three popular cryptocurrencies
(Bitcoin, Ripple and Litecoin) and other traditional financial assets (gold,
bonds and others), showing that the three cryptocurrencies are relatively
isolated of other financial assets and therefore they can be used to diversify
investor risks [16]. Yi et al. studied the mechanism of transmission of
volatility fluctuations among a number of eight cryptocurrencies and showed that
it is almost invisible, being closely related to market imperfections or
investor behaviors and feelings [42].
Darlington formulated an interesting hypothesis, namely that Bitcoin offers an
advantage to people living in underdeveloped economies and facing problems,
because it solves the problems resulting from hyperinflation, exchange and
counterfeiting [43].
At the same time, the fact that Bitcoin ensures an almost perfect anonymity of
transactions, has placed it over time in the area of facilitators of illegal
transactions, with drugs or other goods and services prohibited by law [44].
Therefore, some experts fear that virtual currencies could gradually become
criminal currencies [45] and for this reason, a special place should be
allocated to the issue of cryptocurrency regulation. Moreover, the problem of
regulation also arises in the case of potential attacks on the network itself.
Barber et al. [46] show that the theft of Bitcoins can occur in the network.
Moore and Christin analyze the attacks on Bitcoin exchanges [47]. Kroll et al.
highlight a network attack scenario, by controlling over 50% of mining power
[48]. This particular issue will be widely discussed in the penultimate section
of this paper.
Beyond determining whether or not the cryptocurrency falls into the category of
private money that may or may not survive the market test in the medium and long
term, there is a pragmatic problem related to the increased interest shown by
individuals in the process of obtaining and using cryptocurrency - is this
sustainable or not?
SECTION III.
THE ENVIRONMENTAL IMPACT OF BITCOIN
Considering the fact that cryptocurrencies are defined as a peer-to-peer version
of electronic cash, which allow online payments to be sent directly from one
party to another without going through a financial institution” [49], it can be
easily noticed that in obtaining and using any cryptocurrency, and implicitly
Bitcoin, there are used resources that require electricity consumption. Given
the concerted efforts to reduce global greenhouse gas emissions under the Paris
Agreement, the information and communications industry (ICT) has received little
attention as a significant contributor to the deterioration of environmental
conditions [50]. Under the Paris Agreement, which took place in December 2015,
196 countries approved a global plan to reduce climate change in the coming
years, proposing to limit global warming to below 2 degrees C [50].
Lately, the concerns about the energy consumption required for Bitcoin mining
have begun to grow. Concerns about CO2 and natural gas emissions due to the
exploitation of Bitcoin cannot be overlooked. PoW and PoW / PoS hybrid schemes
are currently used for Bitcoin mining [51]. All calculations of the hybrid PoW
and PoW / PoS schemes, including Bitcoin process of mining and system
maintenance, are complemented by energy-intensive electronic devices. The high
computing power required by the Bitcoin network initially involved the use of
CPU and GPU (2009-2011), FPGA (2011-2013) and later they reached ASICs (since
2013) [52].
There are currently developed two tools for estimating electricity consumption
by the Bitcoin network:
* Cambridge Bitcoin Electricity Consumption Index (CBECI), developed recently
by the University of Cambridge
* Bitcoin Energy Consumption Index (BECI) realized by Digiconomist.
On September 30, 2019, according to the two indexes, the network annually
consumed between 73.1 [53] and 78.3 terawatt-hours (TWh) [54] of electricity
[55]. However, de Vries pointed out that based on an analysis of Bitcoin miners’
sales, it can be estimated that, in fact, the Bitcoin network consumed 87.1 TWh
annually on September 30, 2019, exceeding estimates made based on the two
indexes and approaching energy consumption of a country like Belgium [55]. We
cannot say that currently there were discovered exact means by which energy
consumption can be concretely measured, but there are some instruments that can
be used to approximate it [56].
However, it should be borne in mind that estimates vary considerably depending
on several factors, including hardware efficiency and electricity prices used in
the process [57]. For the years 2016, 2017 and 2018, Krause and Tolaymat
reported estimates of 283 MW, 948 MW and 3441 MW [57]. For 2017, the study
conducted by Dilek and Furuncu shows that except for a few countries on the
African continent compared to which Bitcoin uses more energy, Bitcoin’s energy
consumption accounted for about 13% of Turkey’s electricity consumption [35].
Some studies conducted in 2018 showed a total electricity consumption of the
grid that equaled that of some developed countries and areas, such as Ireland,
Hong Kong and even Austria [58]. Küfeoğlu and Özkuran show that in the first
half of 2018, the estimated minimum energy demand for the Bitcoin mining process
was between 1.34 and 2.80 GW, while the maximum demand was between 5.14 and
13.82 GW [59]. In June 2018, the annual energy consumption was between 15.47
(minimum) and 50.24 TWh (maximum) [59].
Such estimates have attracted the attention not only in the case of scientists,
but also of international bodies, such as the European Commission, which has
stated that it will monitor energy consumption without using its own tool in
this regard [55]. Moreover, there is research, such as that conducted by
Citigroup, which claims that if all the amount of electricity needed for the
network and transactions with Bitcoin continues to grow, it is possible that the
Bitcoin system will collapse [35]. However, we must keep in mind that de Vries
shows that miners are more concerned with the size of the profits that can be
obtained than energy efficiency. He predicts that as more people interested in
profits enter this industry, energy use will increase considerably [55].
At the same time, there have been a number of speculations about the source of
fuel used by Bitcoin network, and some of them lead us to Chinese coal,
Icelandic geothermal energy and Venezuelan subsidies [60]. The Bitcoin industry
is facing a fierce competition. For example, the Swedish company KnCminer has
positioned its Bitcoin mining centers at the Arctic Circle to benefit from the
local hydropower and cold air at extremely low costs; however, it went bankrupt
in the mid-2016 [61]. A study conducted by Cambridge University showed that 58%
of Bitcoin mining is done in China, followed by the USA with 16% [35]. Mining is
done in China, because here electricity is cheaper; Bitcoin centers in China
continue to depend mostly on coal for the consumed energy [62]. The largest such
center is situated in Inner Mongolia, an autonomous area of China, with cheap
electricity [35].
Kamiya (2019) estimates that China is the country where 60% to 70% of the total
of Bitcoins is mined, but mining centers are located in remote areas of China,
with resources that are rich in hydropower or wind energy, thus being cheaper
[63]. Therefore, we note that in order to maximize their profits, miners prefer
geographical areas where electricity is cheaper. We can therefore consider that
the exploitation of cryptocurrencies is related for economic reasons to the
geographical position of the mining site.
The figures accompanying Bitcoin transactions are worrying not only from the
perspective of electricity consumption, but also from the perspective of
greenhouse gas emissions. There are rumors that all cryptocurrencies would “pose
a serious threat to the global commitment to mitigate greenhouse gas emissions
under the Paris Agreement” [64], especially in the context of gloomy forecasts
stating that “Bitcoin emissions alone could push global warming above 2∘C ”
[65]. However, Masanet et al. [66] show that the analysis made by Mora et al.
[65], which predicts that Bitcoin mining may lead to an increase in global
warming by more than 2∘C in the next 11–22 years, is not entirely plausible. The
effects of Bitcoin processes, however, are visible. Stoll et al. emphasized that
the carbon footprint generated by Bitcoin mining “sits between the levels
produced by the nations of Jordan and Sri Lanka, which is comparable to the
level of Kansas City” [67].
Li et al. show that beyond Bitcoin mining, carbon emissions also result from the
activity of obtaining other cryptocurrencies, such as Monero, for which they
estimated a consumption of 645.62 GWh of electricity in 2018. Li et al. showed
that if a mining activity of 4.7% takes place in China, the consumption is at
least 30.34 GWh, contributing to a carbon emission of 19.12-19.42 thousand tons
[56].
Moreover, Loviscach proposed two fundamental aspects that must be taken into
account in assessing the impact of Bitcoin on the environment: (a) computer
power consumption (expressed in kWh) for computing, networking and cooling; (b)
disposal of electronic waste produced [68]. Starting from the fact that the
mining equipment used to obtain Bitcoin becomes obsolete in about 1.5 years,
leaving only those that prove to be economically viable remaining viable, we
should also consider how they turn into electronic waste [69], the amount of
which is comparable to the total electronic waste generated by a country such as
Luxembourg (12 kt) [70].
Let us not forget at the same time that air pollution harms the environment,
generates costs to the economy, but also leads to the loss of human lives. It is
estimated that air pollution leads to around 3 million deaths worldwide each
year. In 2016, it generated 7.6% of the total deaths [71].
There are studies that follow the gain generated by Bitcoin in close connection
with the issue of sustainability. Thus, Hayes assumed that Bitcoin mining would
stop in the specific economic situation in which the marginal cost of Bitcoin
mining would exceed the price of Bitcoin [72]. Stephen shows that Bitcoin will
turn into a disaster due to the cost of the extraction process that consumes
daily electricity worthing over 150,000 USD [73]. The empirical results obtained
by Das and Dutta indicate the energy costs as the Achilles heel for Bitcoin
miners’ incomes when their incomes are low and volatile [74]. Goodkind et al.
estimated that in the case of the year 2018 “each 1USD of Bitcoin value created
was responsible for 0.49USD in health and climate damages in the US and 0.37USD
in China” [75].
Malfuzi et al. highlights the declining trend of marginal costs for renewable
energy production compared to marginal costs of fossil fuel energy production,
which may cause miners to move to renewable energy [76]. Krause and Tolaymat
estimated for the period January 1, 2016 - June 30, 2018, that Bitcoin,
Ethereum, Litecoin and Monero mining consumed on average 17, 7, 7 and 14 MJ to
generate one USD, while conventional aluminum extraction, copper, gold, platinum
and rare oxides consumed 122, 4, 5, 7 and 9 MJ to generate one USD, which draws
our attention to the cost-benefit analysis [57]. The same study shows that
mining for all 4 cryptocurrencies was responsible for an amount of 3–15 million
tons of CO2 emissions [57].
A more important element is that by 2028, 98.44% of the total of Bitcoins will
be extracted, which means that the discussion about the energy consumption
generated by the process of Bitcoin mining will be valid until then [59].
Despite the environmental costs outlined above, Bitcoin appears to remain an
economically viable alternative to the official currency, according to McCook,
who estimated the environmental costs of Bitcoin mining to be lower than the
costs of issuing paper money, gold mining and banking systems, as can be seen in
the table no. 3 [77]. McCook’s study considered only energy consumption compared
to other systems, excluding gold mining, warehousing and transportation, and the
construction of about 600,000 bank branches worldwide that employ about 7
million people, including only operational energy used [77].
TABLE 3 Cost Comparison
However, when comparing the system using Bitcoin with the banking system, one
must take into account the fact that the offered services are not identical and
the fact that unlike fiat money, Bitcoin needs special conditions to be used,
meaning that its existence is conditioned by the using of technology. One cannot
use Bitcoin if one do not have an Internet connection and a special device, such
as a smartphone, a laptop etc.
In the same spirit, Cocco et al. [78] emphasizes that the social and economic
impact of cryptocurrencies is much smaller than that of traditional financial
systems. Their study starts from the premise that periodically in order to
guarantee quality standards for banknotes in circulation, used banknotes are
crushed, so that, to all operating costs specific to the banking system, are
added the production costs of coins and banknotes, but also their destruction.
Instead, systems based on Blockchain technology only need to connect to the
network, without having to bear additional costs such as those generated by
ATMs, large numbers of employees or waste produced, for example by using paper
and toner for printers [79]. At the same time, a research conducted by the
CoolClimate Network from the University of California, Berkeley and cited by
Cocco et al. estimated the impact of the banking sector and showed that it is
worth 383.1 million tonnes of CO2 / year for bank branches and 3.2 million
tonnes of CO2 / year for ATMs. In addition, energy consumption is 2.3 billion GJ
for bank branches and 18.9 million GJ for ATMs [78]. Therefore, the Bitcoin
system is less harmful to the environment, if we were to compare the 0.75
million tons of CO2 produced per year by Bitcoin with the approx. 387 million
tons of CO2 produced by the banking sector. Therefore, Blockchain technology
could be adopted in the banking system [78].
There are also studies that compare the environmental impact of Bitcoin with
that of the VISA system. However, Imran considers it inappropriate to compare
the energy consumption of VISA per transaction with that of Bitcoin, because
while VISA uses this energy specifically for the mentioned transactions, the
energy consumption of Bitcoin is used to protect all transactions with dates
from 2010 [80].
Baur and Oll show that there is a viable technical solution to avoid Bitcoin’s
negative impact on the environment. They start from the premise that Bitcoin
miners could use more and more renewable energy sources, such as hydrogen or
solar energy, which could turn the Bitcoin network into a more sustainable one
[81].
In principle, we can discuss several ways in which Bitcoin can be transformed
into something that meets the principles of sustainability both from the
perspective of environmental implications and from an economic perspective.
Derks et al. shows, however, that none of the possibilities seem realistic [82].
Truby proposes a regulatory-oriented approach, especially by imposing fiscal
measures to limit the energy consumption of the Blockchain and thus its
environmental implications [64]. Ziolo et al. show that environmental taxes have
proven over time to be an effective tool for mitigating greenhouse gas
emissions, especially in the case of developed countries [83]. The issue of
Bitcoin regulation in the sense of reducing its impact on the environment will
be addressed in section 4 of this paper.
Beyond all the disadvantages that the process of obtaining and using
cryptocurrencies generates for the environment, Blockchain technology can be a
support solution in the fight to maintain an unpolluted environment. Blockchain
technology is considered a promising solution to address the challenges of the
modern electricity distribution system, providing a reliable environment for
participants with faster and more transparent operations [84]. This technology,
which was first used in 2008 in the case of Bitcoin [1] has developed and has
been used over time for financial services, real estate, healthcare and business
[85].
Car manufacturers, their component suppliers, technology manufacturers, battery
suppliers, other equipment manufacturers can find in Blockchain technology a
lasting support for their problems, as it can be used in various fields
successfully, even in the sense of environmental protection. It all depends on
the people who implement it. Thus, in the summer of 2017, the Massachusetts
Institute of Technology awarded, in addition to diplomas in standard format, a
group of 111 graduates’ electronic diplomas to certify their authenticity for
employers using Blockchain [86]. As the issue of falsification of diplomas is
not negligible and many countries face it, the major universities in China and
India are considering introducing similar approaches. In Sweden and Brazil, land
rights are registered based on Blockchain technology [86]. Blockchain technology
can contribute to building smart cities by developing common economic services
[87]. Blockchain can be used in healthcare to store large medical documents of
people that can be accessed by doctors and patients from anywhere in the world,
which could save time and save many lives in medical emergencies [88].
Adjeleian et al. highlighted that the application of the Blockchain could
provide more people with access to renewable energy and lead to the resizing of
the renewable energy market [89]. However, the spread of Blockchain technology
is difficult to be applied in countries with a population with a low level of
education and poor infrastructure [90]. Morice et al. concluded that in the
context of zero CO2 emissions by 2070 the implementation of Blockchain
technology can help keep global warming in the range of +0.3−0.5∘C (4−8∘F )
above pre-industrial temperature [91]. Implementing this technology in the next
decade (by 2030) may reduce global warming to 0.3∘C (4∘F ) by 2050. A reduction
of 0.1−0.2∘C could result from the elimination of paper use in the financial
world [92].
The study conducted by Taskinsoy starts from the premise that if paper money
could be removed from global circulation, being replaced with cryptocurrencies,
approximately one billion trees could be saved from deforestation and these
trees would be allowed to continue absorbing CO2 through photosynthesis [92].
However, Blockchain technology, which can be successfully used sustainably in
various areas of activity, cannot guarantee the success of Bitcoin mining so
that the environment will suffer less. Let’s not forget that, beyond all the
effects already mentioned in the case of obtaining Bitcoin, there are voices in
the literature that indicate other dangers. Thus, mining has been found to have
a major impact on local communities due to the high energy consumption of mining
and illegal mining operations in some residential neighborhoods [93].
It is already well known that miners have settled in areas known for cheap
energy. As crypto-mining operations began to consume a large amount of energy in
a district, energy surplus exports declined, significantly increasing the price
of electricity [93]. Moreover, a 2018 study shows that the high demand for
electricity resulting from Bitcoin mining has overwhelmed the capacity of public
utility districts, threatening the capacity of the district’s electricity grid
infrastructure and causing a number of safety issues [94]. Mining operations
endanger both the building in which the miners are located and the neighboring
buildings, as there is a risk of fire generated by overloading the electricity
network, which was sized for domestic consumption, not to support multiple
high-performance servers [94].
Another issue that needs to be discussed is the use of renewable energy. Bitcoin
defenders raise the issue of its exclusive use so that the impact on the
environment to be as insignificant as possible. However, the literature shows
that there are several visions in this regard. Thus, some argue that if miners
start using exclusively renewable energy, mining could help subsidize the
introduction of renewable energy resources, as nowadays there is an estimated
that 77.6% of crypto-mining facilities are using electricity from renewable
sources, while the rest use fossil fuels and nuclear energy [95]. However, we
have to think that it is very difficult to verify these figures due to the
anonymous nature of the mining process. The second view starts from an old
economic problem, that of the self-interest, and shows miners are not interested
in altruistic behavior - they will use the cheapest energy available regardless
of the impact on the environment [93].
De Vries has an international vision of the energy consumption of the Bitcoin
network and its ecological implications and concludes that these problems will
not be solved only by applying renewable energy and that the only way forward is
to change the PoW algorithm with “Proof of Stake” [70].
Therefore, we note that the environmental problems generated by crypto-mining
operations are not to be neglected. That is why this issue should be given more
attention from all members of society, starting with those who have
decision-making and regulatory power and reaching the average citizen, who
should be concerned about sustainability issues.
SECTION IV.
BITCOIN REGULATION
The problem of the legal classification of Bitcoin has been and still is a
challenge, but beyond that, some states have realized that they can benefit from
the popularity of Bitcoin, completing their budget by taxing transactions with
Bitcoin (e.g. Germany, Brazil, Canada, Bulgaria etc.). Currently, on the
regulation of cryptocurrencies, there are several proposals - liberal,
conservative or repressive and waiting models [96]. Within the liberal and
conservative regulatory models, the law establish the taxation of transactions
made with cryptocurrency, which aims to increase state budget revenues and try
to avoid financial flows in the world of cybercrime.
Starting from the difficulty of accurately classifying Bitcoin in the category
of money, financial assets, etc., there is also an increased difficulty when it
comes to regulating it. European experience with legislation shows that at EU
level, unitary regulation has not been addressed so far. Different countries,
however, have decided to approach the issue from their own perspective. Thus,
German law does not recognize Bitcoin as a legal means of payment or foreign
currency, but considers that it meets only the criteria of “accounting unit”
[97]. Germany charges a 25% tax on capital gains in the case of Bitcoin, but
this is only required if the income was obtained within one year from the
receiving of Bitcoin [98].
In Bulgaria, the National Revenue Management Agency has decided that revenues
from the sale of digital currencies, such as Bitcoin, should be treated as
revenues from the sale of financial assets and taxed at a rate of 10% [97].
The Czech government has introduced a law requiring the identification of
customers’ identities when virtual currency exchanges are taking place,
proposing the application of a value added tax (VAT) to virtual currencies [97].
In Denmark, the Financial Supervisory Authority has announced that companies’
transactions with Bitcoin will be taxed normally and individuals will not be
subject to taxation. Slovenia established in 2013 that Bitcoin is neither a
financial asset nor a currency and should be taxed according to the
circumstances in which it is used - for trading or mining profits [97].
In Romania, Law no. 30/2019 introduced a tax, expressly defined, on the sale of
virtual currencies, such as Bitcoin and Ethereum, by amending the Fiscal Code.
Thus, earnings from cryptocurrency transfers are considered income from other
sources, which, if they exceed a certain annual limit, are taxed [98].
In the case of the United States, Bitcoin is recognized as one of the types of
payment in e-commerce. Bitcoin is accepted for payment in many restaurants,
hotels and stores in many states. There are US states where the environment is
conducive to the heavy use of Bitcoin, such as: Texas, Kansas, Tennessee, South
Carolina and Montana, while New York, New Hampshire, Connecticut, Hawaii,
Georgia, North Carolina, Washington and New Mexico have more restrictive
regulations [99]. For example, in New York, in August 2015, the Department of
Financial Services introduced the need to obtain Bitlicense to enter the
cryptocurrency business. In April 2017, Japan legalized cryptocurrency as a form
of payment, which is why interest in Bitcoin continued to grow steadily in the
country [99]. At the end of 2013, the People’s Bank of China banned financial
institutions from transacting with Bitcoin, but individuals are free to use
cryptocurrency. Bitcoin is considered illegal in: Russia, Vietnam, Bolivia,
Ecuador, Colombia, Saudi Arabia and Northern Africa [100].
Some believe that regulation will bring a more stable exchange rate and will
increase the level of trust in Bitcoin [102]. Lim argues that regulation should
not be anti-industry; its role is to reduce the uncertainty specific to Bitcoin
and to increase the legitimacy of its use [103]. It shows that there is a
problem with the principle of territoriality; since the transactions are carried
out in the virtual environment, the law of which state will apply when the
trading parties come from different states? [103]
Moreover, the Bitcoin market behaves like any other market, in which the
tendency to increase the degree of concentration exists. Regardless of the
decentralized nature of the Bitcoin blockchain, the four largest Chinese pools
offer about 50% of the total hash rate, and Bitmain operates three of these four
pools [67]. In addition, PoW, the first Blockchain public consensus mechanism,
becomes vulnerable if a participant has at least 51% of the computing power of
the Blockchain network [104] because it can solve the puzzle faster than others,
and thus monopolizing the rights to validate the new data blocks. This is where
the problem of finding legal means to operate in such a way as to ensure fair
competition in this market arises.
Attempts to use cryptocurrency to trade illegal goods and services have already
been found [105], requiring the intervention of competent bodies. Beyond such
issues, there is the issue of regulation from the perspective of the impact that
the mining process has on the environment. We must keep in mind that there are
currently several thousand cryptocurrencies, whose mining process requires
electricity. Studies have focused mainly on electricity consumption and CO2
emissions in the case of Bitcoin, but we must not forget that in addition to
this, there are other cryptocurrencies that, although not as popular, have an
impact on the environment. Currently, there is no clearly enacted legislation
that specifically provides for this issue. The size of carbon emissions,
combined with the risk of collusion and concerns about control over the monetary
system, could justify regulation [67].
One of the proposed solutions for determining those involved to find new ways to
pollute less the environment could be to apply the “polluter pays” principle.
Within the EU, this principle is enshrined in Article 191 (2) of the Treaty on
the Functioning of the European Union, while the Organization for Economic
Co-operation and Development has long been a supporter of this principle [106].
In “Choices on the Road to Clean Energy Future”, Cash shows that economic
performance can be achieved in accordance with the environment only where smart
government regulation provides clarity, certainty and well-applied rules [107].
Thus, carbon credits could be used [84]. Carbon emitters must measure their
carbon emissions and purchase equivalent credits from emission reduction
projects using smart contracts. Nasdaq was the first global stock exchange to
examine the application of Blockchain technologies to carbon trading [108]. In
addition, these carbon emitters also send money to finance global emission
reduction projects, also using Blockchain technology [84]. In addition, the
governments of the world’s countries should encourage the use of environmentally
friendly technology through various means.
SECTION V.
CONCLUSION
Our research highlights the implications and challenges that Bitcoin faces in
the economic environment and beyond. In general, this research serves as a basic
study, as it provides the opportunity to assess the level of knowledge about the
impact that Bitcoin has on the environment, sounding the alarm on the negative
aspects that accompany the mining process, reason for which we advocate for
finding green solutions.
In addition, we want also to emphasize the limitations of our research, which
are related to the thorough investigation of the externalities generated and the
various methods by which they can be internalized. More extensive studies can be
conducted in the future to look at such issues, as well as the issue of the
perception of certain categories of individuals on the use of Bitcoin as a
potential monetary alternative to the traditional currency. Another limitation
of this paper refers to the analyzed articles, as only articles written in
English were used in the research. The analysis of other articles written in
other languages may be of interest to complete the conclusions of this study. In
addition, the systematic approach used to conduct this study and the selection
of articles were subjective.
We know that Bitcoin is the result of spontaneous and voluntary action of
individuals, not being generated by a decision of a legal authority [9]. What is
certain is the fact that Bitcoin has created unique challenges for both academia
and practitioners. At its inception, Bitcoin seemed to promise a lot, to be seen
by some economists as a kind of Holy Grail, to ensure full freedom of
transactions. Although Bitcoin has opened up a whole new world, the uncertainty
accompanying it and its disadvantages seem to erode Bitcoin’s success.
From an economic point of view, a common denominator has not yet been reached
regarding its identity, as it has not yet been concretely classified as a
currency through legislation, despite the fact that it is accepted by various
economic agents as a means of payment. But, we should not forget all the
functions of a currency! The fact that over time currencies which are similar to
Bitcoin have appeared in a physical or virtual environment and have circulated
in parallel with the traditional currency supported by the state, shows that
individuals have expressed a desire to escape from the “magnifying glass” of
authority or benefit from freedom. Often, the competition between the currencies
that Hayek wrote about was the one that led to their disappearance, the market
maintaining only that particular currency in which individuals had the greatest
confidence. In some cases, it was the law that banned the circulation of a
parallel currency.
However, Bitcoin advocates should pay attention to sustainability issues and the
environmental impact of the mining process. The carbon footprint that
cryptocurrencies generate should raise the issue of externalities for
governments. Although no perfect solution has been discovered so far, we are
aware of the fact that there are certainly options for internalizing such
negative externalities.
The sustainability of Bitcoin depends, as seen, on a number of environmental,
economic, social and ideological factors. What is certain is that, despite the
impact that Bitcoin through the consumption of energy used has on the
environment, it still circulates and is still used, indicating the appetite of a
certain category of individuals for an instrument involving the lack of state
intervention. A question arises: when Bitcoin will be regulated in the states of
the world, will there be the same preference of libertarians to use it and
identify it as a Holy Grail that saves economies, being interpreted as a result
of the spontaneous action of individuals? Will it still be attractive for this
category of economists?
Of course, there have also been economists who have remained skeptical about
this cryptocurrency [13]. Numerous arguments can be found in the case of those
who are pro-Bitcoin, but also in the case of those who want it banned. From a
sustainability perspective, the impact that the mining process has on the
environment is obvious. Moreover, this cryptocurrency, like many other
economically exploited elements for potential gains, tends to be seen beyond the
environmental aspects in which future generations will develop. But one thing
remains certain, that technological advancement cannot be neglected in the area
of means of payment. That is why it is up to all of us to find the optimal
solution not only in terms of economic efficiency, but also in terms of ensuring
the necessary premises for a normal development of future generations.
*
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