As if cryptocurrency didn’t have enough associated controversy and risk, the European Central Bank (ECB) reminded us that:
The functioning of certain crypto-assets (like bitcoin) uses a disproportionate amount of energy that clashes with public and private environmental policies and environmental, social and governance (ESG) objectives. Government intervention is likely. Markets and investors may not correctly price in such an intervention. As a result, climate transition risks are expected to increase in line with the increasing exposure of the financial sector to crypto-assets.
… Public authorities will have to evaluate whether the outsized carbon footprint of certain crypto-assets undermines their green transition commitments. Investors will have to assess whether investing in certain crypto-assets is in line with their ESG objectives. Financial institutions will have to incorporate the climate-related financial risks of crypto-assets into their climate strategy. For prudential standard-setters, several regulatory options exist to define capitalisation requirements. These range from a risk-sensitive approach in the form of risk-weighted add-ons to a capital deduction approach for all new exposures to crypto-assets with a significant carbon footprint.
In one sense, this isn’t really news – we’ve written about this intersection of climate risk and cryptocurrency before. At the same time, the ECB made some pretty strong statements about future regulatory development – adding to the list of potential concern and risk for the investment class.