Why Blockchain Can Solve the Environmental Problem of Cash
When it comes to money, people throughout history have focused mainly on its functions—its uses as a medium of exchange, store of value, and unit of account.
We’ve also shown ingenuity regarding the many ways money has been represented over time, from animal skins and shells to the paper and precious metal currencies of today. But, in the broader scope, money hasn’t changed much at all in centuries. If you consider it a technology—an application for practical uses—money serves the same purposes today that it did in, say, the 17th century.
And that’s notable, because while people everywhere have worked hard to innovate almost everything around it, currency innovation has been overlooked by most. In a world in which we focus on making almost everything better, easier, and healthier, how did money escape closer attention? Why haven’t we improved money? And, more to the point of this writing, why haven’t we given much thought to its negative impact on the environment.
As we continue to learn more and more about the many devastating effects of climate change, we need to focus on making environmental protection a core feature of money and the global financial system, including capital flow. One way to do this is by designing and issuing digital currencies more responsibly, such as via sustainable blockchains. Despite what some headlines want us to believe, not all blockchain tech is energy inefficient. In fact, it can enable people everywhere to transact in ways that are not only environmentally friendly but also reverse the effects of climate change rather than contribute to the crisis.
"Money often costs too much." — Ralph Waldo Emerson
Money’s environmental problem
When we hear the words ‘economic health,’ we immediately think of the state of the economy. A healthy economy means a growing GDP, high employment numbers, and consumer confidence. All over the world, good economic health is defined by increased production and consumption. But that definition dismisses the high cost our planet pays for a shining economy. It ignores the waste resulting from a good economy and from the financial framework that facilitates the movement of money across borders and seas. In our current economic system, we dismiss as externalities the costs of pollution and natural resource consumption.
It’s past time we admit that money and the daily operations of the global financial system, including the broader flow of capital through it, contribute heavily to our current ecological crisis.
Greenhouse gas emissions associated with “financial institutions' investing, lending and underwriting activities are on average over 700 times higher than their direct emissions,” according to a report released in April by CDP, a nonprofit that supports, through research, the creation of a sustainable economy.
Moreover, fiat currency blindly tracks whatever the economy is doing—it acts as a lubricant, and its supply expands and contracts to match the economy's needs. It offers no functionality that would, for example, take into account the ecological costs resulting from its use. Digital currencies, however, can be “smart” in that regard. In addition to serving the economy's currency needs, they can serve other needs, including environmental protection and ecological regeneration.
Creating sustainable currencies and financial processes on the blockchain
Blockchain technology can and will change the world. We are sure of this because it allows for innovation in the ways we transact on a daily basis. Thanks to blockchain tech, we are able to create cryptocurrencies that, when widely adopted, could help reverse our current ecological crisis.
Today, smart contracts and reserve algorithms like those used on the Celo blockchain can enable stablecoins that are backed by natural capital. Such a mechanism can help support a monetary system in which any economic growth—any increase in stablecoin circulation—would lead to the preservation and regeneration of natural resources. While the technology is new to many, the original idea for natural capital-backed currencies was presented by Charles Eisenstein in his book Sacred Economics.
Eisenstein observed that because the value of money is derived from whatever commodity “backs” it, people will always want to create more of that commodity. For example, when money was backed by gold, people rushed to mine it, incentivised by its value. Gold was money. Similarly, when cattle backed money, people were incentivized to increase the production of cattle. So why not, Eisenstein proposed back money with other things that we value and that are growing scarce —pristine forests, clean rivers, etc.
Why not, indeed?
Embracing the economics of tomorrow
The world must embrace a new perspective of economic health gleaned not only by measuring production and consumption but also by assessing how the global financial system affects the state of our planet. If we prioritize long-term ecological health by using emerging technologies like the blockchain, we can push beyond sustainability to planet regeneration.
Learn more about how Celo and other financial and economic organizations are coming together to fight climate change through the Climate Collective initiative.
Dr. Markus Franke is a Partner at cLabs, and a co-creator of Celo. Celo's mission is to build a financial system that creates the conditions for prosperity—for everyone. Markus is focused on research, platform economics, and stability. He's been working at the intersection of finance, economics, and research for over 15 years at several organizations, including J.P.Morgan, Merrill Lynch, risklab, AllianzGI, and various research institutions, such as the Ludwig-Maximilians-Universität München, Columbia Business School in New York, and Hong Kong University of Science and Technology. He holds a Ph.D. in economics.
Author bio: Dr. Slobodan Sudaric is a Partner at cLabs, where he heads the regenerative economics team and coordinates the Climate Collective initiative. His work focuses on reserve management and asset tokenization at the intersection of crypto, economics, and climate tech.
Before entering the crypto space, Slobodan worked with NERA Economic Consulting, where he advised companies, law firms, and public entities on antitrust economics, regulation, and market design with a focus on the energy sector. He holds a Ph.D. in industrial economics and applied game theory from Humboldt University of Berlin, and a Master’s degree in financial economics from the London School of Economics.