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Is the future of cryptocurrency under the sea?

15 January 2021

Reece Cousins, Compliance Department

Once a niche offering for the technologically inclined, cryptocurrencies have surged into the vocabulary of the modern investor and the general public alike. The so-called overnight Bitcoin millionaires and a litany of media attention thrust the status of cryptocurrencies up there with the likes of the more traditional asset classes. Of recent though, the growing digital currencies have come under a negative light, and many investors think rightly so. In October of last year, the Financial Conduct Authority banned the sale and marketing of cryptocurrency derivatives and exchange traded notes to retail customers, due to there being no reliable basis for quantifying the value of the underlying cryptocurrencies. This purely sentiment-based pricing exposes cryptocurrencies to extreme volatility, just as we saw earlier this week when the price of Bitcoin fell $5,000, its biggest crash to date.[1]

In addition to the criticism from investors and limitations set by the FCA, the process by which cryptocurrencies come to be is another of their setbacks, as the ‘mining’ process requires a computer to complete ‘blocks’ of verified cryptocurrency transactions which are then added to an overall ‘blockchain’ of transactions. This model requires vast amounts of power and is a trying process, especially given that the amount of cryptocurrency rewarded to the ‘miner’ is not always as much as they might have hoped or expected.

The major banks are certainly averse to the idea of cryptocurrencies as well, a viewpoint generally shared with most of the world’s financial regulators – a vehicle for untraceable transactions offers up the potential for money laundering and asset theft, amongst other illicit activities. The banks have recognised the power of blockchain technology though, and they have seen it as a tool which might be complementary to use internally for more efficiently managed transactions between accounts; J.P. Morgan concepted their ‘JPM Coin’ digital currency last year, which already has a dedicated team of 100 staff and in October 2019 was used commercially for the first time.[2]

This could be the future of transactions in banking, but the problem remains of the high levels of energy consumption in the production of these cryptocurrencies. In a modern corporate climate that is ever moving towards more sustainable and socially responsible initiatives, can the banks ethically turn to this process on a larger-scale? 

There might be a resolve for them in following a recent project by Microsoft. Project Natick saw the software giant place a datacentre on the seafloor off the coast of Scotland’s Orkney Islands for two-years, in an effort to see what effect this would have on the datacentre and the feasibility of incorporating this in future projects. What they discovered was that the datacentre had an eighth of the faults that a land-based equivalent would have, and the datacentre ran more effectively thanks to the cooling from the sea. Microsoft predict that these datacentres could be deployed and sustained without maintenance for up to five years.[3]

Could banks follow in the footsteps of Microsoft and look to have sea-based crypto-mining facilities to adopt blockchain technology more widely, whilst moving towards long-term ESG objectives? It would certainly be an expensive and research-heavy process presenting its own burdens, but with the ongoing trend of social responsibility and sustainability being more engrained in corporations and more focused on in the public eye, this might be the innovative solution that satisfies both sides.

[1] The Independent, January 2021

[2] CNBC, October 2020

[3] Microsoft, September 2020

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