Blockchain Podcast – Beyond the hype

Our ‘Beyond the Hype’ podcast series takes a deeper view on topics that are in the headlines, providing investors with a more nuanced view and meaningful conversation.

New episode - September 2022

Episode #6 - Governance considerations and blockchain

In the last of our three-part series on ESG and blockchain, we conclude our conversation with Keith Bear and Michel Rauchs, blockchain experts from the Cambridge Centre for Alternative Finance, about the blockchain ecosystem and governance. We focus not only on the operations of blockchain networks themselves, but also look at business risk, tax risk and regulation, and the benefits that blockchains could bring to areas like environmental and supply chain transparency.


Alex Olivares: Welcome to the beyond The Hype podcast I'm Alex Olivares from Invesco and today is the third of a three-part conversation about ESG and blockchain with Keith Bear and Michel Rauchs from the Cambridge Centre for Alternative Finance. Today we're talking about governance considerations and blockchain.  

Hi Keith and hi Michelle, thanks for joining us for the third and final part of our conversation on ESG considerations and blockchain. In previous episodes we talked about the environmental considerations and blockchain. We talked about the social dimensions of blockchain. So now we're talking about the ‘G’, the governance aspect. How can we get started understanding governance which is such a complicated topic and without getting distracted by headlines?  

Keith bear: One way of looking at this, I think, is let’s start off with consensus. So we talked about consensus when we were talking about environmental aspects of ESG. But looking at consensus, there’s really two different types of consensus. There’s the consensus that exists, network consensus if you like on the blockchain itself, which is what we talked about previously.  

But there’s also a social consensus, in terms of how the individuals and the governance mechanism that decides how the blockchain will operate and be run that’s down to social consensus, as opposed to anything which is codified within the blockchain network itself. And that social consensus very depends on within public permissioned blockchains requires persuasion rather than imposing consensus in that way.  


And we can see many examples of how this is manifested itself over the recent years. For example, Bitcoin itself, there was a major debate around the 2016 timeframe around what the size of blocks within bitcoin’s ledger should be based on, was constrained at one stage to one mega byte. There were proposals to increase the efficiency of bitcoin by increasing that to 8 mega bytes and then doubling every two years after that. And that caused a huge split in the individuals and the developers, etc. associated with the bitcoin network as to what the right model should be. And it took quite a while, two years or so to actually get resolved as to what the might be.  


We also have seen another example in the case of Ethereum. As you may know there was a major hack some years ago, the DAO hack so called, which necessitated the removal of a set of balances from the Ethereum network, which was facilitated through a hard fork [division in the network], so basically a fork in the code line. So that actually created two version of Ethereum: Ethereum as we know it today, where, you know, Ethereum in that respect, and the Ethereum which carried on after the fork independent of the current version of Ethereum called Ethereum Classic, which is a much smaller blockchain in that respect.  

So that illustrates the kind of the issues and considerations around the social consensus in terms of how blockchain networks are managed and important to look at those aspects of understanding what the governance elements are around blockchain based networks as well as the way the governance of the actual technology and the actual code is implemented. 

Michel, anything you’d add to that? 


Michel Rauchs: Yeah, I would probably say that if this governance process as it is in many public permissionless blockchains, that if that is not formally defined then it’s a very intricate, quirky process that involved many different constituents, right. It involves the users, the investors. It involves exchanges, wallets, miners. So really any stakeholder within that system. And it’s very unclear who actually gets to decide. That’s why resolving those issues generally takes a long time. And there really is an emergent process.  

I think to combat some of those limitations of this informal governance and what we can see more recently particularly in the context of so-called decentralized autonomous organisations or so-called DAOs is that you want to let people vote with tokens or funds on proper governance. So you try to formalise this governance that otherwise used to be, you know, not defined at all by essentially having organisations such as DAOs that are not controlled by any party but that are governed by the votes of their members. And so this is particularly interesting in the context of the nascent web 3.0, developments where you really have this trend towards community owned and governed protocols. So really like sort of the digital commons if you will. 

But that being said there are of course certain issues with that. So what we can also see is that many of those projects over time gradually tend to rediscover some traditional corporate governance principles which have proven themselves in the past for good reasons.  


KB: And I think if you’re looking at investing in De-Fi [Decentralised Finance] protocols along those lines understanding things like the distribution of token allocations and where some of the risks are associated with it, I mean, in some respects is a great kind of libertarian view, you know, everyone should have an influence on the way a protocol develops, invest in the tokens and have a voice as far as the voting is concerned.  

But then if you go down another level you might see how many tokens the actual founders of the protocol have themselves. And is that a disproportionate role in being able to dictate how the protocol develops. Or are venture capitalists coming in and holding a significant amount of tokens, which again can create imbalances as far as the development of the network itself is actually concerned. 

And then the tokens themselves are potentially exposed to things like flash loans, for example, where this is a type of transaction where the in and out of the transaction takes place within the transaction itself, so essentially someone could come in and borrow a set of governance tokens, make a vote, influence a vote in an extreme way and then get out of the governance tokens all within the space of a single transaction. 

So things like that, and also tokens that are held at exchanges, whether those can be borrowed for a time to again influence a vote. So all sorts of risks and considerations in terms of how this token-based governance model can work, as well as the positive things in terms of transparency and one-token one-vote and whatever democratic principles may be associated with the theory associated with DAOs themselves.  


MR: So I guess really to sum up, what you can say is that governance in public permissionless blockchains is really a messy and unsolved thing. 


AO: Yeah, that sounds intricate, and it's understandable how things can get messy. What we're highlighting for our listeners if they're examining any type of blockchain asset is the importance of understanding how that particular blockchain operates, as well as the consensus mechanism, the governance, whether it has strong constituents and reputable stakeholders. Also is their transparency on the consensus mechanism? And if it's based on tokens, understanding the token allocations? 

KB: Absolutely. 


AO: Great, well that's the governance side of how the blockchains operate themselves, but what about if we look at governance in the standard ESG definition in terms of investors? How would we look at something like business risk for blockchain related activities or companies?  


KB: If we look at conduct risk, for example, I think there is kind of two sides to the story. On one side, obviously crypto may have a reputation to be able to facilitate avoidance, or corruption we talked about in the past, being able to make payments under the covers of as it were as far as being able to use crypto is concerned, bypassing the traditional banking system, for example.  

But by the other side what exists in the public blockchains is visible to all. So the transactions are there. They’re registered for ever. They are easy to identify, in terms of the transaction itself. And obviously there are all sorts of analytical tools available to be able to go even deeper in terms of understanding what’s going on in that respect. So there’s a high degree of transparency as well in terms of what’s actually happening. 

Some commentators make the point that there’s more transparency as far as those networks are concerned than traditional banking if you consider the inefficiencies associated with AML, the success associated with the AML-based analyses for example. 

So there are arguments on both sides, I think, in terms of the facilitation of corrupt practices but also having transparency as to what’s happening in terms of being able to identify when those corrupt practices may be happening.  


AO: Thanks Keith, and for our listeners AML refers to anti money laundering processes.  

Michel, is there anything you'd add? Or should we shift to the data and privacy aspects of business risk for blockchain?  


MR: Yes, I think here you would be looking at some risks that are very similar to traditional assets and traditional activities but then others that are more idiosynchratic and more uniquely tied to crypto. And particularly for those risks that have been codes of conduct that have been developed by industry bodies, most notably global digital finance, which is based here in the UK as well, and is now merging with another industry association to really form the largest trade association with 500 global members including some of the largest funds in the world, and they have developed codes of conduct around all sorts of crypto related activity that financial institutions can use and adopt.  


AO: Thanks, Michel. Shifting slightly. What about tax risk? Because we mentioned in previous episodes how some blockchain activities operate independent of government oversight, but is there more detail you can give us to really understand the issue?  


KB: Yeah so, just a quick comment on that first, and obviously in the early days the tax authorities in various countries didn’t really have a strong position as far as crypto assets are concerned. It wasn’t clear to what extent there may be tax liabilities on trading a crypto, holding a crypto, staking a crypto, etc. And there may have been a view in terms of you know avoiding tax as a result of using crypto because obviously the nature of it. 

But that is changing significantly at the moment. Tax offices are providing greater guidance, greater rules. For example, here in the UK the HMRC [Her Majesty’s Revenue and Customs – tax authority] has a data sharing program with all UK exchanges. Crypto transaction data is held by the tax authorities going back to 2014. And all the KYC [Knowing Your Customer] information that may be provided if you’re signing up for an exchange is also provided to the tax authorities as well. And there’s an obligation on individuals to report any profits they may make.  

Likewise, in Germany there’s clarification for instance now that if you’re staking crypto assets, if you have a holding of more than one year, then you don’t have a tax liability after that. So the tax authorities are I think both developing the means of how they get access to the information taking place, this is largely through regulated exchanges, obviously less so on DeFi [Decentralised Finance applications] which is unregulated. But also making greater clarity in terms of the rules and obligations in all manifestations of crypto, be it trading activity or staking and obligations within DeFi as well, though obviously more difficult for the reasons I’ve said. 


MR: I would probably just say that if you go back to crypto that you have to in certain countries I would say with low institutional trust that you have the risk of course that those countries may lose some tax revenue as a result of a growing share of the population adopting and using crypto.  

But actually in some of those countries, such as Columbia or Agentina, they do require exchanges also to directly report holdings to the tax office. Just as Keith was saying as this is happening in the UK. And since then, I would say, the majority of people are using crypto indirectly through exchanges but shifting really the responsibility and the policing we need to do to some extent to those gatekeepers. That’s one way of making sure that those countries will receive the tax revenue that is due. 


AO: Thanks for that. So we've talked about business risk. We've talked about tax risk. Another major topic within the governance consideration is related to supply chains and environmental risk management. And here we're looking at how blockchains could benefit these areas. How would you describe this to our listeners?  


KB: I mean, I think we’re really talking about enterprise blockchains in this kind of context so private permissioned blockchains. And I think industry really jumped on the bandwagon, if you like, 5 years ago or so when there was a realisation that if there was a private and permissioned version of blockchain where participants on the network were authorized to join in that respect, you could create significant efficiencies and all sorts of use cases, in particular as you say in supply chains.  

If you look at what it takes to ship a specific set of goods from China through to Europe for instance and you have the exporter and the logistics firm, the freight forwarder, the port authority, the customs authority, to the shipping company, and the reverse on the other side to where the goods are received, there’s a huge amount of paper, huge amount of touchpoints, huge numbers of people that are involved through the whole of that transaction, multiple versions of the truth. 

So being able to use an enterprise blockchain approach to being able to have a single version of the truth where everyone is writing the various parts of the lifecycle of a transaction to a blockchain and the participants in that network are validating transactions in that respect, there’s significant efficiencies that could be gained.  

And we’re seeing that within the super market supply chains from the food to fork, as it were, for example, the work taking place between Wal-Mart, Carrefour, IBM as far as food trust is concerned, the food trust network. 

And we’re also seeing that within container shipping, with the work going on between Maersk and IBM in terms of the TradeLens blockchain networks, which now has, I think, 6 of the 7 largest container companies using it, and has something like over 50% of container based shipping is now recorded on that particular blockchain.  

So it’s a very dramatic, I think, set of use cases which are really illustrating the benefits of the blockchain technology independent of the kind of crypto asset world that those enterprise blockchains don’t essentially have those crypto assets of that nature. They’re just using the raw elements, the building blocks of the technology to be able to facilitate the single version of the truth.  


MR: Yeah, I would just add to that that the greater transparency that is achieved thanks to the application of blockchain in combination with other technologies, such as AI [artificial intelligence] and geo-location sensors and so forth, is also really being used to address and reduce environmental risks.  

So one example would be Unilever, for example, using satellite data and a blockchain to improve the monitoring and traceability of their raw materials in order to eliminate de-forestation by 2030.  

And so by connecting their supply chain more effectively by having the data that is available to all participants, you can reduce significantly those environmental risks by through enhanced transparency and traceability. So you actually do know what is happening in your supply chain.   


AO: And what about the topics of regulation and investor protection?  


KB: Yeah, I think that’s obviously a good question. We can look at it in two ways. I think, one, in terms of what’s happening on chain and what’s happening off chain.  

So if we look on chain, then obviously the big issue here is that we’re talking about public and unpermissioned blockchain networks, where there is no central entity serving customers, if you like. So there’s no customer service. There’s no restitution generally speaking. If there is any restitution it’s kind of done in goodwill of the firms involved.  

Obviously we’ve just been through the crash of Terra Luna, the stablecoin Terra, that is. It’s interesting to see that a lot of people lost a lot of money on the back of that, but there is some instances like Nox Bitcoin in Brasil, I think, that compensated for the losses of those individuals on that exchange that lost as a result of the Terra crash. 

So you’re dependent on goodwill rather than restitution from others. 

If it’s off chain, then it depends very much on the company policies of those intermediants, those intermediaries that exist, you know, between individual investors and the blockchain network itself.  

Obviously there are other considerations as well, in terms of exchanges that gatekeep us, for example. So it’s interesting to see, obviously, in terms of accessibility to trading the crypto assets that’s facilitated by exchanges to a large extent and the coins that are listed by exchanges obviously give the exchanges the ability to both list and de-list according to their individual policies. That has an impact, obviously, as well, in terms of providing some level of investor protection or not as the case may be. 

So for example, Coinbase and Binance both de-listed Terra Luna when the problem started so that individuals were no longer able to trade as far on those particular exchanges.  

And we’ve seen other examples, in the other direction, whereby Binance and BITConEx are supporting Luna 2.0, the new Luna that has emerged as a result of the crash of the original Luna itself in order to find a means in order to compensate those holders of those coins, in that respect. 

So we’re seeing exchanges acting as gatekeepers to some extent in either stopping trading activity or creating the ability to trade, which may be a positive thing as far as individual investors are concerned. Or for some it may also be a negative event.  


AO: Thanks Keith, and it seems to highlight the principle that as these technologies evolve, it may be an opportunity for the less robust blockchain solutions to get weeded out in favor of the more robust ones as the space evolves.  


KB: Exactly. 


AO: Thanks Keith and Michel. So we covered a lot of ground today in the governance discussion. We not only talked about governance as it relates to the operations of blockchain networks themselves, but we also took a look from the investor's perspective addressing things like business risk, tax risk, investor protection and regulation, and the benefits that blockchains could bring to areas like environmental and supply chain transparency.  

As always, thank you both so much for a well guided and in depth conversation. I'm sure our listeners found it useful to understand the entire territory of environmental, social and governance issues as as they relate to blockchain.  


KB: Great. Thank you very much for the invitation, Alex. 

MR: Thank you very much, Alex. 


AO: You can find more detail on Keith and Michel's work on the website for the Cambridge Center for Alternative Finance 

Previous episodes

Episode #5 - Social considerations and blockchain

What is the potential of blockchain solutions for addressing social needs? In this new episode, Cambridge Centre for Alternative Finance blockchain experts Keith Bear and Michel Rauchs discuss how blockchain can serve as a stepping stone towards financial inclusion.


Alex Olivares: Welcome to the beyond The Hype podcast I'm Alex Olivas from Invesco. This is the 2nd of a three-part conversation about ESG and blockchain with Keith Bear and Michel Rauchs from the Cambridge Center for Alternative Finance. Today we'll be talking about who blockchain is for and other social considerations and blockchain.  

Hi Keith. Hi Michel, thanks for joining us today for a conversation about the ‘S’ dimension in ESG or environmental, social and governance considerations and blockchain. Here we're looking at the social dimension, the ‘S’ part. To kick things off, who are cryptos or blockchain for? Who do they serve?  


Michel Rauchs: So I think here again, it's worth separating crypto from the broader blockchain ecosystem. Really, go back to the origins of Bitcoin. And I think that it's fair to say that cryptography operates most effectively on what I would call the fringes with usage, so the edges right? Trying to address underserved either geographies, use cases or entities 

And the reason for that is that because of their permissionless nature, they do provide censorship resistance rails to actually store and move value at a global level. Now underserved can really mean different things in different contexts and circumstances.  

So I think today media attention has focused mostly on the rather negative aspects. So you probably heard about crypto enabling or facilitating ransomware, or in dark undermarkets where you can buy drugs and all other sorts of illicit things online, but also online scams.  


Now, there's also been instances where it's being used to circumvent sanctions and capital controls, particularly also in the context of so-called rogue states such as Iran, North Korea or Venezuela.  

And if we look at the recent report from blockchain forensics company Chainalysis, who actually tracking illicit activity or trying to detect illicit activity on the public blockchains, their reports have been constantly saying that it's criminal activity takes up between, I would say 0.3% and 2.5% of all on-chain flows.  

Now that's one aspect of it, right? So if you have a global neutral value transfer system such as crypto, well, that can of course also lend itself for shall we say less nefarious purposes, so to create actually positive social impact. I think the primary use case here is really empowering political activists and human rights groups.  

So the probably most famous example is WikiLeaks, who faced a banking blockade in 2010 after they published the cable gate affair. And essentially they were really forced to turn to Bitcoin because otherwise they wouldn't receive any donations. And interestingly enough, Julian Assange, the founder of WikiLeaks later thanked the US government and then some US senators actually in 2017 that the nonprofit generated a 50,000% return on those donations, although that should not be financial advice. 


But there's been other, not only anecdotes, but actually really well documented instances where human rights groups from Russian dissidents, activists in Burma, in Sub Saharan Africa, and so forth have really been using crypto as a way really to circumvent authoritarian states.  

I think that's quite interesting to consider that, for example, the Human Rights Foundation is actually estimating that about 4.3 billion people, so that's about 53% of the world's population are actually living on the authoritarian regimes.  

Now of course crypto has also been used for marginalized or by marginalized groups and some minorities. So there's been instances of, for example, and women in certain societies that do not have the right to actually either own or handle money, and so giving them an opportunity to break out of that.  

But then also the so-called de-risked sectors, for example, sex workers, cannabis industry. So we really those industries that have fallen victim to the global de-risking policies of major payment service providers that have really been started the last 10 years.  


AO: Thanks for that Michel. And what about the consumer attitude towards crypto solutions or blockchain solutions? Here we're using the terms interchangeably in this conversation. And are there any usage patterns across or between regions and different types of regions?  


Keith Bear: Yeah, if I can chip in there to quote chain analysis again, they did a report of the geographical breakdown of the use of crypto, which is quite fascinating, I think. And they looked at the usage of crypto across multiple factors, weighting it by purchasing power for individual countries and looking at that on a per capita basis. And what's interesting, I think, on those kinds of measures, the top three countries were Vietnam, India and Pakistan. So very similar to what Michel was referring to: countries where there may be a desire for, you know, in terms of the poor being able to have access to crypto where they may be countries where there's a risk of currency devaluation, for instance, countries where there's a high degree of remittance payments taking place where crypto may have a role to play, and also obviously carrying out business transactions. 

And going back to that Chainalysis report, the first major developed country that appears in that league table as it were, was North America, sorry the US, which came in at #8.  

So we are seeing, I think this significant usage of crypto to be able to provide a means of being able to make payments and transfer funds, etc, for the kind of reasons that we're talking about: lack of confidence in local currencies etc. To a major extent compared to the more developed markets where I think it's more a question of the activity being driven by institutional investment to a greater extent.  


MR: Yes, if I can add to that so I think there is really the big discrepancy between advanced economies and really emerging markets and developing economies when it comes to the attitude. So really you can sum it up to some extent, very crudely of course, that advanced economies see it mostly as a speculative tool, so essentially another asset class.  

Whereas in emerging markets and developing economies, it's really mainly utility driven. So it's sort of like it's another tool in the kit. And most people or companies actually using crypto in those markets are completely to some extent agnostic really about the tools that they use. So it develops really, it's true power in a sense, by really combining it with other tools that are available there, whether that's peer to peer markets or gift cards or other things.  

So particularly in those regions where there are comparatively high levels of financial repression, either sanctions capital controls or wealth confiscation, or just generally economic distress, persistent inflation, periodic devaluations, that's really where we can see a major uptick in usage. 

And I think here in the west, we kind of tend to ignore the financial privilege that we have. So I think it's worth considering that actually in the world there's 1.3 billion people that live on a double or triple digit inflation on a constant basis.  

And so getting back to what Keith was saying in terms of the use cases we actually currently conducting a study together with the Interamerican Development Bank to estimate the extended size of the crypto ecosystem in Latin America and the Caribbean. And so some primary findings are really interesting in the sense that there's been an evolution really where crypto was initially being used as a sort of gateway for many people to preserve savings from inflation or wealth confiscation by really enabling them to have access to a stable account balance that is actually spendable online. Now, interestingly enough, that balance is often denominated in U.S. dollars 

But that over time really that crypto has become a stepping stone for offering broader access to financial services. So there's crypto firms gradually evolved in some way into fully fledged financial services companies that really today are one stop shops for digital payments, savings, and investment products, offering even credit and insurance to their users. And so increasingly, really to the scale where crypto is being abstracted away from the consumer, and so you agnostically combine it with other tools and networks.  


And this is really happening at scale now, particularly in Latin America. So you have leading companies such as Mexican Exchange Bitso or Mercado Bitcoin in Brazil that each have millions of users really across all of Latin America. And if you look at the demographics of their users, it's really, it cuts across all demographic groups across all age brackets and also all income brackets. So that's a very interesting development.  


KB: Indeed, the other example for instance, we're talking about Latin America is El Salvador. Obviously we talked about that in the previous podcast, but as of October, I believe there were over 3 milion Bitcoin wallets that were opened because Bitcoin is now legal currency, as far as El Salvador is concerned, compared to 1.9 million traditional bank accounts. So we're much higher penetration theoretically in terms of the broader population.  

As far as Bitcoin accessibility is concerned, as opposed to traditional banking. Obviously that has taken a bit of a hit more recently because of the nature of the markets, representing now a $40 million decline in terms of the Bitcoin holdings held by El Salvador, which is interestingly, roughly equivalent to the next bond payment on El Salvador's national debt.  

So we did illustrate some of the benefits, and also some of the risks when you take a very dramatic move, as El Salvador did as far as the usage of Bitcoin as a legally recognized currency is concerned.  


MR: And I also think maybe just a compliment that it also illustrates again very, very well the nature of crypto as being a tool rather than an end in itself, because the recent study of [EU] economists actually found that the vast majority of transactions are not being done by the official government wallet in Bitcoin, but actually denominated in U.S. dollars. So essentially the population doesn't really care that much about Bitcoin, but thanks to Bitcoin where at least the government's efforts of creating this wallet they've essentially have now access to a digital wallet. And that allows them to actually spend U.S. dollars as well. And so that's really what we mean by crypto acting as a stepping stone and really being abstracted away over time.  


AO: Yes, I find these stats fascinating because it's so easy to fixate on Bitcoin only when there are so many more elements of blockchain solutions, as well as all the different people they serve.  

And quick stat here, the World Bank estimates that 1.7 billion people are unbanked today, so about 1/3 of all adults. So any change there can have a massive impact similar to the use cases you were just describing.  

Keith, going back to you. Is there a role for the public sector or governments to play in all this? You mention country specific initiatives, but beyond these are their further actions that governments should take, especially regarding CBDC's or Central bank digital currencies? 


KB: Yeah, exactly. I think Central Bank Digital Currency is obviously one of the big public plays as far as that's concerned. There's been multiple surveys by the Bank of International Settlements looking at central banks across both developed and emerging market economies, and the strongest rationale for many emerging economies is around financial inclusion.  

That raises its own questions, obviously in terms of accessibility to smartphones or mobile phones, which are one of the ways of obviously holding wallets for a central bank digital currency and where they're kind of smart cards are needed as an alternative for those that don't have access to mobile phones and may not have access to the Internet, for instance.  

And that raises questions of being able to support offline payments, which obviously is a natural feature of physical cash. But if we, if the objective of a central bank digital currency is to be very similar to the usage of digital physical cash, then obviously you need some means to be able to support offline payments as well. 

So it is a key topic, big focus, not just actually an emerging markets, but here in the UK for example, I think we have around 1.7 million people that are underserved in terms of financial services. So we even within the Bank of England's perspective on CBDC, financial inclusion is one of the key objectives that are being discussed in terms of the launch of any GBP that is represented in digital form.  


AO: Thanks, Keith, I think that's a great note on which to end, which encapsulates the potential of blockchain solutions for addressing social needs. We spent a lot of time talking about how blockchain, particularly the cryptocurrencies, can serve as a stepping stone towards financial inclusion for people who are unbanked or underserved, whether by geography or demographics.  

Thanks for sharing all these valuable use cases and developments which I'm sure our listeners found very insightful.  


KB: Thank you Alex.  


AO: Governance is a complicated topic, especially when it relates to blockchain solutions. So how should we begin to try to understand governance as it relates to blockchain? Join us for the third and final part of our ESG conversation. 


Episode #4 - Environmental Considerations and Blockchain

In this new episode, we speak to Keith Bear and Michel Rauchs, blockchain experts from the Cambridge Centre for Alternative Finance, about environmental considerations in the blockchain ecosystem. What is the real environmental footprint of cryptocurrencies, including the energy consumption and CO2 emissions? What are some blockchain decarbonization efforts, and how can new blockchain applications improve environmental data and solutions?


Beyond the Hype: E4 Environmental Considerations & Blockchain

Alex Olivares: Welcome to the Beyond the Hype podcast. I’m Alex Olivares from Invesco, and today I’m speaking to Keith Bear and Michel Rauchs from the Cambridge Centre for Alternative Finance for the first in three conversations about ESG and blockchain. This first conversation will talk about environmental considerations.

Keith and Michel, welcome, it’s always great to speak to you again.


Keith Bear: Likewise to see you.

Michel Rauchs: Great to see Alex.

AO: Thanks, Keith and Michel. So blockchain and cryptocurrencies have been in the headlines, mainly due to their market levels amid a very challenging market environment that entails geopolitical risk, macroeconomic, inflation and rising interest rate concerns. But putting all that to the side, ESG is a topic that definitely remains of interest to investors, especially as it relates to the blockchain ecosystem and applications. From a high level how should we start thinking about environmental concerns in relation to the blockchain ecosystem?


MR: That's quite a lot of things you can highlight there, and to some extent you can't really separate it from the developments in the markets because actually the extent of the electricity consumption is very closely related to the price of the respective coins.

So if you look at the current numbers just from a tool, the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining, currently consumes roughly a 120 terawatt hours of electricity on an annual basis. So just to give you an idea, that's about 0.53% of the world's total consumption of electricity.

Now that's one thing, I guess to determine the environmental impact we really need to look at the carbon intensity of the power mix. So essentially of the electricity generation sources. And so we have built an internal model to estimate the greenhouse gas emissions that result directly from mining.

And so primary figures really show that about 65 million metric tons of CO2 equivalents. And if we're down to perspective, that's about 0.13% of the world's total emissions in 2018. And so, if you want to compare it to some industries, let's say gold mining, that's about 100 million metric tons. So we're at 65% there. It's roughly around the same ballpark as tobacco plantation and production on an annual basis, which is about 18 million metric tons, or about three times more than cruise ship tourism, which emits about 20 million metric tons on the yearly basis.


AO: That’s interesting and really puts it into a different perspective. I was reading an article from an organization called ‘Change the Code, Not the Climate’ and it pointed out that switching cryptocurrencies’ work, in terms of how they function, could potentially reduce the carbon footprint by 99%. Specifically, it was talking about the way the consensus mechanisms work for cryptocurrencies.

The stats you shared were specific to bitcoin, but how should we think about cryptocurrencies more broadly?


Yeah, that's a good question. I think one of the issues is that there's a big misunderstanding, I think, about the energy consumption as it relates to digital assets more broadly. It seems to somehow that digital assets are guilty by association to primarily Bitcoin really.

So in fact, the high energy expenditure is really limited to a particular mechanism to reach consensus over the network, and that mechanism is called proof of work. So the idea being we need that you have to lock up energy as a sort of collateral, and because you can't lock up energy, you essentially just need you, you burn it literally.

But there are a lot of alternative mechanisms, some of them actually emerging as early as 2012, for example peer coin, such as proof of stake, where the idea is that you replace energy with some other sort of form of collateral. So in the case of proof of stake that is a crypto deposit that you lock up and that you may get back if you play by the rules.

And so I think an interesting observation is really that all major new application networks and platforms that really have launched, I would say really over the last five years, are all based almost exclusively based really on alternative energy low consensus mechanisms.

So if we look at crypto really from that perspective you have Bitcoin, which is really the big player in that sense of the biggest energy sink, if you want to call it that way. Then you've got Ethereum, which is the second largest. But it's only about 25 terrawatt hours, so we're talking here about like 20% of Bitcoin’s consumption. And then there's really a very long tail of very small networks that have negligible consumption.

So I think to sum it up, really, when we talk about the energy problem of digital assets, we're really mostly talking about Bitcoin and Ethereum, and that is useful to know that Ethereum is actually has been planning for a long time a transition to proof of stake, and that will then immediately leave Bitcoin as the only major game in town, if you want to call it that way.


KB: I mean just to add to that I think the merge which Michel is referring to the migration of Ethereum from proof of work to proof of stake is now being mooted, I think, for August this year, so it will be very interesting, I think, to see exactly how the electricity consumption greenhouse gas emission significantly changes, As Michel said, once the merge is complete. Obviously that's been kind of variable date for a while, but since it's now in two or three months’ time I think would be fascinating to see that change happen.


AO: That will be interesting to see for sure. And as a quick introduction or reference for some of our listeners, the term ‘consensus mechanism’ refers to how each blockchain network, such as bitcoin or Ethereum, verifies or processes transactions. Is that right?


MR: Technically speaking, it's not really verifying transactions, it's more about processing them. I think that's the best mental model. So because you have a decentralized network without a central authority, you still need to decide if there's two valid but conflicting transactions, which one will actually get processed because you can't do both. And so essentially that process is outsourced in a sort of competition among pseudonymous people--we call them miners in Bitcoin, we call them stakers in proof of stake networks—and then, depending on how that competition is being done and you know new blocks get being added to the blockchain and that particular mechanism is the consensus mechanism.


AO: That makes sense. So we’re essentially talking about different participants in a network processing transactions. And there’s different ways to do that.


MR: Exactly, and some are, as proof of work, really are energy intensive by design. So essentially there's some proposals, for example, to make Bitcoin more energy efficient in that sense, but that kind of like goes against really the key principle of proof of work, where it's really all about burning provably burning electricity, so you can't really fake that you expended something and incurred a financial cost with that.

And so because that is not a very sustainable way of reaching consensus, that's why we have seen innovations and alternative consensus mechanisms. And some of them actually going back as early as the 1980s, where actually we didn't even have blockchains in the first place. So it really builds on a lot of, I would say, existing research that has been done for a long time.


AO: Thanks, Michel. That makes a lot of sense. So essentially there’s kind of two parts of consensus mechanism: one is how the network processes transactions, and then there’s another part that relates to how the peer participants verify what’s true and what’s not. Could you maybe explain that second part a little bit more?


KB: So in order to operate a decentralized network like Bitcoin or Ethereum, we know there's no central entity that is managing that environment. It's therefore distributed environments for multiple actors that are in the process of validating and committing transactions to the blockchain.

In order to facilitate that, one way of looking at it, not necessarily an accurate way, is to think that various individuals have a vote, and there's a cost to that vote. And the cost may be represented in the physical cost of the hardware that they're using to complete an algorithmic problem, and the electricity that's consumed by that hardware, or the other way of considering your cost is through staking crypto assets. So in the case of proof of stake network, committing a set of assets which has a cost, obviously in tying up those assets and the network itself.

So either way, whether it's physical cost in terms of hardware and electricity or a cost associated with committing crypto assets, they both fulfill a similar purpose in terms of a consensus mechanism to provide a means of a socioeconomic model to be able to ensure that it's cheaper, it's more cost effective to play by the rules associated with the network than it is to cheat and therefore potentially devalue the nature of the assets themselves that are the whole network is dependent on.


MR: And I think actually Keith raised a really good point with attaching a financial cost to that operation. The reason being that otherwise, so it's really to create skin in the game if you will.

So we're talking about networks like Bitcoin that have tens of thousands of nodes where we have actually no idea who is running those nodes, whether those are always the same people, when people join leave. So it's like a huge big mishmash. That's the way to imagine it.

So if we did simple voting about which transaction now gets processed and logs, then it would be very simple for an attacker to create or spin up lots of fake identities and actually rig the vote. And so only by attaching a financial cost which can come in different ways, and that's how the consensus mechanisms differ, that's how you essentially create this skin in the game element, which incentivizes people not to cheat, because otherwise they can't recover that cost and so can't get compensated for that.


AO: That’s brilliant. Really appreciate the different perspectives on explaining what that means. So we’ve been talking about the efficiency of networks. But is there anything to be said about renewables or decarbonization within blockchain networks?


KB: I mean there are efforts, especially with the migration of Bitcoin mining, for example, to the US that we've seen Michel talked about the CBECI latest information, and we still see the US as being the largest location in terms of Bitcoin mining at the moment. And obviously there's a quite a big focus in the US in terms of renewable energy consumption from Bitcoin mining being able to locate on the kind of basis along those lines being able to use carbon offsets as means have been able to demonstrate, and investors who are investing in companies that are doing Bitcoin mining, being able to demonstrate their credentials in terms of using green energy or hydro or whatever it may be as a means of being able to gain investment to fund the Bitcoin mining in the first place. Michel, what would you add to that?


MR: I would say that there's actually the interesting part that is also there because we have seen a surge in the interest of institutional investors that are also invest in it, that this creates a sort of ESG pressure, right?—so very topical for this podcast—from those investors, which actually forces many of the miners to actively decarbonize the electricity, makes for operations.

The reason for that is really that this ESG financial pressure in a sense creates a risk that if Bitcoin weren't considered to be compatible with commonly ESG standards, that would lead to really a significant outflow of institutional capital, and as a result of that, the mining equipment—so this huge inventions of millions and millions of machines that those companies mining companies ow—will essentially become completely useless, unusable, E-waste because they can't be used for anything else besides Bitcoin mining.

And so I would say there's this natural, this creates a sort of natural financial incentive for the industry to actually actively decarbonize as well.


AO: Right. Well, we’ve been talking about cryptos, but what about wider blockchain networks? And is there anything happening in particular to use blockchain solutions for improving data for environmental purposes?


KB: Yeah, that's a really topical question I think at the moment. It's, that's interesting, I think the various initiatives that are looking to, for example, facilitate the trading of carbon credits. So Carbon Place is an example of that. It's a collaboration between 8 global banks: CIBC, Atau NAB, NatWest, UBS, Standard Chartered, BNP Paribas and SMBC in the Japan. And they are combined together to create this marketplace for trading of carbon credits on a private permissioned version of the ethereum. So I think it's going to be fascinating to see how that develops, from the market position of those banks.

And then in parallel, we have Adam Neumann, the founder of reworks, also launching his version of basically flow carbon as it's called now funded to the tune of 70 million with I think A16Z being the lead investor, to do something similar to provide trading facilities for carbon credits.

So we almost have these blockchain based carbon wars beginning to develop between these various initiatives to facilitate the more effective, transparent, quick and efficient to settle carbon credits for marketplaces across these kinds of entities.

We also have examples, the Bank of International Settlements, for example, have run 2 pilots, two PoCs (Proof of Concepts) around the issuance of green bonds, so being able to issue bonds, being able to increase the investor reach around those being able to track the credentials that have been delivered in terms of clean energy as a result of the what's being financed by the bonds themselves and being able to see an indication of how CO2 is being reduced as a result of that.

And the final example I just mentioned is Stacks.IO, who are based in Singapore. They've been collaborating with NAS, the local regulator, to create what they call an ESG-pedia. So basically a registry of all the ESG projects etc and being able to then use smart contracts and a blockchain environment to be able to monitor those ESG credentials and look at them and manage them through their lifecycle.

So I think there are many examples of how blockchain technology is being used to really facilitate a lot of the huge focus that we have as far as the environmental aspects of the ESG concerns at the moment.


AO: That’s incredible how quickly the space moves. Well, Keith and Michel, thank you so much for a really interesting conversation.

This is the first in our three-part series on environmental, social and governance considerations in blockchain networks.

In this first episode we talked about the environmental part of the equation and covered a lot of ground, from the environmental footprint of cryptocurrencies, including the energy consumption and CO2 emissions, as well as the different consensus mechanisms and how some of them could improve blockchain efficiency. We took a look at decarbonisaiton efforts more broadly in the ecosystem and lastly how new blockchain applications could improve environmental data and solutions.

Keith and Michel, thank you so much for an interesting conversation.


KB: Thank you


AO: Which groups of people are best served by blockchain solutions? Join us for the next episode of our podcast series where we’ll be looking at social considerations in blockchain networks. For more information please visit


Thanks very much, Keith and and thanks, Michelle. We covered a lot of ground in this segment. We looked at the environmental footprint of blockchain, particularly the cryptocurrencies as well as the energy consumption. We talked a little bit about decarbonization efforts and then we even spent some time on the environmental purposes and the benefits that blockchain could bring to those areas. So thank you very much. Thank you. Thank.

Episode #3 - Blockchain non-crypto use cases

Armajit Singh, Partner and EMEIA Assurance Blockchain Leader at EY, talks about the blockchain opportunity, interesting blockchain use cases beyond crypto, and 5 criteria for checking blockchain is the right solution.



Alex: Welcome to the beyond The Hype podcast. I'm Alex Olivares from Invesco and today I'm speaking to our guest Amarjit Sing from EY. We're going to be having a discussion about blockchain use cases outside of crypto.


Armajit Singh is a partner at EY, leading its blockchain assurance practices across EMEA and India. He is responsible for some of the firm’s largest financial services clients and leads a handful of its diversity inclusiveness initiatives.


All right, welcome Amarjit to our podcast discussion. It's really good having you. How are you?


Amarjit: Fine, thank you Alex, and glad to be here with you.


Alex: Cool, so before we kick off into the heart of the matter and we're focusing on blockchain in non-crypto uses for this conversation, maybe we could start it off with a question that I like to pose to all of our guests here, which is ‘what is blockchain?’ How do you define blockchain?


Amarjit: That's a tough one, so I see blockchain as a way of effectively grouping transactions together in a block using cryptography, to then prove the block. And then chaining those blocks together into a long chain. The cryptography allowing very easily for each block to be validated. But very difficult in calculating the hash in the 1st place. So which comes with a lot of immutability as well as the ability to prove that something did happen.


Alex: Interesting OK cool. So you know we're talking about blockchain overall and a lot of the headlines are focused on the crypto side of the equation and we see lots of news flow there, but just how big is the opportunity size for blockchain? Especially if maybe you look at it in totality? Is it the monumentally transformative technology that lots of people are talking about? Or is it something different? How big is it relative to some of those other things that people talked about recently, such as Internet of Things and big data? AI, how do you approach the opportunity?


Amarjit: So I think Alex for me, I would look at it in 2 different ways. You know on one way is actually just comparing blockchain to the Internet and how the Internet and the curve, the Internet went through, and how it has grown from the beginning to where it is now and I think you are now starting to see a lot of firms now also put out a lot more insight and research papers, which are actually comparing the growth in Blockchain. Two at the growth of the Internet or, or more recently, the growth in cloud computing. And when you actually map it across Alex, you start to see a lot of a lot of similarities, including admittedly the trough of disillusion it went thorough as well. You know where technology is? Go ahead and then there's a little bit of a pause before you know we get the next step, right? So personally, I think there's a lot that we only get very much at the beginning of what this technology can actually do for us.


Alex: By the way, where do you see us in that cycle?


Amarjit:  I think interestingly, just more recently with regards to what's happening too. I know we're not concentrating on crypto in this conversation, but nevertheless trying to separate the crypto conversation from the blockchain conversation can be a little bit difficult, but I actually think that we are now starting to see organizations recognize and realize what crypto does for them. Sorry what blockchain does. That brings to them and actually the benefits on what they should do or what they can do in in looking at blockchain as a separate technology.


Alex: That's interesting for the explanation of kind of where you think we are right now in the cycle. It's an exciting technology and a lot of people are excited about the applications of it. Cynics could argue that people have gotten a little bit carried away. Is it a phenomenon of a new hammer in search of lots of nails? That kind of hammer down? Or how should people use blockchain technology?


Amarjit: I think that's a really, really good question, Alex, and you might find it strange that although I am a team leader for blockchain, I'm also a skeptic in terms of challenging firms as to the use cases and ensuring that actually they've thought about whether, as you say, they're not talking blockchain just because it's the latest hype, but actually that it does address their problems.

So we actually have put forward what we call five sort of indicators on where blockchain may be appropriate to address a particular need or a particular issue as opposed to, you know, as you say, a hammer in search of a nail. So the first one is block chains are generally more suitable when there are multiple parties working together. So you're sort of looking at an ecosystem party sharing data or ownership, or collaborating in a process and so having a look at how that data is shared. Across a distributed network is starting to be sensible.

The second one then we tend to look at is do you actually need a trusted platform? So you know if you are within an organization already, then you really need a trusted platform, or if your external to an organization you know, do you actually need a? Do you need trust between participants? Do you need multiple points of verification? Because if you do, then again block chains are helpful because they could reduce the need of reconciliation. A version of the truth which everybody shares and everybody understands, and it's maintained across all the parties involved.

The Third Point is, do you really, really need an immutable record of transactions, data or agreements, right? And you know, there might be some situations, Alex, where that is not actually helpful, for example with GDPR and the right to be forgotten. So if there is a process that requires data to be deleted, for example, then actually a blockchain may not be suitable. So we do need to consider those sort of challenges.

The 4th point which here we reflect on is looking at the blockchain as a digital twin of an asset or as a as in terms of tokenization and the need then to execute some logic between parties, right? So with smart contracts etc effectively create and with tokenization you can effectively automate some logic. Is that useful? Is that what we need among participants here, and you know? Or is it actually that all we need is to store data amongst parties in a trusted manner? At which point some other technology may be suitable, right?

And then the fifth point is do we actually need a transparent record of what happened? Yeah, do we actually you know that that immutability, that consensus of the blockchain gives participants a visibility, and while you can restrict in certain situations the visibility to certain authorized parties only and we've got for example nightfall, which is a tech, which is why I've open sourced which anybody can have a look at, you know, but if they are processes of data that should be strictly confidential to one party only, then maybe you need to consider whether again blockchain is for you or you should be looking. At other technologies.


Alex: Interesting, interesting. So you're saying that basically you and your colleagues at EY have this framework by which to decide whether blockchain is the right solution, and rather not just applying this as a blanket approach to other use cases that actually might be better served by something as simple as a proprietary electronic database. For instance.


Amarjit: Exactly, absolutely.


Alex: And it's interesting that you that it really kind of pivots around the number of people in the ecosystem, whether they're internal/external, the need for kind of verification, immutability of the records, access to that type of information, whether there's a programmable element of other transactions that you want to do. So all those are the key considerations, aren't they?


Amarjit: Yep, yeah very much so.


Alex: So having said that and this is the I think one of the more exciting parts of having you as a guest given your work as a consultant and the number of different businesses and organizations that you work with. Perhaps you could start bringing this to life a little bit more for our listeners and pointing out some examples of blockchain being used in a non-crypto sense amongst the financial services sector for instance. So what are some of those use cases?


Amarjit: So Alex, my view on this. My personal view on this. It's not an if, but I’m aware that we will be reflecting on and updating the pipes that we have in our financial markets infrastructure and the reason why I say that, Alex, is when we look at blockchain as a technology and we look at these points about, for example, different parties working here than the fact that you can actually settle across. And effectively you have immediate settlement, etc. Versus you know what we might have with DVP (trade settlement: delivery versus payment) for two days at the moment where you then have settlement risk between counterparties, you have monies tied up which are not in treasury. You have situations where big reconciliation hubs exist, all which is all of which are just, you know, different parties making sure right that actually trades did occur, that trades have settled. That you know that the counterparty is the counterparty they're dealing with.

And so when I reflect and think about how blockchain technology can really help make the financial services infrastructure better, I think personally it's a no brainer that there will be significant market infrastructure impact on things like trading settlement and custody because of the benefits that it will then derive to functions such as risk, treasury etc., settlement services organizations.


But the flipside, Alex is a little bit like and actually, I guess I should pick a maybe a more recent analogy because you know, some people might not even remember a fax machine now, but to me it's the network effect problem. Right, that you know you do need people to do come together to get this benefit, and so if you've just invented the fax machine and you only have one, well, it's not very useful really, is it? And so how do you actually get that network effect together?

And the second challenge that also then arises? With the multitudes of different. Proof of concepts going on etc. and people exploring this area etc. Which one do you go for? Right? Which bucket do you put? You know, do you put all your eggs in? Because again, it's a costly exercise. Updating your systems t into these external settlements. What do you go for? Which do you go for? How do you know you've picked the right one?

So I think there's definitely still maturity to come, and I think these proof of concepts are absolutely key, by the way, because they flush out and draw out what the challenges might be across the end to end ecosystem, right? But I think until we get further down there as well, I understand the reticence of firms to sort of, you know, go for it, but I also think that if you don't dip your toes in the water with some sort of proof of concept, etc, I think you are going to start to struggle as and when the market moves, because you're not going to have that know how, the experience, etc on how to progress. Very much so that you know there are positive use cases in the FS (financial services) space. Very, very valuable use cases. It's getting the timing right and getting that network effect right.


Alex: With regards to kind of those points that you made about network effect and kind of maybe coalescing around a singular type of technology. How do we achieve that as a as a sector? Or you know more broadly, is it that you know government or regulatory bodies have to kind of kickstart these things? Or is it private enterprise with a couple big players? Pushing things along and then suddenly everyone coalesces around that technology?


Amarjit: I think we're seeing a mixture of that happening so far, Alex. I think what we are seeing definitely is some of the big institutions, the big institutes may be the wrong phrase to use. Some of the big cross industry organizations.

13:40 The non-for-profit type industry organizations that handle settlements that handle trading etc all starting to look at this and starting to and all of them running and looking to see you know how do we actually get either the banks or the custodians or the asset services or the asset managers etc to start to look at? What might this be and how would any of these sort of settlement infrastructures get moving? And then actually plug into those individual companies to make it happen? And so your point about what firms may want to do is to make sure that they are also hooked into a lot of these industry consortiums that are, you know that are that are already running across many of the FS sub industries.


Alex: Right, right? So that's a good overview for the financial services, use cases and maybe financial services companies, how they could keep up to speed with the developments that are happening at pace for our investor audience out there. I think it singles how monumental the change could be because it's that infrastructure, the pipes and the wires of financial services.

Beyond financial services, how are companies looking at blockchain? Technology and what are the use cases there?


Amarjit: I think, and I think that's really interesting question, because there are some really really interesting. This case is happening in the non FS space, you know we we've been involved with some governments in terms of public finance and our public finance option that has helped certain governments track, for example, budgets all the way down to where it's being used. So budgets being approved tracked down to you know which vehicle or ambulance it was used for. We've been involved in traceability, blockchains being used for traceability, be traceability of wine. Or traceability of blood, human blood supplies.


In terms of making sure that you know. Again, you know to make sure that it's again tracing where it's where it's been, where it's come from, etc. And supporting it's all about giving trust, right? The immutability of blockchain and using that to give trust to people that you know be the food or blood or etc. How do you know where it's been and where it's come from?


Donation type situation right. And we've been involved in things like also firms now using blockchain with regards to ESG or ESG type approach to show source of materials you know these kind of like supply chain applications to show you know where has a piece of clothing been or how has it got there.

And most recently I saw when I bought a shirt over Christmas that actually there was a QR code which let you scan and when you scan the QR code it linked to a blockchain which proved that that was an authentic piece of clothing as opposed to a counterfeit.

So you know there are there are lots of use cases from the traceability side. With regards to using blockchain to prove where something has been to, because you do then have that situation of multiple parties, you need a trusted platform. You want the immutability of data you want to track it, etc, and you want a transparent record. It ticks all those boxes right? And it gives you that that view of where something has been and how it's got to you. So a lot going on in the non FS world as well which is really. Really quite interesting.


Alex: Yeah, it'll be interesting to see the creativity that some companies employ to the technology, because like you said, if it's a matter of traceability or supply chain management, there's obviously lots and lots of companies that dabble in that space.


Amarjit: Yeah, I think the one I saw earlier this week was one of the car companies and I'm just being safe in not naming anybody but you can. You can go look this up. I don’t know actually, but there was a European I can’t remember now that was issuing an NFT (non-fungible token) linked to each car and the NFT would then hold the car’s records.


Alex: I saw that too.


Amarjit: Yeah, and that's again a sensible use case, right? It makes sense, it's useful, it allows you to again track and then have your service history and your mileage and all that good stuff there. And you know, if you buy that for used, you can trust where that’s come from, because of the data.


Alex: Well you were touching upon it already on ESG. And you know, we could kind of understand in the example of the shirt, you know, that it gives insight to consumers on, you know, the origins of the shirt, the data behind the shirt, and how it was produced, and lets those consumers have trust in that data. But is there more nuance to the equation of ESG, especially related to blockchain? Or are there maybe some questions, or some points that you could put forward to us so that we could kind of chew about it a little bit more because I would imagine it's quite complicated in that space.


Amarjit: Yeah, I think I think, Alex, it's worth as you say, chewing on that a little bit more because you know, I'm sure people would have read some of the press out there. And I you've heard the Cambridge Centre for Alternative Finance on as well, on their podcast before. And you know there is a lot of challenge out there about the energy use case for blockchain, right?

And in particular in particular types of crypto and that may change as some of the chains move towards a proof of stake [mechanism], and in fact most of the blockchains that we work with, in terms of more for, you know what we've just talked about in terms of traceability etc tend to be built on Ethereum, and you know, hopefully ethereum as it's made public, is trying to move to a proof of stake [mechanism which is less electricity dependent], etc. And then you've also got some level-2 layers [middle layers] like Polygon, etc, which we've been working with.

But the reason why I think also it's a more nuanced conversation is if we look back to the point you and I were talking about earlier on about financial services companies and the value of the benefit potential of blockchain you know, and the pipes many many of financial service companies have, they have huge, you know reconciliation hubs around the world for example. And again, if you think about OK, if you move to blockchain then you don't need those hubs. Right and those hubs, you know, use a lot of energy. I think it's important for us to also think about the end to end and think about again. OK, so if we do bring blockchain in here then actually what ends up happening further down the value chain? Or you know there are savings, which is positive and easy to get excited.


Then flip it around, In the social part of the equation, what happens to all the people who work in those hubs? Right, so it's a nuanced conversation. Are they going to be deployed in more value-add activities? Well that would be a good thing. And how does that work? So to me, I think you know there is a question that it's not very straightforward, just sort of. You know it's not black and white, nothing ever is that simple.


Yeah, but then you know when you look at us again and touching on all the traceability use cases to me, there's a lot of good S (‘Social’) there. You yeah so you know how? How do we? How do we then give that benefit from a social perspective?

There's a lot happening on carbon trading now using blockchain as well and things like that so. Blockchain to validate trees in a forest and and how that then goes on to a table or etc. So there's a lot happening there which is to me again makes this much more nuanced argument.

Like if you go look at G on the governance. DAOs (decentralized autonomous organizations) those decentralized autonomous organizations are quite interesting. They're shaking up the idea of governance, right? They allowing anybody and everybody at the moment. They're sort of challenging that traditional structure point. Now, yes, again there's been some papers put out about at the moment. They're calling it the decentralized illusion. They really decentralized, are they? And I think that's some of that is because we are also in the sort of space for very much allowing back to the participation of the community, by the users.


Exactly and what we? Space again, we've been pushed by the regulators in terms of proxy voting etc. Here in terms of actually making sure that you know investors are voting and how do we get the retail investors to all these sort of good stuff? If you think about it that way, again, there's some interesting Gee. Food for thought there.


Alex: That's right, and some enablement as well as some questions. Some philosophical questions for us as well.


Amarjit: Yes, Sir.


Alex: Brilliant, brilliant. Well we packed a lot of content, a lot of questions and topics in a relative short amount of time, Amarjit. Thank you so much for joining us and you know your perspective from EY is an interesting one because you see more than just the financial side of the equation or just the crypto and the brokerages. And that part of the ecosystem. So this has been really fascinating discussion, and I'm sure investors have probably taken away a little bit more of the concrete use cases besides the crypto side. So thanks again for joining us and it's been a true pleasure.


Amarjit: Pleasure to be on, Alex. Thank you for your time.

Alex: For more information about blockchain generally or digital assets more broadly, please visit

Episode #2 - Publicly listed companies using blockchain

In this second episode, we speak to digital asset expert Alex Schmidt from CoinShares. Alex shares his insight and views on publicly listed companies using blockchain, as well as blockchain energy consumption and governance issues.



Invesco: Welcome to the Beyond the Hype podcast. My name is Alex Olivares from the Invesco EMEA Marketing team, and today I'm joined by Alex Schmidt from CoinShares.


Invesco: Hi, welcome everybody and welcome to Alex Schmidt from CoinShares who's joining us today for a conversation on publicly listed companies with exposure to blockchain. Alex welcome. Could you maybe tell our audience a little bit about yourself?


Alex Schmidt - CoinShares: Hi yes, thank you for for having me. It’s a pleasure. Yeah so I work at currently at work at CoinShares UK in the equity index team where we manage the index with companies exposed to blockchain technology and cryptocurrencies. My background is I have a finance background starting in the City in 2013 where I covered a variety of sectors ranging from utilities, mining, that is hardrock mining and technology, and I think that's what made me well suited to to join Ellwood, which has been acquired by CoinShares in July this year.


Invesco: Super well, thanks again for joining us and diving right into the questions here.


Schmidt: Yeah.


Invesco: So what are some of the market trends for publicly traded companies utilizing blockchain?


Schmidt: Yeah, we have seen quite a big phenomenon in this area to be honest, uhm? To speak for myself, for example, when I when I joined Ellwood in September 2019, two years ago, we barely had any companies to invest in, in terms of pure players in this space. There there were very few exchanges, very few miners and um there were there was a big number of companies with some crypto and blockchain businesses.

I know for example Monex in Japan. They they have a big crypto currency exchange there, but obviously they cannot be considered pureplay because they have, you know, an FX broker in Japan and that's quite quite a big business as well.

However, going towards 2020 and especially the beginning of this year. You're seeing quite a lot of quite a lot of companies becoming listed. Uh, as pure place and the reasons why this is why this happened is, well, there's one of them is A) companies seeking capital for investment for growth. This is quite a quite let's say, relevant to the miners, which are capital hungry. And then there's been some growing investor appetite for blockchain. Especially because there's still lots of investors who cannot invest in cryptocurrencies themselves, so they have to go via the equity market via these proceeds, if you may, and and yeah, so this has been spurring quite a lot of growth in this sector.


Invesco: That's really interesting and and you've recently put together some research about publicly listed companies that have pure exposure to cryptocurrencies. Can you explain what that means?


Schmidt: Yeah, so these are companies whose core business is related to cryptocurrencies or blockchain technologies. We have split them into four categories in the report and if I may, I can go into a little bit of detail in each of them.

Uhm, so yeah, the first of them is cryptocurrency miners, which I think is perhaps the most obvious pure play company. They were one of the earliest coming to the market. They basically buy hardware, put them into some containers and start mining and make money out of it.

And then they we have the financial services companies in which we have a split. We made a let's say an umbrella term for banking services and consulting companies. You have, you know the likes of Silvergate, Galaxy. These guys are providing almost like investment banking services to companies like you know to some of these blockchain companies as well but also to other people involved with cryptos.

Then you have the exchanges which are quite obvious as well. More likely that people you and I are dealing with buying and selling cryptocurrencies.

Then you have the hardware companies which are the ones that make the mining rigs. Right now we could only identify two companies in this space, which are Canaan, Ebang and the let's say the two biggest ones, which are Bitmain and MicroBT, which produces most miners? They are still private. But yeah, I think Bitmain a few years ago I filed a prospectus to list but never in Hong Kong. But they never went ahead. But yeah, so initially it started with miners and financial services and now the exchanges make up the third largest groups in terms of number of companies. And then yeah, the hardware is still so quite small.


Invesco: Yeah, and you mentioned a lot of the functions there. Are there some kind of broader sectors that provide the exposure to cryptocurrencies and how are these firms concentrated in terms of geography?


Schmidt: Uh, do you mean broader in terms of other companies like I mentioned in the beginning, which have different exposures as well?


Invesco: Yeah, would you extend it more


Schmidt: Yeah, yeah.


Invesco: beyond beyond just you know, technology and financial services per say


Schmidt: Ah. I would say that the vast majority would be financial services and you know the if you take into account in the GICS, financials and technology like the vast majority of these companies.

There will be some companies that are in the media business as well that do provide some. We have some in South Korea that are, you know, Naver um, which is like, you know, kind of the Google or South Korea. So again, technology, but they are far more focused on media and they do also own bits in exchanges and stuff so you can find that it's also quite related. But yeah, I think it will struggle to find something outside those two or three.


In terms of listed ones, it's very, very dominant North America at the moment. US making up for like 44%, Canada 24% of companies listed companies. Then you have Europe, which Sweden, Germany with absent of identifying of 9% of each and the UK with 7%. There's some companies listed, pure players listed in Hong Kong as well.

And yeah, we didn't look into China mainland China because lots of these equities are off limits for most investors. You know the A-Shares is so very hard to to have a, you know, accurate view on that. But yeah, North American dominant actually US in terms of market caps. More than 80% of all companies so we very big dominance of North America there.


Invesco: Yeah, and could you talk a little bit more about the timing of, you know why we're seeing some of these firms list to market right now?


Schmidt: Yeah, uhm, actually in the beginning of the year was far more friendly than it is right now, but yeah. In terms of timing, I would say well initially the rally that you saw in the last quarter of last year, first quarter of this year, in terms of cryptocurrency prices, Bitcoin and Ethereum rallying quite a lot. A lot of these companies come to market right after these phenomenon phenomena happens, and actually in the report we have a chart showing that there's quite a big correlation.

It did happen as well in 2018 after the big rally in 2017, but also you're seeing a lot of capital hungry companies tapping into the market, and it's quite interesting. For example, NASDAQ makes it quite easy for companies to to file for they can file for um listing securities in advance of doing them so they can do as they require. Um, and they call it ATM financing, so that's that's extremely helpful for these companies. Lots of companies are enjoying the fact that, you know, market that does find a big premium and there’s quite a high valuations in the market, especially at the beginning of the year. And they decided to go to go public, then.

And then, finally you saw lots of SPACS. That also was a phenomenon in the beginning of the year. They were looking for targets. Lots of that has subsided now, but you're still seeing companies coming to market as well.


Invesco: Yeah, and could you add some a little bit more color on that so you know you started to discuss different types of companies? But how big are they generally and are they revenue making or loss making and what's the investor appetite for these types of equities?


Schmidt: Yeah, uhm, many of these companies um. They are revenue making. If you think if you break down into the categories I mentioned, you know the miners are inherently going to make revenue just because that's how their operations go, right? And financial services also. These companies that have come to market they are quite established in a way I would say it would be quite hard to IPO a company in this sector without any revenues at the moment, just because investors might be very skeptical in terms of that. Exchanges again are quite, you know, they make some good money.

However there are. There will be some companies which are still in project stage coming into the market still waiting to launch their their main product waiting to be regulated. They might not have that many meaningful revenues.

And then in terms of profitability it's a mixed bag to be honest. You will have many loss making companies. I think it's predominantly loss-making at the moment. And I I can actually relate to the beginning of my time at Elwood, in which you know, for example, miners were exclusively lossmaking because, you know, it's such a capital hungry industry and and and prices were really not very good back in those days.

However, if you look at them now. And with Bitcoin, even you know right now which some people might see those a bit depressed at 45K US. These companies are quite healthy in terms of profitability because their costs have not gone up so much. Actually they're finding power quite cheaply in North America right now. And so they can make some quite good money there and exchanges they did very well both


in the cryptocurrency rally that we saw in Q4 and Q1, but also on the way down because they don't depend on prices, they are really volume businesses, right. So they will make money when there's a lot of trading activity and depend on you know deltas, big deltas or lots of volatility in the market.


So yeah, they they still mainly loss making up. I would say 2021 will see quite a lot of improvement in for these companies and another point is difficulty hasn't gone up because you know, there's been so many backlog in the semiconductor industry and also the whole phenomenon with China banning cryptocurrency mining within the country.

So you would you know when conditions are so favorable for mining would expect lots of people to come into the market and difficulty to go up. But this has not happened. It has recovered a little bit in the last couple of months but hasn't gone back stratospherically like you would expect.

In terms of size in terms of market cap they are usually you know what you would call small to mid-cap. Lots of companies in the single hundreds to you know five/six million dollars market caps. And then you would see teams mostly under 100 employees. Now this can vary quite a quite a bit. Miners are companies that will have small management team and then, you know, maybe a few companies, two of them to overlook containers and you know supervised those operations, but really not that many because this is very automated.

Exchanges and financial services, you would see a little bit more because it would need developers to be adding features and maintaining those platforms.

And in hardware, you would see bigger teams because you need a lot of R&D and some manufacturing those companies.

I didn't address the last bit. In terms of investor appetite for the equities. I've mentioned before, that lots of people are trying to jump into cryptocurrencies, but they some of them are not allowed. And you saw in the beginning of the year, with all of these listings also there were lots of secondary listings as well and they were all amazingly, you know, over over subscribed and you know 1234x times, so there's this quite a lot of appetite for for companies getting to this Despite that they have to evaluations.


Invesco: That's really interesting about the investor appetite Alex. And could you maybe talk a little bit why investors would want to target equities as opposed to directly investing in the crypto currencies themselves? What are the advantages and disadvantages of equities?


Schmidt: Yeah, uh, I will start the advantages and I think the first mean of main one would be well, just because they can. You know some because there's so many restrictions you know these guys become a vehicle to emulate a similar performance as you will have with with Bitcoin or you know any other cryptocurrency.

But yeah, some of the other advantages is that you know these equity businesses are usually regulated and audited, meaning that you know that the figures that they present are reliable and you know, they are more solid businesses. That you would expect.

Also you have access to management teams and you can assess whether management teams are good or not. And you can choose to invest or not in those companies, and I think there's a lot of transparency going on with this.

And finally, you can. It's a way of acquiring crypto for for less money, especially in terms of when you look into mining, because you know, at Bitcoin at 45 and a mining business mining one Bitcoin for like $7000 or $8000. You were indirectly buying a big big discount.


Obviously these companies themselves traded valuation premiums, but that's one of the rationales for investing in these companies.

In terms of disadvantages. One of the things I could say about these companies as intermediaries, why add a layer somewhere that you know you could just go directly. And if you're looking at a portfolio and want to add crypto exposure to it, you may not get exactly the same performance as the underlying crypto you're looking at. So that there could be some noise in there.

And as I said before, this sector. Is insanely valued. The valuations are insane. And yeah, so people can be. People need to be very careful when they invest there.


Invesco: And Alex, a lot of our conversation has been focused on companies that have exposure to cryptocurrency. But what about those other companies that have exposure to kind of broader blockchain technology?


Schmidt: Do not have exposure to cryptocurrencies and you're talking about broader blockchain technologies, I would say A) they are rarer you don't find so much of that in the markets and B) it's a bet, right? You need to understand very well what they're doing. You need to investigate. Talk to them quite a lot.

We talked to some companies that we're doing something very interesting in terms of proxy voting, and they were using crypto blockchain. Sorry blockchain to make those ledges and mutable, and you know, for people to be able to do online voting and that eventually took off and became a very interesting business. But you're not finding so much of that.

I would also like to talk about companies that are not pure place so and advantages of investing them is that you have a whole other side business to support all that that whole operation. But the big disadvantage with that is that you don't get. The exposure that you might be looking for, so you might be you may end up with a lot of noise. And let's say you know Bitcoin goes up by 50% that business which is so diluted might go up by just you know 10 or 15%.


Invesco: Yeah, thanks for that answer and kind of. Shifting on tangents here, energy consumption has been a major headline for crypto currencies in particular, but one could even argue blockchain more broadly. And in a previous podcast we linked up with some colleagues at Cambridge who were able to shed light on the nuances of blockchain energy consumption. But what are you seeing on this issue in particular?


Schmidt: Yeah, so we talk a lot with cryptocurrency miners. I think we have talked to pretty much all of the listed ones there and also to other investors. So what's happening? What we're seeing is that a A) miners are seeking greener sources of energy. You see, there's a lot of miners based in, especially in Quebec, where they have a lot of hydropower capacity, some of them are based in Iceland, Sweden also hydro geothermal, so they're quite good.

Some of them are looking for excess for carbon capture, flare gas, and other sources which are not 100% green, but let's say better than, uh, you know, pure coal or pure gas, even an.

Also, you're seeing green energy mining pools. Where some miners are joining up together so that they can strengthen their ESG profiles. And you know, if you see a miner in that pool, that can mean that they will be, you know, using those greener sources of energy.

And then yeah, when you talk about energy usage itself, then there's a discussion between baseload and peak load power. So if they are, you know, if they are only using peak load you can see that they are having quite a quite a big burden on the system and you could you could you could say that you know they are A) taking


the place of someone who would be consuming that power, and B) usually peak load is far less environmentally friendly energy. So so there's that discussion.

But on the other hand you could also say that these companies are helping make projects viable because if you are taking, for example, intermittent sources of power.

You know, let's say a wind turbine is producing a lot of wind at 3:00 o'clock in the morning, and if you have a miner that's willing to take that power for for cheap, it makes you know A) the miner find a cheap source of energy and B) the wind turbine operator they get revenue at that point in which they wouldn't. So that's how they they can fill those gaps and help those increase the revenues of those projects.

And finally, you see some miners also who are offsetting to the carbon footprint with carbon credit and stuff. Now there are some some people who might see that as you know, hey, great and some others might see that you know it's not the way to go, but they're trying to certainly try to reduce their footprint.


Invesco: That's really interesting, and it adds a lot of nuances of the conversation because the headlines could sometimes be so, so distracting.


Schmidt: Absolutely, and I mean I think people like to jump into into those big headlines and see know the what Elon Musk says and take that at face value, but it's not black and white. There is a lot of things going on in the background and people need to take that into account. We also do that.


Invesco: Definitely, and along those lines, maybe there's some nuance to be said around the governance for companies that utilize blockchain or that have exposure to cryptocurrencies. Could you talk a little bit there about what you see is the major issues?


Schmidt: Yeah, well as you mentioned, yeah, we look into into equities more than the protocols themselves. Our focus is on the companies and I think, one of the going back to advantage incentives advantages, but one of the advantages is that. The level of scrutiny of on these listed companies is far bigger than than around crypto themselves. You know we have the SEC looking at these businesses and making sure that they have boards that are, you know, on top of things with management and and the businesses.

And shareholders are far more able to voice their concerns then you know in relation to companies than crypto users. Just think about Ichan or you know the elite funds these companies have been able to charge quite a lot whilst. Uhm, in crypto currencies and block some company some some users, you know the decentralized nature of them makes it very hard for users to have a meaningful voice, and sometimes they end up at the developers themselves have a bigger say. And it's almost like you know the community is to shareholders and the developers are management as a bit of a comparison. But I think in terms of equities. There's a whole legal framework that supports shareholders there.


Invesco: Great thank you. And finally, what's the outlook for blockchain, especially for publicly traded companies that utilize the blockchain as we were discussing?


Schmidt: The number of companies listing has been very high and you know, like I said, people are choosing to list after price rallies and and you have seen that happen this year an and you're seeing these companies mature. You're seeing them having hiring former people from Wall Street, former people from you know, mining businesses like you know, traditional mining businesses, from traditional other companies.

And that's very good, because you can see that both boards and all are taking this seriously. And also the CEOs believe in this company. And I think that helps the whole investment community around there.

I would say that you know the only negative I could see there is that the increased regulation around cryptos, they could make cryptos more appealing to investors and reduce some of the appetite towards the equities involved in that, but I don't think there's going to be any cannibalism there. I think both sides are able to grow, and actually increased regulation around cryptos could be beneficial to companies dealing with them because you know they could see higher volumes and and higher individual interest going into that space. So I think everybody is likely to win there.


Invesco: Great, thanks very much for sharing your outlook there and if people want more information on some of the research pieces that you mentioned, they should visit the CoinShares website. Or they could also look at where we have other research pieces on blockchain.

Well Alex thank you so much for a really fascinating discussion and sharing your thoughts, especially given your insights and where you sit in terms of the blockchain investing universe so thank you for joining us.


Schmidt: Thank you very much as being that big pleasure.


Episode #1 - A whistlestop tour of the blockchain ecosystem

In this first episode, we speak to blockchain experts Keith Bear and Michel Rauchs, both from the Cambridge Centre for Alternative Finance.

Keith and Michel share their views on the latest blockchain ecosystem developments, separating hype from meaningful events, and providing a deeper view on a variety of blockchain related topics, such as Non-fungible tokens (NFTs), cryptocurrencies, energy usage by blockchain technologies, governance, and Central Bank Digital Currencies (CBDC), among others.