You are currently viewing Fiat and Crypto are one.  This blog shares the journey of my… |  by Arnold Hui, CFA, FRM, SCR |  Coinmonks |  Sep 2022

Fiat and Crypto are one. This blog shares the journey of my… | by Arnold Hui, CFA, FRM, SCR | Coinmonks | Sep 2022

This blog shares the journey of my transition as a central banker, with 16-year experience in i )overseeing the operations of the Linked Exchange Rate System of Hong Kong and ii) researching on the asset allocation and ESG Policy for the Exchange Fund, to my recent new role at the Sustainability Bitcoin Protocol.

As a Zen student, I was taught to guard against discriminative and dualistic thinking as well as to avoid becoming bound by any ideology. If we do not continue to expand the boundaries of our understanding, we will lose sight of new developments and opportunities. This teaching helps me in studying the arena of digital assets with an open mind which allows me to see fiat, crypto, USD, and bitcoin as they are without undue attachment, judgment, or excitement.

The ongoing debate between fiat vs crypto, traditional vs decentralized finance, and alike is reminiscent of a religious war with both camps claiming the supremacy of their own regime and refuting each other, sometimes, in a polemical vein. I am nobody to predict how this ‘war’ will unfold, nor do I side with either camp. I would rather make the best of the cards we are dealt. With my central banking background, I notice that both camps can offer insights to each other, providing solutions to a myriad of challenging issues facing their creators — mankind, if we are able to cultivate openness, non-discrimination, and non-attachment to our views.

My teacher said “all of us are only human, and we have wrong perceptions every day…we should not trust our perceptions too much.” He urged us to ask ourselves — “Are you sure of your perceptions?”

Therefore, I would like to share my humble observations here going forward to facilitate my learning and engage in valuable discussions with my friends from the fiat and crypto communities. Your comments and feedback are important to help me better understand the current wave of monetary evolution to which I wish to contribute more in the second half of my career path!

Don’t miss the chance to green the “UST” of the crypto world

The first subject I would like to touch on is the main criticism of Bitcoin — its energy use, which is on par with some countries as regularly reported by the media. As such, some people advocate for a global ban on Bitcoin mining while some call for a change of code from proof-of-work to the more energy-efficient proof-of-stake, both of which are not likely to happen in the foreseeable future. Meanwhile, despite the recent turmoil in crypto markets, it would not be sensible to portend an end for the whole crypto industry, given its growing intuitional adoption (see examples here, here, and here), expanding use cases (see examples here), and mainstream interest in the metaverse (see examples here, and here).

Metaverse platform The Sandbox launches its newest alpha season and expects half a million users

Indeed, the recent market correction would help shift focus from the speculative nature back to the fundamental utility of the crypto ecosystem. Against this backdrop, it is necessary and pragmatic to come up with solutions to address the environmental impact of Bitcoin mining. Why Bitcoin specifically? While various constraints prevent widespread Bitcoin adoption for now, it remains the backbone of the crypto industry, functioning like the US treasury in the crypto world.

Bitcoin is the gateway cryptocurrency for many investors before they purchase other cryptocurrencies. As a case in point, Bitcoin was used as the funding currency for the initial coin offerings of the second largest cryptocurrency Ether back in 2014. This is thanks to Bitcoin’s status as the most reliable cryptocurrency which, nevertheless, requires a proof-of-work Reward system along with the energy costs associated with the process, to safeguard its robustness.

Note: If you are new to Bitcoin like me and want to understand more, I highly recommend reading this book.

In addition, as the largest market cap and most liquid cryptocurrency, Bitcoin plays an important role as collateral in the development of decentralized Finance (DeFi) which relies on over-collateralization in the absence of credit checks and personal data. Hence, to enable the continued development and maturation of the broader crypto ecosystem in a sustainable manner, different organizations and companies are trying to make the energy footprint of Bitcoin mining process cleaner and more efficient such as improving energy-efficiency of mining chips and using renewables. energy. This is an encouraging development as we now have a chance to greening the “US Treasury” of the crypto world, which is something unthinkable for its counterpart — the real US Treasury — in the fiat world.

In my previous role to support the submission for UN Principles for Responsible Investment, I was puzzled by the fact that carbon footprint of the US Treasury and other sovereign bonds, which accounted for the majority of investments for asset owners, was largely ignored and unanalyzed. Our data vendors explained that it was due to a lack of appropriate metrics and actionable insight. For the metrics, it is unclear how to define the ownership and responsibility of carbon emitted by a country, as it involves various stakeholders across public and private sectors and different methodologies such as production-based and consumption-based. As for actionable insight, asset allocation to sovereign debt is usually a passive function, depending on monetary regimes for central banks or liability-matching needs for pension funds and endowments. Put differently, public investors find it difficult, if not impossible, to adjust their sovereign bond allocation or undertake effective engagement with a government, even if the carbon footprint information is made available. Sadly, the supposedly market-neutral interventions by central banks since the 2008–9 Global Financial Crisis may show an unintended structural bias towards carbon-intensive industry incumbents, as evidenced by the focus on infrastructure programs and pick-up in housing loans in many countries .

Major central bank balance sheets ballooned to roughly US$36 trillion after COVID, compared to around US$5 trillion prior to the 2008–9 Global Financial Crisis.

Only what gets measured, gets managed.

Whereas for Bitcoin, the situation is more hopeful in that appropriate metrics are not totally out of reach, given the full transparency of the mining process on the blockchain. However, robust scientific assessment and deep stakeholder engagement are required to translate the metrics into meaningful actions. We at the Sustainability Bitcoin Protocol have been working closely with leading nonprofits and scientists in renewable energy and energy audits to develop a scientific, sound, and systematic approach to incentivize sustainable Bitcoin mining. In a nutshell:

  • Miners who use clean energy sources to mine Bitcoin apply to the Sustainable Bitcoin Protocol for certification.
  • The Sustainable Bitcoin Protocol verifies that Bitcoin was mined using green energy and issues a Sustainable Bitcoin Certificate for each BTC mined, built as a smart contract on the Stacks blockchain.
  • The Sustainable Bitcoin Certificate allows miners and investors to make sustainability claims for BTC in their possession without disrupting fungibility.

Similar to other sustainable initiatives, there is no single panacea for the issue at stake. Collaboration is key to building awareness and an effective multi-disciplinary approach to drive sustainable and inclusive developments for the Bitcoin community and the broader financial and crypto markets. As the Zen teaching says, “together we are one.” We aim to drive a greener future with you all and enable wider adoption and application of crypto technology.

Thanks for reading this post. Questions and comments are very much appreciated. Your feedback will help build up my knowledge, and encourage me to deep dive into topics of interest using my central-banking and, newly trained, crypto brains!

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