Environmental impact of DLT infrastructures

The environmental impact of digital ledger technology (DLT) infrastructures varies significantly, with the proof-of-work (PoW) consensus mechanism emerging as the most energy-intensive. Bitcoin, the largest cryptocurrency, relies on PoW, which consumed over 70 terawatt-hours (TWh) of electricity in 2021—equivalent to the energy usage of small nations such as Malaysia. This resulted in annual carbon emissions of approximately 65 million tonnes of CO₂, comparable to the emissions of some developed countries. Furthermore, a single Bitcoin transaction in 2021 generated an average carbon footprint similar to a one-way passenger flight from Amsterdam to New York.

Mining activities under PoW also produce significant electronic waste (e-waste) due to the rapid obsolescence of specialised hardware. In 2021, Bitcoin mining generated 30.7 kilotonnes of e-waste annually, equivalent to the volume of small IT equipment discarded by a country such as the Netherlands.

Challenges in quantifying the environmental impact stem from inconsistent data, geographical masking by miners, and fluctuating energy sources. The mining industry often claims reliance on renewables, but peer-reviewed studies suggest otherwise, with the global share of renewables in Bitcoin mining estimated between 29% and 58%. Renewable energy reliance is further limited by its seasonal availability, making it a less reliable solution for the 24/7 energy demands of mining operations.

Transitioning to less energy-intensive solutions for digital assets

Transitioning to less energy-intensive consensus mechanisms, such as proof-of-stake (PoS), can significantly reduce environmental impacts. Ethereum, the second-largest cryptocurrency, shifted from PoW to PoS in 2022, reducing its energy consumption by approximately 99%. Other blockchain mechanisms, such as proof-of-authority and delegated proof-of-stake, further highlight energy-efficient alternatives.

Despite the potential for reduced energy consumption, Bitcoin’s decentralised structure and community resistance make its transition to PoS unlikely. Factors include concerns over network security, investments in existing mining infrastructure, and a community preference to adhere to its original protocol. This reluctance poses challenges for institutional investors prioritising environmental, social, and governance (ESG) goals, as Bitcoin’s energy demands conflict with carbon reduction strategies.

The use of renewable energy in mining has also been proposed, but this faces challenges such as limited availability during peak demand and the higher opportunity cost of using renewables in other sectors. For example, in China, miners relied on hydroelectric power during wet seasons but turned to coal during dry months, exacerbating carbon emissions.

Preliminary policy considerations

Policy interventions are necessary to address the environmental impact of digital assets, but outright bans on crypto-asset mining have proven ineffective. China’s 2021 ban on mining displaced operations to other regions, such as the United States and Kazakhstan, often with worse environmental outcomes. For instance, the share of renewables in Bitcoin mining fell from 41.6% in 2020 to 25.1% after China’s ban, increasing the carbon footprint of mining globally.

Targeted regulations, such as restricting fossil fuel use in mining or mandating specific energy mixes, could be more effective. Additionally, policymakers should incentivise miners to adopt energy-efficient technologies and transition to less carbon-intensive consensus mechanisms. International cooperation is crucial to ensure that environmental impacts are not simply transferred between regions.

Closing data gaps is another priority. Reliable and consistent data on energy consumption and carbon emissions from mining activities is essential for informed policy-making. Disclosure requirements for miners and validators, as well as industry-led transparency initiatives, are recommended to improve reporting accuracy.

Finally, while addressing the environmental drawbacks of DLTs, governments should support beneficial use cases of blockchain technology, such as tokenised green bonds and ESG reporting systems. These innovations can improve financial market transparency, promote sustainable finance, and offset some of the negative externalities of digital assets.