It is hard to deny the rising popularity of cryptocurrencies in the modern world.
Cryptocurrencies like Bitcoin have recently shifted from something I considered distant, abstract, and largely inaccessible – into something welcomed at even the tiny corner stores around my neighborhood.
Before exploring how cryptocurrencies might be highly beneficial for impact entrepreneurs across the globe, let’s begin with the basics: what is crypto, and how does it work?
Simply put, a cryptocurrency is a digital, decentralized system of monetary exchange, such as Bitcoin. Cryptocurrencies use distributed ledger technology, like Blockchain, which works as a database storing records of assets and transactions.
In other words, blocks of data become replicated and shared with a network of users, creating a chain. While traditional currencies are managed by centralized authorities, transactions of cryptocurrencies can occur beyond governmental control.
Now, what does this level of decentralization mean for impact investment? Fortunately, a lot. The decentralized network of exchange embedded in every cryptocurrency’s framework can help both entrepreneurs and investors in four main areas:
In the next section, I’ll outline how each one of these goals can be easily reached by accepting, employing, and embracing cryptocurrencies.
The Four Biggest Benefits of Crypto
1. Crypto increases security
Starting with security, the technology supporting cryptocurrencies (namely, blockchains) is revolutionary for its ability to track and transfer wealth.
Blockchains are able to securely store information by moving away from a centralized model to one that copies and distributes records of ownership and trade to multiple locations across a network.
Since these records are not just saved in one central spot but shared with every computer on the network, some scholars, like Andrej Zwitter and Mathilde Boisse-Despiaux, consider cryptocurrency to be the most secure financial record system yet.
2. Crypto reduces fraud
When it comes to handling your money, security is great in and of itself. But the security provided by cryptocurrencies also yields another benefit: a reduction of fraud.
While credit card payments can be reversed, cryptocurrency payments cannot. The secure network of transaction records is resistant to tampering and creates an extensive audit trail, which can track and confirm the authenticity of each transfer.
What does this result in? An increase in accountability, transparency, and trust, not to mention a decrease in the chances of fraudulent transactions taking place.
Crypto payments can replace payments by credit card. Source: Open source.
3. Crypto decreases fees
Crypto can be especially useful for impact entrepreneurs since it reduces transaction costs. As organizations grow, they need to make more and more transactions each day. However, the high transaction fees resulting from credit card payments can make transaction costs overwhelmingly expensive.
But while credit cards, banks, and financial institutions often have central locations and figures determining the price of each transaction, crypto does not. Hence, by using crypto for these transactions, your transaction costs drop dramatically.
4. Crypto transcends borders
Finally, crypto outperforms other kinds of currencies by knocking down barriers to international trade. As Bitcoin expert Nozomi Hayase explains:
Bitcoin is the most inclusive financial network of all time. It is borderless, welcoming everyone regardless of their culture, nationality, gender and religion… Bitcoin enables a level playing field.
Cross-border payments can be timely, costly, and complicated when most other currencies are exchanged. However, cryptocurrencies can be smoothly exchanged across borders without the additional hassle of third-party actors.
This means that organizations can send or receive payments in crypto from anyone, anywhere in the world. Needless to say, with all four factors in mind, the future of impact investment is looking a whole lot brighter.
Applying the Benefits of Crypto to Social Impact
There are nearly endless opportunities for cryptocurrency and the technology behind it to achieve a positive social impact. As Nicolas Cary, the co-founder of Blockchain, shares:
The transformative power of blockchain technology should not be seen as a threat… rather, it should be seen as an opportunity… to accelerate our collective progress towards meeting the United Nations’ Sustainable Development Goals.
For example, the startup Provenance uses blockchains to track the movement and export of yellowfin and skipjack tuna. The security and transparent recordkeeping provided by blockchain technology enables this startup to make huge strides toward United Nations Sustainable Development Goal (SDG) 14: Life Below Water.
Blockchain providing the base layer of truth across the supply chain. Source: Provenance.
Skipjack tuna being gathered by a supplier in Ambon before freezing, storage and transportation for manufacture into canned tuna for the EU market. Source: Provenance.
Blockchain technology can also be similarly implemented to promote SDG 16: Peace, Justice, and Strong Institutions. As Cary argues:
Billions of dollars are spent yearly by NGOs, sovereign nations, and private foundations on this vital humanitarian mission, yet much of this is wasted through inefficiencies and corruption.
Since blockchains reduce the risk of tampering and fraud, they could be especially useful for transactions in regions with weaker institutions and histories of corruption.
LO3 Energy’s platform TransActive Grid (TAG) represents another example of how the technology behind crypto can be used to tackle environmental issues. Through decentralized digital ledgers, TAG helps consumers buy and sell clean energy at a local level. By making renewable energy more accessible to more communities, TAG makes serious headway toward SDG 13: Climate Action.
Microgrids connect rooftop solar energy prosumers and traditional utility consumers, enabling them to buy and sell local, emissions-free electricity directly from one another. Source: LO3.
Moving Forward: How Should Entrepreneurs Think About Crypto?
With a higher degree of security, lower chances of fraud, reduced transaction costs, and more opportunities for funding from investors all across the globe, I think most entrepreneurs can agree: the sooner you warm up to crypto, the sooner you can reap the benefits.
However, as Cary reminds us, blockchains are not magic beans! Even though it’s easy to get excited about the countless ways crypto can improve impact investment, we should still remember that no technology is without its flaws.
Because of how often cryptocurrencies rapidly fluctuate in value, some have stated that investing in crypto is like playing roulette; the gamble cannot guarantee a gain.
Meanwhile, the process of creating new crypto coins (mining) involves environmental harms that should not be overlooked. Since mining relies on running programs on a vast number of computers, an overwhelming quantity of energy is consumed as people compete for coins. What are the consequences of this degree of energy consumption? According to Business Insider, around 40 billion pounds of carbon dioxide, produced through Bitcoin mining in the United States alone.
Especially since Bitcoin, Blockchain, and cryptocurrencies in general are relatively new in the tech world, there’s a lot more time needed for experimentation to combat these effects. But the bottom line is this: cryptocurrencies and the technology behind them are key to the future of impact investing. I may not be an investor in crypto, but I’m invested in what it will achieve.
Mira is an undergraduate student at McGill University studying Political Science, Philosophy, and English Literature. She currently lives in Montréal, where she works with a variety of organizations that explore how gender, human rights, and the environment fit into the contemporary political landscape. Get in touch with her at mira[at]starduststartupfactory.org.