Financial institutions can use Web3 technologies to index money to natural resources, thus putting sustainability and environmental protection at the forefront.
As far as money is concerned, we have mainly focused on its functionality – its usefulness as a medium of exchange, store of value and unit of account. Historically, we have shown naivety and carelessness about the way money has been represented throughout the ages, from animal skins and shells to today’s paper and precious metal coins. In general, however, money does not evolve much over the centuries. If we regard it as technology – an application for practical uses – money serves the same purposes today as it did in the 17th century.
Interestingly enough, and given that we do everything to innovate almost every aspect of daily life, monetary innovation was mostly forgotten.
In a world where the focus is on making almost everything better, easier, and more sustainable, how do you explain that money has not received the same attention? Why haven’t we improved the money? And why don’t we take their negative impact on the environment into consideration?
As we find out more and more about the many devastating effects of climate change, there is an urgent need for collective efforts to make environmental protection a central feature of the global financial system, including capital flows. One way to do this is to issue digital currencies responsibly, through sustainable blockchains. Not all blockchain technology contributes to environmental degradation. In fact, it may enable ecologically responsible transactions with the possibility of reversing the effects of climate change, rather than contributing to this crisis.
“Money usually has a high cost.” – Ralph Waldo Emerson
The environmental problem of money
When we hear the words “economic health” we immediately think of the state of the economy. A healthy economy means GDP growth, high employment levels, and consumer confidence. Throughout the world, good economic health is defined by increased production and consumption. But this definition does not take into account the high costs to the planet that a glow economy brings. It ignores the waste that results from a good economy and the financial framework that allows the easy movement of money across borders and seas. In our current economic system, we dismiss the costs of pollution and overconsumption of natural resources.
It is time to assume that money and the day-to-day operations of the global financial system, including the vast flows of capital that circulate through it, contribute heavily to the current ecological crisis. The greenhouse gas emissions associated with “investment, credit and underwriting activities of financial institutions are, on average, above 700 times higher than its direct emissions“, according to a report released in April by the CDPa non-profit organization that supports, through research, the creation of a sustainable economy.
Physical money blindly follows everything the economy does – it works as a lubricant and its supply expands and contracts in order to meet the needs of the economy. It offers no functionality that meets the ecological costs of its use. Digital currencies, however, can be “smart” in this respect. In addition to serving the monetary needs of the economy, they can serve other needs, including environmental protection and ecological regeneration.
Creating sustainable currencies and financial processes on the blockchain
Blockchain technology can and will change the world. That. we are right, since it allows us to innovate in the way we transact on a daily basis. Thanks to blockchain technology, we can create cryptocurrencies that, when widely adopted, can help reverse our current ecological crisis.
Currently, smart contracts and reservation algorithms such as those used in the Celo blockchain can enable the emergence of stablecoins indexed to natural capital. This mechanism could help sustain a monetary system in which economic growth – and the increased circulation of stablecoins – would lead to the preservation and regeneration of natural resources. Although the technology is recent to many, the original idea of currencies indexed to natural capital was introduced by Charles Eisenstein in his book “Sacred Economics”.
Eisenstein noted that since the value of money is derived from whatever commodity serves as its “standard” of valuation, people will always want to create such commodities. For example, when money was pegged to gold, people ran to mine it considering how valuable it was. Gold was money. Similarly, when cattle functioned as the standard for money, people had the incentive to increase cattle production. And why not, Eisenstein proposed, index money to things that
we value and which are increasingly scarce – virgin forests, clean rivers, etc.
Why not, indeed?
Embracing the economy of the future
The world must embrace a new perspective on economic health, assessing not only production and consumption, but also how the global financial system affects the state of our planet. If we prioritize long-term ecological sustainability through the use of emerging technologies like blockchain, we can go beyond sustainability and even regenerate the planet.
Learn more about how Celo and other financial and economic organizations are joining forces to fight climate change through initiatives like the Climate Collective.
Dr. Slobodan Sudaric is a partner at cLabs, where he leads the regenerative economy team and coordinates the Climate Collective initiative. His work focuses on reserve management and tokenization of assets in the intersection between cryptography, economics and climate technology Before entering the cryptographic space, Slobodan worked with NERA Economic Consulting, where he provided advisory services to companies, law firms and public entities in antitrust economics, regulation and market creation with a focus on the energy sector. He has a PhD in industrial economics and applied theory of games from Humboldt University Berlin, and a master's degree in financial economics from the London School of Economics.
Dr. Markus Franke is a partner at cLabs and co-creator of Celo. Celo's mission is to build a financial system that creates the conditions for prosperity - for everyone. Markus' work focuses on research, platform economics and stability. He has been working at the intersection of finance, economics and research for over 15 years in several organizations such as JPMorgan, Merrill Lynch, risklab, AllianzGI and several research institutions, such as the University Ludwig-Maximilians of Munich, Columbia Business School in New York and the University of Science and Technology in Hong Kong. He has a PhD in Economics.
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