An estimated 18 million Americans are invested in cryptocurrency, according to the Federal Reserve. And the United States just elected a pro-crypto president.

Cryptocurrencies such as Bitcoin have become a trendy digital asset. Supporters claim that crypto subverts capitalism because it bypasses traditional bankers. Crypto can offer quick riches along with an air of high-tech sophistication.

Early adopters reaped enormous rewards, many becoming millionaires and billionaires.

Currently, there are about 100,000 crypto millionaires. Cryptocurrency wealth, furthermore, has built Fairshake, the largest political lobbying group in the U.S. During the recent election, it helped elect 253 pro-crypto candidates.

But is cryptocurrency a good ethical investment?

As a business professor who studies technology and its consequences, I’ve identified three ethical harms associated with cryptocurrency that might give investors pause.

The three harms

The first harm is excessive energy use, most notably by Bitcoin, the first decentralized cryptocurrency.

Bitcoins are created, or “mined,” by tens of thousands of computers in massive data centers, contributing significantly to carbon emissions and environmental degradation. Bitcoin mining, which represents the lion’s share of crypto energy consumption, uses as much as 0.9% of global demand for electricity – similar to the annual energy needs of Australia.

Second, unregulated and anonymous crypto is the payment system of choice for criminals behind fraud, tax evasion, human trafficking and ransomware – the latter costing victims an estimated $1 billion in extorted cryptocurrency payments.

Until about a decade ago, these bad actors generally moved and laundered money through cash and shell companies. But around 2015, many transitioned to cryptocurrency, a much less troublesome form of handling dirty money anonymously.

A bank cannot hold or transfer money anonymously. By law, a bank is passively complicit in money laundering if it isn’t enforcing know-your-customer measures to restrict bad actors, such as money launderers.

In the case of a crypto coin, however, legal and ethical accountability cannot be transferred to a bank – there is no bank. So, who is complicit? Anyone in the crypto ecosystem may be viewed as ethically complicit in enabling illicit activities.

I believe these first two harms are the most ethically troublesome. The first one harms the Earth and the second undermines global systems of trust – the interplay of institutions that underpin economic activity and social order.

Cryptocurrency’s third problem is its predatory culture.

A predatory system, especially without regulatory oversight, takes advantage of small investors. And some cryptos have enriched their founders while taking advantage of investors’ lack of knowledge about the virtual currency.

Some cryptocurrencies, especially the smaller coins and initial coin offerings, have characteristics of Ponzi schemes.

The now defunct Bitconnect, for example, promised large profits to investors who exchanged their Bitcoins for Bitconnect tokens. New investor money paid out “profits” to the first layer of investors with money from later investors.

Ultimately, Satish Kumbhani, the Bitconnect founder, was indicted by a federal grand jury, and as of 2024 his whereabouts are unknown.

Pernicious myth

Besides cryptocurrency’s ethical harms, a pernicious myth surrounds the digital coin. It is the myth of inclusion, that cryptocurrency has the power to benefit society’s disadvantaged, especially the unbanked.

The global poor who don’t have bank accounts, and who could use cryptocurrency for international money transfers to family back home, do not necessarily benefit from crypto’s advantages. That’s because of the need to pay fees when converting and transferring, say, dollars to crypto and then from crypto to the local currency of the person receiving the money transfer.

In reality, the distribution of crypto assets is highly concentrated among the wealthy. A 2021 study found that just 0.01% of Bitcoin holders control 27% of its value.

Democratizing finance is often framed as a movement to break the dominance of traditional financial institutions – private banks and government central banks. However, this narrative has not played out.

Instead, a new elite has emerged: cryptocurrency’s creators, early backers and maintainers, who tweak the crypto’s software code and influence its future direction. This group holds disproportionate control, including over the crypto coin’s governance. All of this replicates the concentration of power that crypto was meant to dismantle.

A bit more ethical?

To be fair, the crypto community hasn’t ignored the criticism, including calls for more environmental awareness.

In early 2021, members of the community founded the Crypto Climate Accord. The group enlisted some 250 crypto firms to reduce environmental harm.

The following year, Ethereum, with its Ether coin, took the most significant step. It reduced its energy consumption by over 99% by migrating to a coin mining mechanism called “proof-of-stake,” which doesn’t require miners to solve complex, energy-guzzling puzzles to validate transactions.

This was a brave move. However, Bitcoin, the largest cryptocurrency, hasn’t followed Ethereum’s lead. Bitcoin stands out because its energy consumption surpasses any other crypto coin.

To address cryptocurrency’s other harms, some regulatory bodies began controlling the crypto market in 2023. The European Union, United Kingdom and United States began attempting to curb illegal activities and protect investors.

In January 2024, U.S. regulators permitted exchange-traded funds, which are popular investment funds, to invest in crypto. This move was meant to help small investors trade in a safer marketplace.

But normalizing crypto trading can create perverse ethical repercussions.

For example, the most successful 2023 “ethical” fund, Nikko Ark Positive Change Innovation Fund, prospered with a 68% return because it made a bet on crypto. Its manager rationalized this investment by repeating the myth that cryptocurrency allows “provision of financial services to the underbanked.”

Where does all this leave the ethical investor?

Investors, I believe, have two clear ethical choices on cryptocurrency: They can divest from Bitcoin or, at the very least, invest in other cryptocurrencies that minimize harms, especially harms that jeopardize the environment.

But even so-called ethical investments come with hidden ethical issues.

Many ethical investors invest in so-called ESG funds that stress social or environmental impact. Some of these ESG funds may avoid shares in petroleum companies while investing directly or indirectly in crypto.

This doesn’t seem ethically consistent.

While cryptocurrency offers exciting opportunities and the potential for high returns, its environmental impact, association with illegal activities and predatory nature all present significant ethical challenges.

Erran Carmel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.