Central banks must design CBDCs to be explicitly environmentally friendly: IMF

In a study titled “Digital Currencies and Energy Consumption”, the International Monetary Fund evaluated the impact of design elements of crypto assets on their energy consumption in order to develop an ideal framework for a mainstream central bank digital currency (CBDC).

The report brings to light the significance of making the right design choices on the overall environment-friendliness of the crypto ecosystem and its ability to go mainstream.

With the intention of facilitating further policy discussion on the current impact of crypto on green consumption, IMF recommends against the use of proof-of-work-based distributed ledger technology applications.   

Highlighting Bitcoin’s energy consumption of about 144TWh per year, the report pointed out that while scalability solutions reduce the energy cost per transaction, they do not affect the overall energy spending.

The organisation also recognised the potential and energy efficiency of non-PoW, permissioned crypto assets:

“The potential of non-PoW permissioned crypto assets to reduce energy consumption relative to the existing payment system comes about from energy savings on both core processing architectures and user payment means.”

With the increasing interest of countries in developing their very own digital currencies, the IMF advised central banks to design CBDCs with the explicit goal of being environmentally friendly. This, according to the report includes but is not limited to selecting platforms, hardware and design options that come with a lower carbon footprint that the mechanisms traditionally being used by the central bank.

The report added that the green component of implementing the CBDC must be looked into right from the experimentation phase itself. The IMF also recommended that central banks integrate compliance, higher resilience, offline capabilities and other such features during the development of CBDC. 

Policymakers will weigh the environmental impact of cryptocurrencies and CBDCs and their underlying technology while considering their utility for mainstream adoption, the report concluded.