Most of the world’s central banks have already agreed that they should help tackle climate change, a major challenge that requires reducing energy use, which is our focus, and the carbon emissions associated with energy use.
To achieve these goals, it is important to focus on the energy consumption of payment systems that are regulated and monitored by central banks. Monetary authorities now have a unique opportunity to improve efficiency as the way people pay is changing rapidly around the world. Digital currencies, from crypto assets to central bank digital currencies, can play a role in shifting the imagination of policymakers.
With the desire to limit energy use comes the need to understand what drives it. Policymakers ask researchers like us many questions that have yet to be fully explored. This includes how crypto assets compare to existing payment systems, what factors affect a network’s energy consumption, and how new technologies can make payments cleaner and greener.
Digital currency and energy coverage often highlights Bitcoin, which is notorious for its reliance on raw computing power and electricity. Our new paper goes beyond these discussions by revealing the key components and technical options that drive the energy profile of digital currencies.
We use academic and industry estimates to compare digital currencies to each other and to existing payment systems. The research sits at the intersection of digital currencies and climate change, two key issues for policymakers, and the findings are particularly relevant to many central banks planning new digital currencies while considering their environmental impact. are in. Our research shows how technological design choices for digital currencies make a big difference to their energy consumption.
Depending on the specific details of their configuration, CBDCs and certain types of crypto assets can be more energy efficient than the current payments landscape, including credit and debit cards. Credit and debit cards are important for the comparison because they account for nearly three-quarters of non-cash transactions, according to the latest Red Book data from the Bank for International Settlements.
Our insights into energy efficiency come from an in-depth look at emerging technologies that are disrupting the way consumers shop and send money around the world. Digital currencies often rely on distributed ledgers to validate and record transactions. How much energy they consume in these cases depends mainly on two factors:
- The first is how network participants agree on transaction history. Some crypto assets like Bitcoin use a proof-of-work consensus mechanism that requires significant computing power and energy to obtain the right to update transaction traces. Other cryptotypes use other methods for their ledger updates that don’t require much computing power.
- The second is access to distributed ledger systems. Some of these are permission-free, allowing anyone to participate in and validate transactions. Access for others requires approval from a central authority, which provides greater control over important aspects of energy consumption, such as the number of network participants, their geographic location, and software updates.
Our study on the energy consumption of digital currencies is based on estimates from academia and industry for various processing technologies. Research shows that proof-of-work crypto uses much more energy than credit cards. Replacing proof of work with other consensus mechanisms is the first green leap for crypto, and using approved systems is the second. Together, these advances have significantly reduced crypto’s energy consumption compared to credit cards.
But payment systems are more than just processing technologies. The total energy consumption varies depending on the technology, the size of the payment chain and other additional features.
Such views resonate with central banks considering digital currencies. Many CBDC projects are based on energy-efficient distributed ledger systems, where only licensed institutions such as commercial banks can be involved and validated without proof of work.
Other non-distributed ledger options are also being considered, some of which are seen as promising from an energy consumption perspective. This means that CBDCs have the potential to reduce the power demand for digital payments and even be more energy efficient than the now widely used credit card networks.
CBDCs are still in their infancy and it’s hard to gauge how far and how fast they can travel, but it’s clear that central banks will introduce new technologies that will affect the use of electricity. Your energy savings potential depends on use in conjunction with other design features that can be combined to comply with regulations, support security and integrity, or facilitate universal access.
For example, some central banks are considering accessing CBDCs via physical cards such as credit cards. Card payments consume more energy than digital wallet payments, which is how most crypto transactions are conducted. However, cards can help drive adoption and inclusion, especially when digital literacy or mobile network connectivity is an issue.
As payment systems increasingly use distributed ledgers, there is a clear case for more energy-efficient alternatives that have been approved and do not rely on proof-of-work mechanisms. And although the debate about the future of money is still in its infancy, using electricity is just one of many ideas. Policymakers need to balance energy needs with other benefits and risks when designing a CBDC or considering the regulatory environment for crypto.
—This art also shows the research contribution of Joseph Deodoro, Soledad Martinez Peiria, Damian Sandrik and herve türpe,
*About the author:
- Italy guide He is a senior economist in the research department of the IMF. He previously worked in the IMF’s Strategy, Policy and Review Department, where he participated in IMF missions to Canada and Mongolia and at the IMF’s Singapore Regional Training Institute.
- Xavier Lavesiere is a Digital Finance Specialist and works in the Digital Advisory Unit of the Department of Information Technology. He focuses on the intersection of technical architecture, policy goals and regulations for the new digital financial infrastructure.
- German Villegas Bauri There are economists in the macrofinance department of the IMF research department. His research interests include institutional investors, financial markets, fintech and climate change.
Source: This article was published by the IMF Blog