Home Digital Currencies CBDC tech vendors could compete on energy impact: IMF paper

CBDC tech vendors could compete on energy impact: IMF paper

CBDCs and energy usage: the suggestion that tech suppliers compete on energy impact is among ‘several possible policy lines’ in the 31-page paper | Credit: lacasadicomo; Pixabay

Central banks considering introducing a digital currency could encourage technology suppliers to compete on the energy impact of their platforms, a paper published by the International Monetary Fund (IMF) has suggested.

The ‘Digital Currencies and Energy Consumptions’ paper, published as part of the IMF’s ‘Fintech Notes’ series, explores the implications for energy consumption from different types of crypto assets based on their design and offers suggestions on the design of ‘environmentally friendly’ central bank digital currencies (CBDCs).

The suggestion that tech suppliers compete on energy impact is among ‘several possible policy lines’ in the 31-page paper, which draws on academic and industry estimates to compare digital currencies to each other and to existing payment systems, and derives implications for the design of ‘green’ CBDCs.

Central banks could design CBDCs with the explicit goal to be environmentally friendly, the paper notes in its conclusions. ‘For example, central banks could select new platforms, hardware and design options that are expected to have a lower carbon footprint than the central banks’ legacy systems,’ it states, adding that ‘this could be included in contracts with third parties such as cloud service providers’.

‘Because CBDC technologies are still emerging, central banks have a window of opportunity to influence the industry by encouraging vendors to compete on the energy impact of their platforms. Other desirable features that central banks could decide to incorporate in CBDCs, such as compliance, higher resilience or offline capabilities, will have a say in whether this potential positive environmental impact is ultimately achieved,’ states the paper, which is co-authored by seven IMF staff members.

G7’s CBDC public policy principles

CBDCs are of growing interest to most governments and monetary authorities worldwide. CBDCs such as the Bahamas’ Sand Dollar and Nigeria’s eNaira are already live, while the US Federal Reserve, European Central Bank (ECB – for the eurozone) and Bank of England are all stepping up their interest. A Bank for International Settlements paper, published in May, revealed that 68 per cent of central banks (of 81 surveyed) consider themselves ‘likely to’ or ‘might possibly’ issue a retail CBDC in the short or medium term.

‘Energy and Environment’ was included among 13 public policy principles for the implementation of retail CBDCs published by the Group of Seven (G7) nations last October. Principle number eight stated that ‘the energy usage of any CBDC infrastructure should be as efficient as possible to support the international community’s shared commitments to transition to a “net zero” economy’.

‘With increasing digitalisation, IT infrastructures facilitating the storage, processing and transfer of information and value are becoming an important global user of energy,’ the G7 document noted. ‘CBDCs present the opportunity to set a marker for how future payment and settlement ecosystems are designed for optimal energy efficiency, including through utilising carbon-neutral and sustainable energy sources, whilst achieving necessary functional, performance and resilience aims.’

The G7 document added that energy usage ‘should be factored into the design and implementation of any CBDC from the outset’ and that central banks publishing climate-related disclosures should consider disclosure of the environmental impact of CBDC operations in their reporting.

Programmability’s possibilities

It is likely to be years yet before many major jurisdictions commit to launching a CBDC and the IMF paper states that CBDCs’ environmental impact ‘depends on various design parameters on which the coming years will bring greater clarity’.

During this period the paper’s authors note that it will ‘become clearer what added facets are common across countries, how these may affect the carbon footprint of this new form of digital money, and to what extent central banks can design these facets with environmental aims in mind.’

It suggests that programmability features of digital currencies, for example smart contracts, could ‘support precise policies such as incentivisation of climate-friendly behaviours by users and environmental impact accounting’.

*** Separately, a largely sceptical take on the prospects for CBDCs has been published by the Centre for European Reform. ‘Why would anyone use a central bank digital currency?’ – a five-page paper authored by Zach Meyers, a senior research fellow at the think-tank – argues that CBDCs ‘may sound exciting… but may offer users few compelling benefits that they do not already enjoy’ and that ‘central banks will struggle to rollout CBDCs that will be widely adopted’.