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.