According to IMF research, nations and crypto infrastructure providers should transition away from proof-of-work CBDCs.
As per a new report released by the International Monetary Fund, governments considering developing CBDCs should consider energy consumption while making design decisions.
What is the advice of the IMF?
According to the IMF, central banks should “create CBDCs [central bank digital currencies] with the explicit purpose of being ecologically sustainable.” The payments system, including central banks’ legacy systems, consumes a lot of energy. Thus, shifting to renewables across the financial industry should be a priority, according to IMF analysts.
What we are seeing now is a broader realization that if CBDC is going to be an infrastructure, it has to be better than the one we have,” said Carmelle Cadet, CEO of CBDC infrastructure provider EMTECH. “CBDC must be energy efficient in addition to processing payments faster, with better traceability and confidence.”
“To lower the carbon footprint in generating power, major cloud service providers are turning toward renewable sources of energy such as geothermal and hydropower, as well as to areas with colder temperatures,” according to the paper. “Including a cloud partner’s environmental impact as a selection criterion can help the CBDC project and any future central bank digitization effort.”
The IMF also advises countries and crypto firms to move away from energy-intensive proof-of-work systems, a suggestion that some believe may negatively damage user experience.
“Different protocols focus on various priorities…you have trade-offs that might not align to energy efficiency,” Cadet explained.
The report comes as more countries, particularly developing countries, get closer to establishing their own CBDCs, which proponents claim may dramatically improve the lives of people in a mostly cash-based society.
“The most common consideration [for building a CBDC] is to provide a cash-like digital method of payment, in light of declining cash usage and an increase in private digital payment services,” according to a recent report from the Bank for International Settlements. “Strengthening competition among payment service providers (PSPs), enhancing efficiency, and lowering financial service costs are other important factors.”
The status of CBDC across the globe
The Jamaican government has already authorized the CBDC as legal tender. Brazil, Nigeria, and Haiti are among the countries considering establishing or expanding CBDCs. In 2020, the Sand Dollar, issued by the Central Bank of the Bahamas, became the world’s first CBDC.
According to another CBDC expert, with environmental, social, and governance-focused investing and climate change at the forefront of many people’s minds, it’s no wonder the IMF is focusing on how digital assets affect the environment.
“Central banks are thinking about energy, and they should be thinking about energy,” Jonathan Dharmapalan, CEO of eCurrency, a company that helps central banks issue and distribute CBDCs, said. “Energy efficiency isn’t only about how to do it with digital cash; it’s also about the inefficiency of moving real currency, which is a problem.”