Tech

IMF recommends eco-friendly CBDCs and non-PoW mechanisms for payments

06/08/2022
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An International Monetary Fund study on energy consumption has reveale the importance of design choices within the crypto ecosystem to build an environmentally friendly mainstream payment system.

In the study, titled “Digital Currencies and Energy Consumption,” the IMF examines the energy consumption of crypto assets based on their distinct design elements to evaluate the ideal mechanism for developing central bank digital currencies (CBDCs).

Estimates of energy use (in kWh) per transaction for the core processing of different payment systems. Source: IMF

Sharing the groundwork for policy discussions around the environmental impacts of digital currencies, the IMF recommends moving away from proof-of-work-based distributed ledger technology applications, adding:

“In particular, Bitcoin, the best known application of this type, is estimated to consume much energy (about 144 TWh [terawatt-hours]) per year. Although scalability solutions reduce the energy cost per transaction, they do not reduce the overall energy spending.”

However, the international organization acknowledged the high energy efficiency brought about by non-PoW, permissioned crypto assets when compared with the traditional financial system:

“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.”

The IMF recommends the central banks “design CBDCs with the explicit goal to be environmentally friendly.” This means selecting platforms, hardware and design options with “a lower carbon footprint than the central banks’ legacy systems” right from the experimentation phase.

In addition to eco-friendly components, the IMF recommended central banks include other features in CBDCs, such as compliance, higher resilience and offline capabilities.

The IMF also points out that the policymakers will consider the mainstreaming of crypto or CBDCs by weighing the environmental impact of the technology’s underlying design. It estimates that the global payment system’s annual energy consumption stands at 47.3 TWh — roughly matching the yearly consumption of economies like Portugal and Bangladesh.

Joining in the cause to address climate change, the Iota Foundation, a nonprofit DLT ecosystem provider, partnered with Dell Technologies to develop a real-time carbon footprint tracking system.

The initiative will bring about near-real-time tracking of carbon emissions from BioE’s sustainable energy and composting facility. Mathew Yarger, head of sustainability at the Iota Foundation, stated:

“We’re now able to track and verify data around climate change and how we’re actively trying to address it at a level that’s never been achieved before.”