Central banks must design CBDCs to be explicitly environmentally friendly: IMF

In a study titled “Digital Currencies and Energy Consumption”, the International Monetary Fund evaluated the impact of design elements of crypto assets on their energy consumption in order to develop an ideal framework for a mainstream central bank digital currency (CBDC).

The report highlights the importance of making the right design choices on the overall eco-friendliness and potential of the crypto ecosystem to go mainstream.

With the intention of facilitating further policy discussion on the current impact of crypto on green consumption, the IMF recommends against the use of proof-of-work-based distributed ledger technology applications.

Highlighting bitcoin’s energy consumption of around 144TWh per year, the report noted that scalability solutions reduce energy costs per transaction, but they do not affect overall energy expenditure.

The organization also recognized the potential and energy efficiency of non-PoW, permitted crypto assets:

“The ability of non-PoW permitted crypto assets to reduce energy consumption relative to existing payment systems comes from energy savings on both the core processing architecture and user payment instruments.”

With countries increasingly interested in developing their own digital currencies, the IMF advises central banks to design CBDCs with the clear goal of being environmentally friendly. According to the report, this includes, but is not limited to, choosing platforms, hardware and design options that come with a low carbon footprint, which are mechanisms traditionally used by central banks.

The report states that the green component of implementing a CBDC should be observed from the pilot phase itself. The IMF has also recommended that central banks integrate compliance, high flexibility, offline capabilities and other such features during the development of CBDCs.

The report concludes that policymakers will consider the environmental impact of cryptocurrencies and CBDCs and their underlying technology as their utility for mainstream adoption.