In a new Fintech note by IMF on “Digital Currencies and Energy Consumption” noted Central Bank Digital Currencies Design(CBDC) choices have implication on energy consumption. This paper describes how CBDC main components and technologies options impact energy profile of digital currencies using both academic and industry estimates. The paper noted ability to control participation and the consensus algorithm are the main factors affecting energy consumption. The paper argue that Bitcoin by design are energy intensive through proof of work mechanism, there is a path to design digital currency which are more energy efficient.
Executive summary : Payment system is evolving rapidly, with new forms of digital currencies providing opportunities,while fueling debates, including on the environmental costs.1 Whether through the printing,distribution, and disposal of cash or through the processing and maintenance of card or bank payments,
there is an energy and environmental cost to payments, which is nonnegligible. But the payment system is in motion. One key part of the payment system transformation is the rise of crypto assets that rely on cryptography and distributed ledger technologies (DLTs). This paper examines the implications for energyconsumption from different forms of crypto assets based on their distinct design elements. It investigateshow the takeaways from this evaluation can inform the design of environmentally friendly central bank digital currencies (CBDCs)”.The energy consumption of crypto assets can vary greatly depending on two design elements of the supporting DLT network. The first element is the consensus mechanism used to achieve agreement about the present state of the network. Resulting energy needs range from very intensive, as in the case of proof-of-work (PoW) algorithms, such as the one used in Bitcoin, to orders of magnitude lower energy consumption when non-PoW mechanisms are used. The second element is the level of control that can
be exercised on the underlying architecture (for example, control over the number of nodes, ability to assign roles to participants, location of the nodes, and ease of updating code). Compared to permissionless systems that allow anyone to join as a validator, permissioned networks allow for stronger controls on parameters that influence the energy consumption of the core processing infrastructure.
Some design options implemented by crypto assets can allow for higher energy efficiency compared to the current payment system. Academic and industry estimates indicate that non-PoW permissioned networks are significantly more energy efficient than current credit card processing centers, in part because the latter involve energy-inefficient legacy systems. Moreover, these crypto assets can further improve on the traditional payment system in terms of energy consumption because they employ purely
digital solutions rather than physical means of payments (such as cash or cards and terminals).
CBDCs could also be designed to use infrastructures that are less energy intensive than the current payment system. CBDCs that rely on non-PoW permissioned networks could harness the efficiency gains from those networks and from relying on digital means of payments. Depending on the number and location of the nodes of a particular design, CBDCs could further optimize energy use. Non-DLT CBDCs could also be more efficient than the current payment system if central banks select the platform, hardware, and other elements of the CBDC ecosystem with energy efficiency as a criterion.
Such potential for a positive environmental impact will also depend on additional factors. Regulation and compliance costs, for instance, can be an important source of energy spending. It will also depend on whether and how additional features, not commonly part of crypto assets, are deemed necessary for CBDCs, such as increased resilience measures or offline capabilities. Methodologies and data for the full assessment of the payment chain are currently a work in progress.