A growing number of countries and institutions proclaim climate change as a defining issue of our time. Intergovernmental agencies such as the UN have highlighted this, and it is regularly the most urgent talking point on the global agenda at events such as the World Economic Forum. Meanwhile, Web3 technology is reforming information technology to represent our lives virtually and to ease the transfer of value with stronger, trustless mechanisms. Mainstream banking must embrace this technology as part of the growing wave of technological innovations aiming to solve traditional challenges, including the current climate crisis.
This presents a once-in-a-lifetime opportunity to put forth a resilient, inclusive, environmentally and ecosystem-friendly Central Bank Digital Currency (CBDC) infrastructure design. A CBDC as a critical piece of societal infrastructure is a new concept, but for millions of unbanked people around the world, it can change lives. Additionally, the concept of a “Green CBDC” is quickly becoming popular, and central banks, which will need to embrace future-proofing approaches, should consider the additional necessity of rebuilding their systems with sustainability in mind from the beginning.
Leveraging CBDC as a low-energy digital cash infrastructure instead of printing paper cash is only one factor in its potential for sustainability. Structuring Green Finance initiatives such as Green Bonds or tokenizing natural resources that can be accurately measured but not easily transported are both possible with CBDC trust mechanisms, allowing traditional enterprises a chance to be climate-friendly architects in banking. These innovations were impossible not too long ago, but this new era of technology brings new possibilities to old problems.
Some decentralized protocols prioritize “privacy,” as they define it, while others prioritize embedded legal execution. Many, however, use proof-of-work systems of consensus which consume fossil fuels at unsustainable rates and pump carbon into the atmosphere; even proof-of-stake models are guilty of gas usage and fluctuating gas fees.
The International Monetary Fund, a significant institution for many countries and their central banks, recently published a report on CBDCs. It correctly highlighted that central banks should select vendors that use energy efficient software stacks as they adopt CBDC technology. In creating a CBDC infrastructure, enterprises should choose a more sustainable consensus protocol to mint and validate transactions, such as a gossip-based consensus system. This cost-efficient solution ensures that companies are not building green infrastructure on a carbon crisis foundation.
Distributed ledger technology (DLT) is rapidly evolving beyond the blockchain-based protocols like Bitcoin and Ethereum, which were pioneers in the space. Next generation DLT shows that there are options beyond Proof-of-Work and Proof-of-Stake for building a high-performance, energy efficient CBDC infrastructure.
Climate-friendly technology infrastructure can be a powerful tool for economic development, financial inclusion, and sustainability. Banks must adopt operational solutions to innovation that put modern central banking on the path to a ‘low carbon’ future as the world goes digital.