An International Monetary Fund (IMF) study on energy consumption revealed the importance of design choices within the crypto ecosystem to build an environmentally friendly mainstream payment system.
In the study entitled “Digital Currencies and Energy Consumption,” the IMF examined 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 recommended moving away from proof-of-work (PoW)-based distributed ledger (DLT) applications, adding:
“In particular, Bitcoin (BTC), the best-known application of this type, is estimated to consume much energy (about 144 terawatt-hours (TWh)) 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 to 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.”
Drawing a conclusion from the study, the IMF’s recommendation to the central banks is to “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, central banks were recommended to include other features in the CBDCs, such as compliance, higher resilience and offline capabilities.
The IMF also pointed out that the policymakers will consider the mainstreaming of crypto or CBDCs by weighing the environmental impact of the technology’s underlying design. In the study, IMF estimated that the annual energy consumption by the global payment system stands at 47.3 TWh — roughly matching the yearly consumption of economies like Portugal and Bangladesh.