In a publication dated June 7, 2022, the International Monetary Fund talked about cryptocurrencies. In it, he establishes the main technological components that determine the energy profile of digital currencies. It relies on academic and industry assessments to compare digital currencies against each other. According to the IMF, if cryptocurrencies like Bitcoin are considered polluting, other initiatives could be more environmentally friendly than existing payment systems.
The impact of the payment system on the environment
The IMF makes the following observation: Payment systems are changing rapidly and methods are diversifying as technology becomes part of our society. New forms of digital currencies offer opportunities while fueling debates about environmental impact. Indeed, each transaction entails significant energy and environmental costs. However, the payment system has always been constantly evolving. The document published by the IMF aims to examine the impacts of different forms of crypto-assets on energy consumption. Also, the document is intended to be useful for the design of environmentally friendly central bank digital currencies (CBDCs).
Environment: polluting elements
The power consumption of cryptocurrencies can vary significantly depending on two design elements. The first element is a consensus mechanism used to reach agreement on the current state of the network. The resulting energy requirements can be very large, as in the case of Proof-of-work (PoW) algorithms. Such a mechanism is used when it comes to Bitcoin. Others have less impact, such as those using a Proof-of-Stake (Pos) mechanism.
The second element is the level of control that can be exercised over the underlying architecture. For example, the control of the number of nodes, but also the possibility of assigning roles to participants, the location of nodes and the ease of updating the code. Compared to permissionless systems that allow anyone to join as a validator, permissioned networks allow tighter control of parameters that affect energy consumption.
Position in relation to current payment systems
Academic studies show that non-PoW networks are more energy efficient than current credit card processing centers, in part because the latter have significant energy costs. Furthermore, these cryptocurrencies can further improve the traditional payment system in terms of energy consumption. Indeed, the latter use purely digital solutions. In contrast, the current system uses physical means of payment such as cash or cards and terminals.
Therefore, CBDCs could be designed to use less energy-intensive infrastructure than the current payment system. CBDCs that rely on non-PoW authorized networks could benefit from both the efficiency of these networks and the use of digital means of payment. Depending on the number and location of nodes, CBDCs could further optimize energy use.
CBDCs face an environmental problem
Distributed Ledger Technology (DLT) is a digital asset transaction recording system where transactions and their details are recorded in multiple places at the same time. Non-DLT CBDCs could be more efficient than the current payment system if central banks choose the platform, hardware and other elements of the CBDC ecosystem with energy efficiency in mind.
This potential for a positive impact on the environment will also depend on additional factors.
For example, regulatory and compliance costs can be a significant source of energy costs. It will also depend on the occasion and how additional features are deemed necessary. These could be measures of increased resilience or offline payment capabilities. Methodologies and data for a full assessment of the payment chain are currently in progress.
Source: IMF website
Receive a digest of news from the cryptocurrency world by subscribing to our new daily and weekly newsletter so you don’t miss anything important from Cointribune!
I oppose the angelism of the representatives of the current monetary system with DeFi, digital assets and the metaverse. A lawyer in Luxembourg, I am interested in cryptocurrency investment funds.
