IMF study Recommends use of Eco-friendly CBDCs to Tackle Environmental Concerns

Key Takeaways

  • IMF paper titled “Digital Currency and Energy Consumption” emphasized the importance of design choices within the crypto market to build an eco-friendly payment system.
  •  IMF recommended shifting from PoW based distributed ledger technology applications owing to their huge energy consumption

The International Monetary Fund(IMF), in its study titled “Digital Currency and Energy Consumption,” recommended the use of eco-friendly central bank digital currency(CBDC). The study, which establishes the main components and technological options that determine the energy profile of digital currencies, emphasises the importance of design choices within the crypto ecosystem to build an eco-friendly payment system.

In the paper, IMF recommended shifting from proof-of-work (PoW) based distributed ledger technology applications stating that the potential of non-PoW permissioned crypto assets to reduce energy consumption is higher. The study examined the environmental implications of different implementations of CBDCs by studying consumption patterns of crypto assets based on their distinct design elements.

According to IMF, the paper was aimed at evaluating the ideal mechanism for developing central bank digital currencies without huge energy consumption. The IMF, while acknowledging the high energy efficiency brought about by non-PoW, permissioned crypto assets, stated that PoW assets like Bitcoin are energy extensive, consuming about 144 TWh per year. The regulator authority states that although scalability solutions reduce the energy cost per transaction, they do not, however, reduce the overall energy spending of PoW crypto assets.

Besides bringing attention to the energy consumption involved in crypto mining, IMF in its paper also suggested central banks to include certain features in CBDCs, such as compliance, higher resilience, and offline capabilities. The financial regulator giant wants central banks to design CBDCs keeping in mind the environment; This includes choosing platforms, design options, hardware, and software with the least carbon footprint right from the experimentation phase.

The IMF also points out that the policymakers will consider mainstreaming CBDCs after weighing the environmental impact of the technology’s underlying design. The Agency states that the global payment system’s annual energy consumption is around 47.3 TWh — roughly matching the yearly consumption of economies such as Portugal and Bangladesh.

IMF’s suggestions come amid a time when the crypto community has been taking a more proactive stance towards reducing energy consumption. Green Bitcoin mining using renewable energy and efficient carbon footprint tracking systems are suggestions put forth by many crypto enthusiasts worldwide.

Saniya Raahath
Saniya Raahath

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