From a global perspective, Central Bank Digital Currencies (CBDCs) have gained significant popularity. In the last half-year, almost every G20 country has poured billions into these projects. In a new report, Juniper Research anticipates an explosion in the global value of CBDCs. It will increase from $100 million today to an incredible $213 billion by 2030. As these new digital currencies continue to develop, we need to be asking important questions about their environmental impact.
As the Bank for International Settlements (BIS) notes, there are four central design areas that must be considered when developing CBDCs. Look at how the legal claims are structured. Second, choose an RTGS system or blockchain. You’ll need to decide account-based or token-based approach, and whether you want to position for wholesale or retail use. The International Monetary Fund emphasizes the importance of considering energy consumption in these design choices, aligning with global climate change efforts.
This article takes a closer look at the environmental impacts of CBDCs. To that end, it examines the electricity use that would result from various CBDC designs and compares this to legacy payment rails and cryptocurrencies. Policymakers and developers should consider these impacts in order to make choices that will lead to environmentally sustainable digital currencies.
Pioneering CBDCs and Environmental Considerations
In 2020, the Central Bank of The Bahamas introduced the Sand Dollar. This momentous occasion was the world’s first central bank digital currency (CBDC) to progress from testing in a pilot phase to an official, full scale launch. In Sweden, the Riksbank began its pilot phase of the e-krona token back in 2021, running simulations to assess the feasibility of its transactions. By April 2022, the Riksbank had achieved an impressive offline functionality test. During the second phase, they connected commercial banks and other payment service providers to the CBDC network. These initial adopters provide us with a treasure chest of data as to what CBDCs will look like in real world applications.
The European Central Bank (ECB) expresses these fundamental principles in its 2020 Report on a digital euro. It focuses on accessibility, robustness, safety, efficiency, and privacy, all the while doing its part to lower the ecological footprint. This commitment is formalized as Requirement 7b (R7b): Environmentally friendly.
Together, these initiatives represent a burgeoning recognition of the environmental effects of digital currencies. As CBDCs move forward, designing and operationalizing them in the most sustainable way will be tremendously important.
Energy Consumption: CBDCs vs. Traditional Payments and Cryptocurrencies
Gaining a better understanding of how payment method affects energy consumption will be critical for assessing the environmental impact of any future CBDCs. We found that card payments use 47 times less energy than other payment methods. They only use 0.0006 KWh to 0.0008 KWh, depending on the provider. This short time frame means that card payments are much more environmentally friendly than some of their digital counterparts.
Cryptocurrencies like Bitcoin have come under fire for their excessive energy usage. United Nations University and Earth’s Future just made a jaw-dropping study public. In fact, the international Bitcoin mining network used more electricity than nearly any country on earth in 2020 and 2021 — upwards of 173.42 Terawatt hours. To understand how much energy this is, Bitcoin’s forecasted annual energy consumption would equal the height of Merdeka 118, the world’s second-tallest building. In contrast, Ethereum 1.0’s energy consumption has been likened to that of the London Eye, one of the world’s largest observation wheels.
Ethereum switched to a Proof of Stake (PoS) consensus mechanism in September 2022, reducing energy consumption by 99.9%. This moves to show that with the right technological advancements, we can greatly reduce the environmental impact associated with digital currencies. Depending on design choices, the energy consumption of CBDCs could be substantial. Two key factors are the consensus mechanism and infrastructure.
Sustainable CBDC Design: Key Considerations
Here are four key factors that impact the environmental effects of CBDCs. Then, you decide what technology will underlie the digital currency. You decide which consensus mechanism you’ll use to validate transactions and create the underlying infrastructure. By thoughtfully addressing these issues, policymakers and developers can design CBDCs that are efficient and environmentally friendly.
One important factor is whether or not a centralized vs. decentralized system. Centralized systems, where a central authority maintains control over the currency, tend to be much more energy-efficient than decentralized, trustless systems like Bitcoin. Decentralized systems provide these additional advantages as well, including enhanced security and transparency.
Another important factor is the consensus mechanism. Proof of Work (PoW) mechanisms – like the one used by Bitcoin – require a huge, and growing, level of energy consumption. They solve complex equations to confirm transactions are legit. By way of comparison, Proof of Stake (PoS) mechanisms, such as those employed by Ethereum post-merge, use 99.95% less energy. Selecting a PoS mechanism, or another energy-efficient alternative, is one way to significantly lower a CBDC’s environmental impact.
