Crypto: IMF speaks out on digital assets

In a publication dated June 7, 2022, the International Monetary Fund spoke out on cryptocurrencies. In it, he establishes the main technological components that determine the energy profile of digital currencies. It relies on academic and industry estimates to compare digital currencies to 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 on environmental impact. Indeed, each transaction entails a significant energy and environmental cost. Nevertheless, the payment system has always been constantly evolving. The document posted 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 the 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 a lower impact, such as those using the Proof-of-stake (Pos) mechanism.

The second element is the level of control that can be exercised over the underlying architecture. For example, control of the number of nodes but also the ability to assign roles to participants, the location of nodes and the ease of updating code. Compared to permissionless systems that allow anyone to join as a validator, permissioned networks allow tighter control of parameters that influence power consumption.

The Pos in the face of current payment systems

Academic studies indicate that non-PoW networks are significantly more energy efficient than current credit card processing centers, in part because the latter incur 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. Conversely, the current system uses physical means of payment such as cash or cards and terminals.

Thus, CBDCs could be designed to use less energy-intensive infrastructure than the current payment system. CBDCs that rely on non-PoW authorized networks could exploit both the efficiencies 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.

The CBDCs facing the environmental issue

Fiat currency versus virtual currency

Distributed Ledger Technology (DLT) is a digital asset transaction recording system in which 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 positive environmental impact will also depend on additional factors.
For example, regulatory and compliance costs can be a significant source of energy expenses. It will also depend on the opportunity and how additional features are deemed necessary. It could be increased resiliency measures or offline payment capabilities. Methodologies and data for the full payment chain assessment are currently underway.

Source : IMF Website

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