How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems

IMF Blog, June 17, 2022

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Canonical URL: How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems

Authors: Itai Agur, Xavier Lavayssière, Germán Villegas Bauer
Date: June 17, 2022
High-level point: Environmentally conscious design can make a major difference in the energy efficiency of digital currencies.
Policy relevance: Most of the world’s central banks have already agreed they should help fight climate change; reducing energy consumption and associated carbon emissions is a central concern tied to payment-system design.

Payment-system energy use depends on technology choices, payment-chain size, and additional features.
For distributed-ledger–based digital currencies, two main factors determine energy use:
- How network participants agree on transaction histories (consensus mechanism).
- Example: proof-of-work consensus mechanisms (as used by some crypto assets like Bitcoin) require substantial calculation power and energy.
- Alternative consensus mechanisms do not require as much computing power.
- Access model to the distributed-ledger system.
- Permissionless systems allow anyone to join and validate transactions.
- Permissioned systems require authorization from a central authority and enable greater control over the number and location of participants and software updates.

Research draws on academic and industry estimates to compare digital currencies, crypto assets, and existing payment systems.
Proof-of-work crypto uses vastly more energy than credit cards.
Replacing proof-of-work with other consensus mechanisms is a first green leap for crypto.
Using permissioned systems is a second green leap.
Together, non-proof-of-work consensus mechanisms plus permissioned architectures can put crypto’s energy consumption well below that of credit cards.
Depending on configuration, CBDCs and some kinds of crypto assets can be more energy efficient than much of the current payment landscape, including credit and debit cards.
Credit and debit cards account for about three-quarters of cashless transactions (according to the most recent Red Book statistics from the Bank for International Settlements).

Many CBDC projects build on energy-efficient distributed-ledger systems under which only permissioned institutions like commercial banks can join and validate without proof-of-work.
Other non-distributed-ledger options are also being considered and can be promising from an energy-consumption standpoint.
CBDCs have the potential to reduce the power needs for digital payments and even be more energy efficient than widely used credit card networks.
Energy-saving potential of CBDCs will depend on additional design features chosen for compliance, security and integrity, or universal access.

Card payments use more energy than digital-wallet–based payments (the latter is how most crypto transactions are made).
Physical card access for CBDCs can increase energy use but may aid adoption and inclusion where digital literacy or mobile network connectivity are limited.
Power use is one among many considerations; policymakers should weigh energy needs alongside other benefits and risks when designing CBDCs or regulating crypto.

The blog synthesizes academic and industry estimates on processing technologies and energy use.
Additional research contributions: Jose Deodoro, Soledad Martinez Peria, Damiano Sandri and Hervé Tourpe.

IMF Blog: How Crypto and CBDCs Can Use Less Energy Than Existing Payment Systems