Most central banks worldwide have already decided they should support efforts to combat climate change, a serious issue that calls for reductions in energy consumption, which is the topic of this article, and carbon emissions caused by that consumption.
It’s critical to consider how much energy is needed by the payment systems that central banks oversee and regulate to achieve these goals. The ability of monetary authorities to increase efficiency is now more critical than ever as the world’s payment systems experience rapid development. The revolution policymakers desire can be facilitated by digital currencies, including those issued by central banks and crypto assets.
Understanding what causes energy usage is necessary to reduce it. Researchers like us are faced with several unanswered questions from policymakers. These include how crypto assets compare to current payment methods, what factors affect how much energy networks consume, and how new technologies can make payments more efficient and environmentally friendly.
Bitcoin, notorious for relying on unrefined computational power and electricity, is frequently featured in news coverage of digital currencies and energy. Our new research goes beyond existing talks by identifying the key elements and technological possibilities that define the energy profile of digital currencies.
We compare digital currencies to one another and current payment methods using estimates from academia and business. The findings of this study, which examines the interaction between digital currencies and climate change, two issues that are crucial to policymakers, are especially relevant to many central banks that are developing new digital currencies while taking environmental effects into account. According to our research, the technological decisions made when designing digital currencies significantly impact how much energy they need.
CBDCs and various types of crypto assets, depending on the specifics of how they are set up, maybe more energy-efficient than the majority of the present payment landscape, including credit and debit cards. According to the most recent Red Book numbers from the Bank for International Settlements, credit and debit cards account for nearly three-quarters of cashless transactions, making them crucial for comparison.
Our conclusions about energy efficiency result from a careful examination of the new technologies revolutionizing how people worldwide send and receive money. Digital currencies frequently use distributed ledgers to validate and record transactions. When that occurs, the amount of energy they require primarily depends on two things:
How to network users agree on transaction histories is the first factor. Some digital assets, such as Bitcoin, employ a proof-of-work consensus method that necessitates a significant amount of computational effort and energy to be granted the authority to change the transaction history. For their ledger updates, other crypto types employ various strategies that don’t demand as much computational power.
Access to distributed ledger systems is the second. Some of these are open to participation and transaction validation by anyone. Access to others requires authorization from a central authority, which provides better control over critical energy-related factors such as the number of network users, their location, and software updates.
Our analysis of the energy consumption of digital currencies is based on estimates from academia and business for various processing methods. According to the research, proof-of-work cryptography consumes much more energy than credit cards. The first step toward a greener future for crypto is switching from proof-of-work to another consensus method, and the second is implementing permissioned systems.