World Bank Group Korea Office Innovation and Technology Note Series JULY 2022, NOTE SERIES NUMBER 8 Environmental Implications of a Central Bank Digital Currency (CBDC) Soohyang Lee, Jinhee Park KOREA OFFICE PAGE | 2 ENVIRONMENTAL IMPLICATIONS OF A CBDC Abstract Two-thirds of central banks in the East Asia and Pacific (EAP) region have started researching or testing the implementation of a Central Bank Digital Currency (CBDC). At the same time, the region accounts for one-third of world CO2 emissions and is vulnerable to climate risks. As the Group of 7 (G7), European Central Bank (ECB), and Bank of England (BoE) have stated in their public statements, it is increasingly important to consider environmental impact when designing CBDC. However, only a few brief studies have been done on this subject, which will be crucial for the region. This Note explores the environmental implications of CBDC by comparing technical mechanisms and energy consumption within its distributed structure. It also illustrates differences in ecological footprint between CBDC and other payment methods (cryptocurrency, cash, and card networks). As the legitimacy of CBDC is backed by the trust of central banks, CBDC does not need to prove its legitimacy through its technological structure. Therefore, CBDC does not require the energy-intensive consensus or mining mechanisms used by a cryptocurrency, so its energy consumption is lower (comparable to that of a credit card system). CBDC can be designed to use various systems, such as Real Time Gross Settlement (RTGS), Distributed Ledger Technology (DLT), or a mixture of both. Careful deliberation to meet the objectives and implications will be important as CBDC can be a catalyst for financial innovation. Acknowledgements This Note is a product of the East Asia and Pacific Region, Financial, Competitiveness and Innovation Practice, Seoul Center for Finance and Innovation, and the Information, Technology and Solutions Vice Presidency, of the World Bank Group. It is part of a larger effort by the World Bank Korea Office to focus on technology and innovation issues and contribute to development policy discussions around technology and innovation matters in East Asia and the Pacific and beyond. This Note’s findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank Group, their Executive Directors, or the countries they represent. The authors appreciate guidance and comments from Zafer Mustafaoglu (Practice Manager, FCI EAP1), Stela Mocan (Manager, ITSTI), Stuart Yikona (Program Manager, FCI Seoul Center), Ahmed Faragallah (Senior Financial Sector Specialist, EFNFI), Erik Feyen (Lead Financial Sector Economist, EFNDR), Rachel Halsema (IT Officer, ITSTI), Raunak Mittal (IT Officer, ITSTI), and Yongdae Kim (IT Officer, ITSTI). The authors also thank John Steinhardt for the editorial review. Loun Lee, Former IT Officer at ITSTI was a contributor on early drafts until Feb 2022. The authors may be contacted at slee55@ worldbank.org, and jpark23@worldbankgroup.org. Cover design/page design: Design Sol Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org. The Korea Office Innovation and Technology Note Series is intended to summarize Korea’s good practices and key policy findings on topics related to innovation and technology. They are produced by the Korea Office of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: https://www.worldbank.org/en/country/korea. KOREA OFFICE INNOVATION & TECHNOLOGY NOTE SERIES PAGE | 3 Acronyms and Abbreviations ATM Automated Teller Machine BIS Bank for International Settlements BoE Bank of England CBDC Central Bank Digital Currency DLT Distributed Ledger Technology DNB De Nederlandsche Bank ECB European Central Bank EAP East Asia and Pacific EUBOF European Union Blockchain Observatory & Forum FCI Finance, Competitiveness & Innovation Global Practice G7 Group of 7 GRID Green, Resilient, and Inclusive Development IMF International Monetary Fund ITSTI Information & Technology Solutions Technology & Innovation Lab / Unit kWh Kilowatt hour PBFT Practical Byzantine Fault Tolerance RTGS Real-Time Gross Settlement SAR Special Administrative Region SPOF Single Point of Failure PAGE | 4 ENVIRONMENTAL IMPLICATIONS OF A CBDC I. Context Setting and Objective Although there is a growing awareness of because CBDC is a new area without precedent the need to consider the environmental and only a few countries have fully implemented implications of financial and monetary policies CBDC.5 around the world, such discussions are hardly found in relation to Central Bank Digital If CBDC is adopted, environmental awareness Currency (CBDC), which has attracted many of CBDC will be important because it will be central banks’ attention in recent years. CBDC related to the long-term sustainability of an is expected to bring about fundamental changes economy. Climate change will affect monetary to monetary policy measures, hence most of the and financial stability in the long term through research on CBDC has focused on its impact on physical risks (such as extreme life events and financial stability and payment systems. Since long-term changes to the climate) and transition last year, public discussions on environmental risks (that is, behavioral changes for a greener considerations of CBDC seem to have started in world).6 The overall environmental impact will earnest. As seen in Box 1, the Group of 7 (G7),1 not be limited to the lives of individuals; rather, it European Central Bank (ECB),2 and Bank of will affect overall financial stability and monetary England (BoE)3 each announced principles or policy tools. CBDC can be used to serve as a requirements in designing CBDC, and one of monetary policy tool and a payment method: it is these was to consider ecological footprint. There therefore vital to assess CBDC’s potential impact have been some initial efforts to look at this on the environment in advance. This direct and principle closely.4 However, research truly focused indirect relationship between climate change and on environmental aspects is still in its infancy, CBDC is illustrated in Figure 1. Figure 1. Relationship between climate change and CBDC Physical Risk Extreme life events, Impact longer-term changes Financial to our climate System & Transition Risk Central Bank Climate Change Impact Financial Stability Institutional, governance, behavioral changes for and Monetary policy tools greener world Base Interest Reserve Open Market Others... Rate Requirement Operations CBDC Can be one of the factors impacting climate change Customers Banks Source: Author 1  G7, “Public Policy Principles for Retail Central Bank Digital Currencies,” October 2021. 2  ECB, “Report on a digital euro,” October 2020. 3  Bank of England, “The Bank of England’s climate-related financial disclosure 2021,” June 2021. 4  Giaglis et al. (2021) Proposed design options for the digital euro as well as considerations in technical, economic, and macroprudential aspects. 5  At the time of finalizing this Note, the IMF published a Fintech Note titled “Digital Currencies and Energy Consumption” on June 7, 2022. This IMF Note confirms that the energy consumption of crypto assets, as well as CBDC, is related to the technical design options supporting DLT network, and some of the design options can be less energy efficient than the current payment system. These observations are broadly in accordance with the conclusions of this Note. 6  Financial Stability Board, “The Implications of Climate Change for Financial Stability,” November 2020. KOREA OFFICE INNOVATION & TECHNOLOGY NOTE SERIES PAGE | 5 Therefore, this Note aims to contribute to the as seen in Table 1, two-thirds of central banks in exploration of CBDC and raise awareness the EAP region have embarked on researching of its environmental impact, especially for or testing the implementation of a CBDC. In client countries in the East Asia and Pacific this regard, it will be necessary to infer early (EAP) region. According to Climate Watch, the lessons on the CBDC’s ecological impacts for EAP region is particularly vulnerable to climate the EAP region, the better to respond to these change, accounting for one-third of world CO2 expected risks proactively. This will be in line emissions.7 The long-term Climate Risk Index, with the World Bank Group’s Green, Resilient, which analyzes the human and economic losses and Inclusive Development (GRID) framework caused by extreme weather events between 2000 suggesting a balanced approach focused on and 2019, shows that six countries from the development, inclusion, and sustainability in ways EAP ranked among the world’s most vulnerable that are tailored to country development needs 20 countries.8 More frequent and severe natural and objectives.9 disasters, the prevalence of tropical diseases, and poor air and water quality are all substantial risks to the region’s growth and well-being. Meanwhile, Table 1. CBDC development stage in the EAP region ( ○ = retail, ● = wholesale) None Research Proof of Concept Pilot Mongolia ○ Australia ●○ Japan ○ China Brunei ○ New Zealand ● Thailand ● Singapore Myanmar ○ Thailand ● Hong Kong SAR ○ South Korea Timor-Leste ○ Hong Kong SAR Pacific Islands ○ Macao SAR Cambodia ● Malaysia ○ Vietnam ○ Philippines ○ Lao PDR ○ Indonesia Source: Central banks website, CBDC Tracker, S&P Global Ratings. “The Future of Banking: Central Bank Digital Currencies in Asia- Pacific—Pathways Are Plenty, Destination is Uncertain.” (2021) This Note does not seek to generate or resources); rather, the Note uses existing research recommend policies; rather, it points out papers and data to examine and compare environmental factors to be understood when environmental opportunities presented by each designing CBDCs. Similarly, this Note is not payment system. We acknowledge our limitations; intended to create methodologies for assessing and further research will be needed when and evaluating the carbon footprint of payments additional data becomes available. systems, including CBDC (such an undertaking must be predicated on very extensive data and 7  World Resources Institute. Climate Watch Historical Country Greenhouse Gas Emissions Data (1990–2018). 8  David Eckstein, Vera Künzel, Laura Schäfer, “Global Climate Index 2021,” Germanwatch Briefing Paper, January 2021. 9  World Bank Group, “Green, Resilient, and Inclusive Development,” October 2021. PAGE | 6 ENVIRONMENTAL IMPLICATIONS OF A CBDC Box 1. CBDC Design Implications/Principles The research and development of CBDC design principles are still at an early stage. However, governments and organizations are making efforts to address those issues. The G7 published the report “Public Policy Principles for Retail Central Bank Digital Currencies,” outlining foundational principles to guide and inform the exploration and potential development of CBDC. It also addresses the environmental principle that energy usage should be factored into the design and implementation of any CBDC from the outset: • Principle 8: The energy usage of any CBDC infrastructure should be as efficient as possible to support the international community’s shared commitments to transition to a ‘net zero’ economy. The report notes that CBDC can present the opportunity to set a marker for how future payment and settlement ecosystems are designed for optimal energy efficiency, including through the use of carbon- neutral and sustainable energy sources, while achieving necessary functional, performance, and resilience aims. Considering that processing, storing, and transferring information is becoming a significant user of global energy, CBDC can open up new possibilities for the energy and environment sector.10 Meanwhile, ECB published a report on a digital euro in October 2020 addressing several principles and requirements—accessibility, robustness, safety, efficiency, and privacy, while complying with relevant legislation. ECB emphasized that the Eurosystem will proactively support improvements in the monetary and payment system’s overall costs and ecological footprint, achieving higher energy efficiency: • Requirement 7b (R7b): Environmentally friendly. The design of the digital euro should be based on technological solutions that minimize its ecological footprint and improve that of the current payment ecosystem.11 The Bank of England (BoE) also claimed that any future decisions on CBDC issuance and design would consider the Bank’s climate strategy and the recent changes in the remit of and recommendations to BoE policy committees.12 II. Hypothesis and Methodology To identify the environmental impact of CBDC greenhouse gas emissions. (However, the relevant and assess potential related risks, this Note consumption index is accompanied by suggestions aims to address the intrinsic structure and that mining could use renewable sources of energy, characteristics of CBDC and its difference from accommodate grid demand variability, and even other payment methods from the environmental soak up surplus energy that would otherwise have perspective, as seen in Figure 2. It mainly focuses been wasted).13 Hence, some are concerned that on two processes of the CBDC lifecycle, which CBDC will also adversely affect the environment. are production and circulation. It seeks to provide It is important to address the intrinsic critical interpretation based on key findings and characteristics of CBDC, how it works, and demonstrate the potential areas for additional identify differences between other cryptocurrencies research. to establish the likely environmental impact of CBDC. Therefore, this Note will explore how (i) Production perspective: How much energy CBDC is different from cryptocurrencies and can CBDC potentially use? Which technical compare design options for CBDC and their factors in CBDC design consume more energy energy consumption. than others? (ii) Circulation perspective: Does CBDC There are still some misconceptions suggesting consume less energy than other payment that CBDC and cryptocurrencies are identical. methods? If so, how? What lessons can be Critics have raised concerns that the mining of learned from other payment methods? Bitcoin and similar cryptocurrencies pollute the planet because they require a huge amount of Along with the review on the intrinsic energy that currently generates a huge volume of characteristics and infrastructure of the CBDC— 10  “G7 Public Policy Principles for Retail Central Bank Digital Currencies” Accessed November 4, 2021. 11  “Report on a Digital Euro – European Central Bank.” Accessed November 4, 2021. 12  “The Bank of England’s Climate-Related Financial Disclosure 2021.” Bank of England, November 1, 2021. 13  See, Cambridge Bitcoin Electricity Consumption Index, University of Cambridge Center for Alternative Finance, Accessed June, 2022 KOREA OFFICE INNOVATION & TECHNOLOGY NOTE SERIES PAGE | 7 how the production and lifecycle of CBDC estimation. Comparison with other payment will impact environmental aspects—this Note methods will provide an opportunity to gauge also tries to compare it with other payment CBDC’s environmental footprint and support a methods in order to make a comparative comparative interpretation of its level of impact. Figure 2. Conceptualization of the comparison methods Payment Methods Comparison between payment methods Card Cash Network CBDC Existing Raft-based Proof of PBFT-Based Nakamoto Centralized Distributed Authority Consensus Consensus in a Digital Money System + Longest Chain Mechanism Permissionless System Rule Network (Bitcoin) Source: Author III. CBDC Technology: How it works and what makes it different To consider the environmental impact send money using a smartphone to your friend, of CBDC, it will help to understand the you select your account and enter the transfer technologies that can be used for CBDC amount and your friend’s account. As you touch and their differences from current payment confirm, the transaction information is sent to methods. This section introduces the concepts and the server of the bank through the internet. Then differences in the technological structure behind the bank system checks its databases to see if the the current payment & settlement system and transaction is valid: if you are the owner of the cryptocurrency. Then it explores the question of account from which a withdrawal is requested, if which technical stacks of CBDC can be related the account balance is sufficient, if the destination to environmental implications, which solution account exists, and so forth. If the transaction is may (or may not) be relevant to environmentally valid, the transaction is recorded in the database, friendly CBDCs, and what should be considered and the balance of your and your friend’s accounts when designing the system. are updated accordingly. Then the system notifies you and your friend that the transfer is completed. 1. Current Payment System & Real-Time Gross And, if your account and your friend’s account Settlement (RTGS) System belong to different banks, the transaction should be settled between the banks. There are several Let’s think about how the bank system usually approaches to this settlement process. Banks can processes money transfers. When you want to PAGE | 8 ENVIRONMENTAL IMPLICATIONS OF A CBDC settle the entirety of a day’s transactions between 3. A Deeper Look at Blockchain & Underlying themselves, or banks can send transactions to a Consensus Mechanisms settlement agent, who settles the transaction on their behalf. As direct settlement between banks Technically, blockchain refers to its data structure. becomes complex (with an increasing number of Transactions that are recorded on the ledger are banks), the settlement process through trustworthy grouped into blocks, and each block is linked to agents is generally seen as the efficient alternative. the previous block by using a hash value calculated A central bank usually acts as a settlement agent based on the previous block and transactions in because every payment service provider, including the current block. The word “blockchain” came banks and other financial institutions, should hold from this linked-block structure. This structure accounts in the settlement system. makes the ledger hard to be modified because the hash value is unique; therefore, if someone As the digital transformation accelerates, wants to modify a transaction in a past block, central banks adopt a real-time gross settlement they should update not only the target block but (RTGS) system, which has the potential for also the whole blockchain following the block. In CBDC use. Compared to the conventional the Bitcoin network, miners create and propose settlement system that settles periodically, RTGS blocks and receive mining rewards if the block is settles the transaction in real time, diminishing accepted. Therefore, miners record the transaction settlement risks such as liquidity shortage. This into the ledger, which means miners can decide RTGS system can be used to issue CBDC, because which transactions would be recorded or not it has functions to manage accounts, balances, and and which transaction would be recorded first. settlement processes. Furthermore, double spending can happen when several blocks of the same miner are accepted 2. Distributed Ledger Technology & Blockchain sequentially. Thus, it is important to decide who will be the block creator. Blockchain technology came into the spotlight with the growth of cryptocurrencies, and its 4. Opportunities in CBDC Design concept of digital money with technically established legitimacy drew the attention of The Bank for International Settlements (BIS) the central banks considering CBDC. At a identified the design areas for CBDC as the legal basic level, a cryptocurrency such as Bitcoin is claim structure of CBDC: a choice between an based on blockchain technology. Blockchain is RTGS system and blockchain, between an account a specific type of distributed ledger. Distributed and token-based method, and between wholesale ledger technology (DLT) is the infrastructure and retail use.15 The European Union Blockchain and protocol that stores transaction records Observatory & Forum (EUBOF) selected the in the ledger and ensures sharing of the same access method (account-based or token-based), the ledger records among the distributed network ledger infrastructure (RTGS or blockchain), and participants. Blockchain is a distributed ledger that the management (centralist or federalist) as the prevents double-spending without a trusted third CBDC design spaces.16 party, using a consensus mechanism that defines the canonical state of the ledger. From these design spaces, the focus will be on the ledger infrastructure and the management DLT/blockchain can be used to record the structure as it is closely related to the consensus transactions as a substitute for the database within mechanism. Considerations for building the retail the real-time gross settlement (RTGS) system. CBDC system can be applied similarly to the CBDC system can be designed in a hybrid wholesale CBDC system; therefore, treating the form best understood as related to—yet distinct two systems differently would not be appropriate from—both a centralized RTGS system, and a here. Furthermore, the ownership verification blockchain-based system.14 The difference between method choice, account-based or token-based, them is that the blockchain system uses a more does not make a big difference, including the robust consensus mechanism to ensure the ledger environmental implications. Consequently, the records are correct even in a hostile environment. next section will explore the choice between RTGS and DLT/blockchain and who will participate in the consensus mechanism. As previously discussed, the RTGS system can be utilized to issue CBDC, 14  George Giaglis et al., “Central Bank Digital Currencies and a Euro for the Future,” The European Union Blockchain Observatory & Forum (EUBOF), 2021. 15  Raphael Auer and Rainer Böhme, “The technology of retail central bank digital currency,” BIS Quarterly Review, March 2020. 16  George Giaglis et al., EUBOF, 2021 (see earlier footnote). KOREA OFFICE INNOVATION & TECHNOLOGY NOTE SERIES PAGE | 9 as it has functions to manage accounts, balances, and settlement processes. IV. Environmental Implications of RTGS, Blockchain, and Consensus Mechanisms 1. Ledger Infrastructure: RTGS versus the difference extends to environmental impact. Blockchain Compared to RTGS-based systems, blockchain systems require additional computations to In designing CBDC, the selection of a ledger achieve the consensus without having SPOFs. infrastructure is important. A choice between This computation cost affects the system’s energy RTGS and Blockchain— that is to say, between consumption. The cost varies depending on the centralized and distributed ledger infrastructure, consensus mechanism adopted. For example, a respectively— can vary based on its priorities and blockchain mechanism with the least additional objectives, and it will make a difference to security computations will not be different from an RTGS- level and computation cost, affecting energy based system in terms of energy consumption. 19 consumption. Therefore, it would be better to choose RTGS if Many countries are using RTGS or RTGS- reducing the energy consumption in CBDC is the equivalent systems for the settlements between top priority, because the blockchain system would banks.17 Several countries recently implemented a incur additional energy consumption, albeit often new RTGS system (EU, Australia, Hungary, Hong very marginally. However, national authorities will Kong, Brazil) or are planning to develop one (US, want to consider the merits of using blockchain, Sweden).18 RTGS systems achieved high resilience depending on the objective of the CBDC system, and performance with continuous effort and have as it can offer unique security advantages. already been tested and used in the field for many years. 2. Environmental Implications of Consensus Mechanism Compared to the RTGS system, the key strength of the blockchain system is the absence of a After choosing blockchain technology as a design single point of failure (SPOF). A SPOF is a part option for ledger infrastructure, it is time to of a system that stops the whole system’s operation choose the appropriate consensus mechanism that when the part fails to work correctly. As a SPOF meets the overall objectives of the system. The key can be a target of attack by malicious players, to the blockchain operation is the maintenance of eliminating SPOFs is one of the key objectives for the consensus of the information recorded on the a system required to operate continually without blockchain within the network, which impacts the interruption. Blockchain technology is built financial parameters and security of the operations. to operate properly even when some network There are various consensus mechanisms with participants are malicious. Therefore, adopting the different characteristics that will affect the different blockchain technology appropriatelyor the CBDC energy consumption levels. Figure 3 shows system might help achieve higher resilience. a conceptual summary of the environmental implications, security advantages, and This advantage of blockchain technology performances in general. There are various other derives from the consensus mechanism combinations with a Sybil resistance mechanism within its distributed structure. This is the and a consensus protocol (not included here), and most significant difference between the RTGS- details can vary depending on the implementation. based system and the blockchain system, and Figure 3. Conceptual summary of tradeoffs between CBDC design choices 17  Morten Bech, Yuuki Shimizu and Paul Wong, “The quest for speed in payments,” BIS Quarterly Review, March 2017 18  Jinwook Jang and Hyung geun Yoon, “A case of introducing a rapid fund transfer system using Real-Time Gross Payment (RTGS) method in major countries”, Bank of Korea, March 2021. 19  George Giaglis et al., EUBOF, 2021 (as above). PAGE | 10 ENVIRONMENTAL IMPLICATIONS OF A CBDC Existing Raft-based Proof of PBFT-Based Nakamoto Consensus in Centralized Distributed Authority Consensus a Permissionless Network Digital Money System + Longest Mechanism (Bitcoin) System Chain Rule Low energy consumption High energy consumption Low security advantage High security advantage High performance Low performance Source: Author Along with its intrinsic operating mechanism, the distribution perspective, having many nodes the number and the distribution of the within a single space, or managed by a single participants can also affect the energy entity, does not give a massive advantage in consumption depending on the consensus terms of security and can be a SPOF. However, protocols. For example, computation cost having many different entities participating as a increases linearly as the number of participants node operator can also incur high management grows when validating themselves but increases costs and privacy-related issues in addition to the exponentially under Practical Byzantine Fault environmental implications. Tolerance (PBFT)-based consensus protocols.20 Limiting the number of participants can save Therefore, it is important to understand that energy, especially for PBFT-based mechanisms, there is no silver bullet. Making design choices for but that will reduce the security advantages and CBDC with an understanding of the tradeoffs and multiply vulnerabilities to attack. Also, from the consideration points would be essential. V. Comparing CBDC’s environmental footprint with other payment methods 1. Cryptocurrency is currently using proof-of-work for its Sybil resistance mechanism. The Ethereum network is Intrinsic limitations will inevitably constrain estimated to consume 87.97 TWh annually, which efforts to design a completely energy-saving is comparable to Finland and Belgium’s annual cryptocurrency. Current systems were designed power consumption.23 to operate within a trustless environment, and an energy-intensive mechanism was adopted to In response to the increasing attention on achieve the goal. Therefore, under a decentralized sustainability, cryptocurrencies have recently ecosystem, it can be difficult for cryptocurrency adopted more eco-friendly consensus mechanisms. networks to reduce the energy consumption Several cryptocurrencies, such as Solana, Cosmos, level to that of existing money. High energy Algorand, or Polkadot, use proof-of-stake, consumption and the negative environmental which consumes less energy than proof-of- impact is considered a critical side effect of work. Ethereum is also planning to switch to cryptocurrency; this raises concerns and impedes proof-of-stake in the first or second quarter of rapid adoption.21 2022.24 Ethereum Foundation estimates that the transition to proof-of-stake will reduce its energy Energy consumption can vary depending on consumption by at least 99.95%.25 Cambridge the type of cryptocurrency and its underlying Center for Alternative Finance (CCAF) also structure. For example, Ethereum, the second- indicates that mining could utilize renewable and largest cryptocurrency by market capitalization,22 stranded sources of energy.26 20  The Practical Byzantine Fault Tolerance (PBFT) is a consensus protocol that validates the transactions in the block and creates consensus for each block with explicit voting between the consensus process participants. 21  Browne, Ryan. “Why Everyone from Elon Musk to Janet Yellen Is Worried about Bitcoin’s Energy Usage.” CNBC, May 2021. 22  “Cryptocurrency Prices by Market Cap”, Coingecko, Accessed November 15, 2021 23  Ethereum Energy Consumption Index”, Digiconomist, Accessed November 15, 2021 24  “The Merge”, Ethereum Foundation, last modified August 19, 2021, Accessed November 15, 2021 25  Carl Beekhuizen, “A country’s worth of power, no more!”, Ethereum Foundation (blog). 26  Cambridge Bitcoin Electricity Consumption Index, University of Cambridge Centre for Alternative Finance, Accessed June, 2022 KOREA OFFICE INNOVATION & TECHNOLOGY NOTE SERIES PAGE | 11 While a crypto asset’s intrinsic structure requires of payment methods. De Nederlandsche Bank considerable energy, CBDC is in a different (DNB), the central bank of the Netherlands, energy-consuming structure. Because it is backed evaluated the environmental impact of debit by the central bank, it does not need to earn its card payments by using a life-cycle assessment.29 trust in a trustless environment like Bitcoin,27 DNB indicated that the total ecological impact and its environmental fingerprint will be more of a cash payment is 1.5 times higher than that comparable to existing digital money systems than of a debit card payment. Ripple, a blockchain- cryptocurrencies.28 based payment protocol company, measured the environmental impact of cryptocurrencies, cash, 2. Cash and card network and card networks (Visa and Mastercard). As seen below in Table 2, it is estimated that card networks Although comprehensive hypotheses and use less energy than blockchain assets and cash. assumptions must remain imperfect, there has been an effort to verify the climate impact Table 2. Latest available estimate of electricity consumption per transaction Type Blockchain Asset Cash Network Paper money Bitcoin Ethereum XRP Visa Mastercard (US) Electricity consumption 700 30 0.0079 0.044 0.0008 0.0006 per transaction (2020 YTD) (2020 YTD) (2019) (2018) (2018) (2018) (kWh) Source: Ripple. “Measuring the Environmental Impact of Cryptocurrency.” (2020) Tracing the energy consumption throughout specific consumption have been captured—the the entire lifecycle of paper money is difficult numbers are minimal. It is estimated that the because the process varies by country and use energy consumption corresponding to each Visa of raw materials. However, there have been and Mastercard transaction is 0.0008kWh and many efforts to estimate it based on multiple 0.0006kWh respectively. Clearly, these amounts methodologies. A study by S. Rochemont are far less than those of cryptocurrencies and focused their methodology on printing notes paper money. and note circulation.30 According to the research, the average electricity cost for the United CBDC will be in the form of digital money. The States Bureau of Engraving and Printing bill BIS reported that a CBDC is a digital payment manufacturer corresponds to 11.38 cents/kWh instrument denominated in the national unit (an average 2018 household electricity unit cost of account that is a direct liability of the central in Texas). Also, the research shows that automated bank.32 In a CBDC world, each virtual currency teller machine (ATM) energy consumption is a unit will have a unique digital code in a digital dominant factor impacting energy consumption wallet and will be transferred seamlessly by the and estimates that 0.84 TWh was consumed by wallet-holder to other digital wallets of individuals. ATMs in the United States annually.31 It is very similar to what we see in today’s fintech and other digital wallets provided by big tech The card network, including debit and credit companies, including mobile payment apps and cards, consumes much less electricity than wallets offered by traditional banks that do not other payment methods. Companies such as require the exchange of paper money. Visa and Mastercard pledge net-zero emissions to create a more sustainable and inclusive digital Most of the current CBDC projects are using economy and make efforts to reduce their a hybrid CBDC where the accounts represent electricity consumption per transaction. Current a liability of the central bank, but private business electricity consumption and data center intermediaries can handle retail payments. ECB pointed out that “a parallel infrastructure 27  “Central Bank Digital Currency: An update on the Bank of England’s work – speech by Tom Mutton”, Bank of England, June 17, 2021. 28  George Giaglis et al., EUBOF, 2021 (as above). 29  De Nederlandsche Bank, “Life cycle assessment of cash payments,” October 2018. 30  S. Rochemont, “A cashless society: benefits, risks, issues,” Institute and Faculty of Actuaries, October 2018. 31  “Measuring the Environmental Impact of Cryptocurrency.” Ripple. Accessed November 20, 2021. 32  “Central Bank Digital Currencies: Foundational Principles and Core Features, Report No. 1” Bank for International Settlements (2020). PAGE | 12 ENVIRONMENTAL IMPLICATIONS OF A CBDC would also run counter to the aim of issuing a consume the most energy, followed by cash and digital euro in order to improve the cost and the card network. While the card network has the environmental footprint of payments.”33 least environmental impact from the perspective of energy consumption, the payment method with Although there are still limitations that cannot the most similar characteristics and infrastructure yet be overcome when directly comparing the to it is CBDC. ecological footprint of future CBDC and other payment methods, studies show that crypto assets VI. Conclusion This Note tried to address considerations around performance. The tradeoffs of design choices are the environmental impacts of CBDC, explored the intimately bound up with the objectives, such differences between various design options, and that the pursuit of one aspect can make it hard compared them with the existing payment systems to achieve other goals. Therefore, the CBDC to raise awareness among central banks, regulators, objectives and design decisions should be carefully and policy makers on the environmental balanced on the priorities with comprehensive implications of CBDC. While this Note is focused research from a holistic viewpoint. on the EAP audience, the issues to be considered as outlined below can be applicable to countries 3. Importance of assessing technology choices to in other regions as well. Below are the key meet strategic and environmental goals considerations we would like to highlight. CBDC is not tied to a single technology, and 1. Central banks, especially in EAP, need to both blockchain and digital payment solutions consider the environmental impact of CBDC can be adopted. Blockchain technology is not a mandatory requirement for CBDC, and the Two-thirds of central banks in the EAP region existing digital payment solutions like an RTGS- carry out CBDC-related research or have based system or a credit card payment system conducted implemental preparations. Research can also be utilized for CBDC. The outputs and on EAP vulnerability to environmental impact environmental risk can be different depending indicates that central banks in the region may on technology choices. For example, CBDC is need to carefully consider CBDC’s environmental expected to consume less energy than that of impact and potential climate risks. The EAP cryptocurrencies, with energy consumption similar region is one of the key contributors to rising to that of card networks or mobile payments. greenhouse gas emissions. Six countries in the Therefore, it is critical for national authorities region have been identified as the most vulnerable to assess how each technology might meet both to climate change and comparatively more their strategic goals and environmental objectives vulnerable to environmental risks. Considering and choose the optimal option—the one most these characteristics, central banks in the EAP conducive to long-term financial stability. region should consider the environmental impact and potential climate risks while exploring and CBDC is in the early stage of exploration, yet its adopting CBDC. development is rapidly evolving. Considering the socioeconomic impacts of CBDC, it is important 2. Environmental impact will vary depending to consider the environment and climate strategy on CBDC Design Options to achieve long-term financial sustainability. This Note seeks to address some of the initial ideas CBDC could be a catalyst for financial and assumptions to tackle this problem and the innovations; however, careful deliberation is research and results of this Note will lead to required to balance the objectives and their further research. Moving forward, development of implications. Based on their own circumstances, CBDC and the accumulation of relevant data will central banks are exploring CBDC with various support a better projection on carbon footprint. objectives, including resiliency and inclusive payment services. The environmental impact of design choices in ledger infrastructure and consensus mechanism choices can vary, and the choice entails tradeoffs between energy consumption, security advantage, and 33  European Central Bank, “Report on a digital Euro”, October 2020. 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