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More sustainability in finance with CBDCs

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4 Mins.

Recent media reports on digital currencies have focused mainly on cryptocurrencies, as a result of the enormous fluctuations in their exchange rates and criticism of their huge energy consumption. Central bank digital currencies (CBDCs) have so far attracted relatively little attention, even though they could make an important contribution to protecting the environment. G+D’s CBDC solution Filia® would also contribute to sustainable CBDCs.

Climate change is having an impact on all of us. Central banks and governments have recognized the need for collective, sustainable action on this front. As an example, the European Central Bank (ECB) defines three strategic objectives in its climate agenda.1 These include promoting a sustainable financial sector, and creating incentives for the establishment of a greener finance system. The G7 nations have also identified the environmental impact of central bank digital currencies, also known as “digital cash,” as being a fundamental consideration.2

However, no clear, standardized designs for CBDCs have been put in place yet. As a result, the associated influencing factors on their CO2 footprint cannot be reliably assessed, which makes it difficult to compare them with existing payment methods. It is likely, though, that the CO2 footprint of CBDC payments will be similar to that of credit and debit card payments, which is significantly smaller than that of cryptocurrencies.

Huge energy consumption of crypto mining

Cryptocurrencies such as Bitcoin, Ethereum, and XRP are based on blockchains, which consume enormous amounts of energy. The most energy-intensive blockchains use the proof-of-work mechanism. This requires crypto blockchain transactions to be authenticated locally by all the participants, instead of centrally by a central bank. A money transfer is archived as an entry in the blockchain following a highly complex calculation. This process is known as mining.

Users who can provide proof of an entry in the blockchain are rewarded with newly generated – or “mined” – money in the relevant currency. A huge amount of computing power is needed to calculate these entries. According to the Cambridge Centre for Alternative Finance (CCAF), Bitcoin alone uses around 110 terawatt-hours per year.3 This corresponds, roughly, to the annual energy consumption of Sweden.

Clearly the greatest potential savings lie in the decentralized organization, but this is the very feature that characterizes the cryptocurrency market. Attempts to manage blockchains centrally have been the subject of heated debate. Ethereum has recently adopted this approach, but whether other cryptocurrencies will voluntarily follow suit is yet to be seen.

Central banks create trust

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The infrastructure of central bank digital currencies is fundamentally different to that of cryptocurrencies. Alongside cash, CBDCs are public currencies legitimized by central banks.

Accordingly, there is no need for the energy-intensive, decentralized mining process, because CBDCs do not require authentication. The central bank acts as the guarantor for the authenticity and value of the currency, and ensures that it is a secure and stable means of payment. Digital currencies are also a tool that governments can use to increase the sustainability of the financial sector. CBDCs are regulated by central banks. Governments and the financial industry have given clear signals that these regulations will take CO2 footprints into consideration. The central governmental organization of central bank digital currencies therefore guarantees that their energy consumption is not only much more efficient, but also more transparent than that of cryptocurrencies.

More sustainable payment systems

A unique feature of CBDCs is that they can be designed to be sustainable right from the start. This is a milestone in the move toward a future payment and settlement ecosystem. Filia® is a modular CBDC solution developed by G+D for central banks. It meets their individual functionality and performance requirements without compromising on sustainability. Features of the solution include offline CBDC payments with CO2-neutral smart cards, and running the core infrastructure on servers powered by green electricity.

Smart Wallets®, Filia®’s approach to programmability, can enable public entities and corporates to work toward their sustainability objectives. A Smart Wallet is a special-purpose wallet with pre-defined conditions, such as targeted spending, expiry dates, or qualified recipients. For example, carbon-neutral or “green” wallets could be issued to incentivize the purchase of goods or services that fulfill certain sustainability criteria.

G+D is continuously working to make the entire currency cycle and value chain more sustainable and efficient. Its efforts range from developing more environmentally friendly banknotes, such as the new Green Banknote, to the digitalization of cash infrastructure. Sustainable payment methods include not only cash, but also cards for digital payment that are made from compostable or recycled materials, or eSIMs enabling mobile payments.

A number of steps in the right direction have already been taken. Sustainable CBDCs will help to reduce the environmental footprint of monetary and payment systems even further.

  1. Climate change and the ECB, European Central Bank, 2022

  2. Public Policy Principles for Retail Central Bank Digital Currencies (CBDCs), G7 United Kingdom, 2021

  3. Cambridge Bitcoin Electricity Consumption Index, 2022

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