Why are central bank digital currencies (CBDCs) now and what they might mean for climate change? (2/2)
This is the second of two articles. You can find the first article here.
Major central banks around the world are in a tight race to deliver the first credible version of digital currency. China is testing a digital version of the renminbi, through which customers can make payments on their mobile phones. Europe has announced the launch of a digital euro as part of the five-year plan. The Fed has announced that it will release a discussion paper this summer regarding digital payments, including the respective calls and threats of a central bank digital currency.
The following are some considerations before the Fed Discussion Paper.
Could such a CBDC initiative surpass the advantages of Bitcoin?
The main attraction of Bitcoin is its trustless payment execution offering in a decentralized environment, fully supported by distributed ledger technology and the resulting peer-to-peer network, circumscribed by a crypto code as well as ‘a limited supply of coins in circulation. Thus, the five key concepts representing a competitive advantage are the (confidential) execution of trustless payments, decentralized governance, distributed technology, crypto consensus protocol and limited supply.
The four inherent weaknesses of Bitcoin are its speed of execution, its use for ransomware and its inability to obtain leverage (even limited), away from derivative structures, settled in fiat currency. But the most important drawback is its carbon footprint.
Bitcoin’s carbon footprint is anathema in a world facing a finite carbon store to maintain temperature increases above 1.5 degrees Celsius. A recent study from the Cambridge Center for Alternative Finance (CCAF) suggests that bitcoin mining consumes 110 terawatt hours of electricity per year, about 0.55% of global electricity production, and as much as small countries like Sweden. or Malaysia.
It triggers a totally misguided capital allocation in a world of corporate finance still completely blinded by externalities.
Atlas Holdings invested in a dismantled Greenidge power plant in upstate New York in 2014 to convert and generate direct ‘over the counter’ energy capacity for the benefit of Greenidge Generation Holdings, a Bitcoin mining operator . An example of continued vertical integration, which, in the absence of externalities pricing, results in immediate short-term benefits for the Bitcoin miner at the expense of longer-term intergenerational commons and quality of life considerations.
This is where the challenge of Bitcoin disruptors lies. How and when could the Bitcoin consensus protocol be changed to minimize its carbon footprint without resorting to carbon offsets?
Could such a central bank digital currency improve Bitcoin’s heavy carbon footprint and reduce the consequences of the current six-headed crisis: health pandemic, social injustice and inclusion, distrust of international trade and institutions? , climate change, loss of biodiversity and global monetary policy? policy devoid of powerful political tools?
The CBDC should first and foremost identify several objective functions, but the main constraining variable should be the minimization of the carbon footprint. Yet this constraint is hardly mentioned in current research on CBDCs.
The remits of several central banks are continually being extended to integrate climate-related risks into their area of ââcompetence. Christine Lagarde. The President of the European Central Bank said earlier last month: âThe ECB subscribes to the view that climate-related risks can be a source of financial risk and, to that extent, it is also within the mandate of banks. Central and supervisory authorities ensure the financial system is resilient to these risks.
By referring to the reflections of Minouche Shafik in his recent book âWhat We owe to Each Otherâ, could opportunities and security be fundamentally reorganized in society?
As such, could a currency be designed to wipe out the things we want less, like carbon and smoking, and encourage the things we want more, like education, regeneration and a greener economy?
This is where the perfect opportunity lies for the CBDC as a complementary currency in the universe of monetary, digital and crypto currencies on offer.
Programmability, using smart contracts, is a potential and desirable feature of digital currency. Smart contracts are computer code instructions that automatically execute all or part of an agreement. These types of contracts, supported by distributed ledger technology and linked to a particular taxonomy of green products and services, could make it possible to laser guide an economic policy to promote the consumption of low-carbon goods targeted on certain geographical areas with a provision delay. The preconditions would allow automatic execution and could have strong appeal during periods of prolonged stress from climate change in disaster-affected areas.
In addition, the extinction provision could be coupled with a function of eroding the value of the CBDC over time if deflation issues had plagued a specific region.
By extension, the CBDC utility could be governed by a value conversion matrix, linking the painkilling capability of the products and services offered to the toll at hand. The reduction in the conversion rate would be greater for products and services offered by companies whose footprint contributes to climate change and biodiversity loss. The conversion rate would increase for companies that integrate strong and sustained inclusion and diversity policies. New disclosure requirements set forth by TCFD, CDP, and SEC, among others, will provide transparent and accurate mapping of respective companies’ fingerprints to help build such conversion matrices.
Monetary policy tools could be broadened by deploying longer-term targeted refinancing operations (TLTROs), initially introduced by the ECB. This policy offers commercial banks long-term financing on attractive conditions, but on the condition that it is redeployed to stimulate bank credit in the real economy. The green TLTRO could be provided to commercial banks with a CBDC (green and traceable) on the counterpart to use for bank loans to decarbonize the economy.
Likewise, green quantitative easing and rescue programs could be designed, by injecting the CBDC, against discounts proportional to the degree of intensity of the ESG characteristics (Environmental, Social, Governance) of the securities considered.
How could the CBDC mitigate or even avoid an emerging systemic risk model?
Systemic risk could be countered by creating a new nature or climate centric anchor currency, which could autonomously reallocate capital where the most pressing societal challenges lie.
A proposal was made in a previous article to release the IMF’s climate coins, on the back of Special Drawing Rights (SDRs). Special Drawing Rights are international reserve assets created by the IMF in 1969 and whose value is based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling. .
SDRs, inactive on the IMF’s balance sheet, could be bundled into an IMF climate coin to help meet the Paris climate targets in 2015. A signatory country would receive an IMF climate coin against a permanent reduction certified by one third of 1 ton of CO2.
This anchor currency, replicating the store of value, could become the benchmark against which all other currencies, cash, CBDCs, cryptocurrencies or Stablecoins would be measured.
What function (s) would the CBDC target in the long term: a medium of exchange, a unit of measure, a store of value or an instrument of relief and reward?
The CBDC proposal offers a unique opportunity to introduce several functions at the same time and to launch a dynamic âwith an invisible handâ, by reallocating capital from the extractive and degenerative economy towards a regenerative, redistributed, inclusive and fully carbon-free economy. .
This is the end of the second article. You can find the first article here.