The Bank of England today criticized the “energy inefficiency” of Bitcoin while adding that a central bank digital currency (CBDC) could help with a net zero economy.
A CBDC is a digital version of a fiat currency (like the British pound or US dollar), backed by a central bank. Some, but not all, CBDCs employ a blockchain, the technology that underpins cryptocurrencies such as Bitcoin. The difference, however, is that CBDCs are permissioned (i.e. private) and centralized, unlike crypto assets like Bitcoin and Ethereum. Countries around the world are currently researching the benefits of developing their own CBDCs.
But despite talking about them today, the UK lags behind other countries in the development of such a technology. In a speech today, the Bank of England’s director of fintech, Tom Mutton, said that the central bank had “not yet made a decision on whether or not one is needed.”
Mutton said that a CBDC’s tech would be different to Bitcoin’s, “given its performance shortcomings and energy inefficiency.” He added that “the energy consumption of Bitcoin is not typical of all blockchain and distributed ledger based approaches.”
“Rather, we should focus on identifying how CBDC might play its part in the transition to a net zero economy,” the speech continued.
He added that a UK CBDC would be “the safest type of money available” and “energy efficiency should be a core consideration” for its design.
Bitcoin uses a mechanism called proof of work to function. In order for new coins to be produced, Bitcoin “miners” use powerful computers to compete to solve complex mathematical equations. This uses up a lot of electricity.
The debate around the energy consumption of cryptocurrency is heating up. Critics say that Bitcoin’s carbon footprint is too big, and projects are working on making the asset greener.
A CBDC could function without such wasteful technology, according to Mutton, who said that not all digital money systems use proof of work and some are “potentially in the order of tens of thousands of times more efficient per transaction.”
Just last month, Canada’s central bank said that its own CBDC—when released—would not make use of “wasteful methods of mining technologies.”
The Bank of England is skeptical about decentralized cryptocurrencies like Bitcoin and Ethereum. The central bank’s governor, Andrew Bailey, has said that Bitcoin is not money and has no intrinsic value.
Though the Bank has shown interest in stablecoin (cryptocurrencies pegged to fiat currencies) regulation and CBDCs.
A number of other countries—China included—are way ahead of the game and are already trialling their own CBDCs. But Mutton went on to say that the UK isn’t falling behind such countries because it is a “thought leader” on CBDCs.