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Cover FinTech Notes
Blockchain Consensus Mechanisms: A Primer for Supervisors
Parma Bains
Technology plays an increasingly important role in financial services. With the pace of technological inno-vation moving ever faster, the role new technology plays in the provision of financial services is becoming increasingly fundamental. New technology can generate efficiencies for firms, lowering costs that can be passed on to end users. It can increase access to financial services and products for consumers, particularly the most vulnerable; however, new technology can also create new risks and unintended consequences that can harm financial stability, consumer protection, and market integrity. This primer is designed for financial supervisors at central banks, regulatory authorities, and government departments. It adds to existing literature by summarizing key aspects of popular consensus mechanisms at a high level, with a specific focus on how such mechanisms may impact the mandates of supervisors and policymakers when deployed in financial services markets. It could also help inform IMF staff on policy development and technical assistance related to crypto assets, stablecoins, and blockchains.
Keywords:
fintech, blockchain, distributed ledger technology, proof-of-stake, proof-of-work, crypto assets, stablecoins, central bank digital currencies, Bitcoin, BigTech; Blockchain consensus mechanism; bitcoin mining; FINTECH note; A. consensus mechanism; B. consensus mechanism; Blockchain and DLT; Virtual currencies; Technological innovation; Global
Cover Finance & Development
Currency Notes: Cleaning Up Crypto
International Monetary Fund

TESLA CEO ELON MUSK reignited a long-simmering debate in June over Bitcoin’s energy consumption. Tesla will accept the cryptocurrency for car sales only “when there’s confirmation of reasonable (~50 percent) clean energy usage by miners with positive future trend,” Musk said in a tweet. Bitcoin mining—the process of creating new bitcoins and updating the digital ledger that tracks transactions—consumes vast amounts of computing power and electricity. To earn bitcoins, miners solve increasingly difficult puzzles. The faster and more efficiently they do so

Keywords:
bitcoin rival Ethereum; bitcoin transaction; Bitcoin system; Bitcoin's status; energy consumption problem; Renewable energy; Blockchain and DLT; Mining sector; Electricity; consumption problem; unit of account
Cover FinTech Notes
Front Matter
Parma Bains

-of-Stake (PoS) Delegated-Proof-of-Stake (DPoS) B. Consensus Mechanisms in Private Blockchains Practical and Istanbul Byzantine Fault Tolerance (pBFT/iBFT) Federated Byzantine Fault Tolerance (fBFT) DiemBFT Proof-of-Elapsed-Time (PoET) V. CONCLUSION VI. REFERENCES Box 1. Definitions Box 2. How Consensus Fits into Distributed Systems Box 3. Selected Risks of Some Consensus Mechanisms FIGURE 1. Bitcoin Mining Pools November 2020 to November 2021 TABLE 1. Comparison of Different Consensus Mechanisms Glossary AML Anti

Keywords:
Bali Fintech agenda; Blockchain and DLT; Fintech
Cover FinTech Notes
Back Matter
Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier

VII. Appendixes Appendix 1. Drivers of Crypto Asset Adoption in Selected Countries This note highlights the drivers of crypto adoption by country and how they differ by level of development. ADVANCED ECONOMIES US Bitcoin mining, trading, and DeFi transactions in the US are among the highest in the world. Retail investors dominated the market, driven by speculative investment motives, but institutional investors searching for yield amid low interest rates contributed to recent price rallies. The launch of Bitcoin futures

Keywords:
asset holder; Virtual currencies; Capital flow management
Cover FinTech Notes
Blockchain Consensus Mechanisms: A Primer for Supervisors
Parma Bains

energy usage of Bitcoin mining is comparable to Poland at 140 Terrawatt-hour, and so runs counter to this aim. 15 Regulators using or supporting consensus mechanisms that rely on large-scale energy use should pay attention to this energy consumption; most of them will likely find such damaging impacts to the environment unacceptable. Although PoW guarantees eventual consistency in the blockchain, there may be some instances where there are competing forks, which can impact the network by making it slow, expensive, and inefficient. Forks can lead to slower settlement

Keywords:
consensus mechanism; network security; DLT network; network participant; DPoS stakeholder
Cover IMF Staff Country Reports
El Salvador: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for El Salvador
International Monetary Fund. Western Hemisphere Dept.
The pandemic interrupted ten years of growth, but El Salvador is rebounding quickly. Robust external demand, resilient remittances, and a sound management of the pandemic—with the help of a disbursement under the Rapid Financing Instrument (RFI) (SDR287.2 million or US$389 million) approved in April 2020—are supporting a strong recovery. Persistent fiscal deficits and high debt service are leading to large and increasing gross fiscal financing needs.
Keywords:
Salvadorian authorities; authorities of El Salvador; anti-smuggling plan; government finance statistics manual; El Salvador's authorities; authorities' estimate; Virtual currencies; International reserves; Currencies; Remittances; Central America; Caribbean; Global
Cover FinTech Notes
Digital Currencies and Energy Consumption
Mr. Itai Agur, Jose Deodoro, Xavier Lavayssière, Soledad Martinez Peria, Mr. Damiano Sandri, Hervé Tourpe, and Mr. German Villegas Bauer

) per year according to the Cambridge Bitcoin Electricity Consumption Index . 10 This amounts to about 0.6 percent of total global electricity consumption . 11 A second environmental concern is e-waste, which refers to electronics that are discarded at the end of their useful life ( Box 2 ). The reason PoW consensus mechanisms lead to large e-waste is that validators need to constantly upgrade to the latest, fastest hardware to remain competitive. De Vries and Stoll (2021) estimate that the average life span of Bitcoin mining devices is 1.3 years and that as a

Keywords:
energy consumption; novel payment instrument; clearance system; credit card transactions; DLT system; Central Bank digital currencies; Digital currencies; Payment systems
Cover FinTech Notes
Digital Currencies and Energy Consumption
Mr. Itai Agur, Jose Deodoro, Xavier Lavayssière, Soledad Martinez Peria, Mr. Damiano Sandri, Hervé Tourpe, and Mr. German Villegas Bauer
Whether in crypto assets or in CBDCs, design choices can make an important difference to the energy consumption of digital currencies. This paper establishes the main components and technological options that determine the energy profile of digital currencies. It draws on academic and industry estimates to compare digital currencies to each other and to existing payment systems and derives implications for the design of environmentally friendly CBDCs. For distributed ledger technologies, the key factors affecting energy consumption are the ability to control participation and the consensus algorithm. While crypto assets like Bitcoin are wasteful in terms of resources, other designs could be more energy efficient than existing payment systems.
Keywords:
Payments; Energy efficiency; Environmental impact; Crypto assets; Bitcoin; Central Bank Digital Currency; CBDC; Distributed Ledger technology; DLT; CBDC user payment; energy consumption; FINTECH note; title page; user payment; Virtual currencies; Blockchain and DLT; Digital currencies; Central Bank digital currencies; Payment systems; Global
Cover FinTech Notes
Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets
Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier
Capital flow management measures (CFMs) can be part of the broader policy toolkit to help countries reap the benefits of capital flows while managing the associated risks. Their implementation typically requires that financial intermediaries verify the nature of transactions and the identities of transacting parties but is facing the rising challenge of crypto assets. Indeed, crypto assets have become a significant instrument for payments and speculative investments in some countries. They can be traded pseudonymously and held without identification of the residency of the asset holder. Many crypto service providers operate across borders, making supervision and enforcement by national authorities more difficult. The challenges posed by the attributes of crypto assets are compounded by gaps in the legal and regulatory frameworks. This paper aims to discuss how crypto assets could impact the effectiveness of CFMs from a structural and longer-term perspective. To preserve the effectiveness of CFMs against crypto-related challenges, policymakers need to consider a multifaceted strategy whose essential elements include clarifying the legal status of crypto assets and ensuring that CFM laws and regulations cover them; devising a comprehensive, consistent, and coordinated regulatory approach to crypto assets and applying it effectively to CFMs; establishing international collaborative arrangements for supervision of crypto assets; addressing data gaps and leveraging technology (regtech and suptech) to create anomaly-detection models and red-flag indicators that will allow for timely risk monitoring and CFM implementation.
Keywords:
capital flow management measures; CFMs; crypto assets; digital currencies; Regtech; Suptech; untraceable transactions; crypto exchanges; distributed ledger technology; Bitcoin; FINTECH note; asset holder; capital outflow restriction; crypto asset Adoption; crypto-asset exchange; Virtual currencies; Capital flow management; Blockchain and DLT; Capital flows; Anti-money laundering and combating the financing of terrorism (AML/CFT); Global
Cover Finance & Development
Finance and Development, September 2021
International Monetary Fund
Finance and Development, September 2021
Keywords:
IEA report; IMF staff research; emissions target; Bitcoin mining; climate threat; Climate change; Climate finance; Greenhouse gas emissions; Virtual currencies; Global; Asia and Pacific; Africa; Pacific Islands; Sub-Saharan Africa; pricing carbon; bitcoin rival Ethereum