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Parma Bains

transparent, immutable, and auditable data and activity. DLT can offer greater democratization of data as the data are distributed and control of the data is decentralized. It can improve the provision of financial products and services (including financial inclusion), supply chain management, and record keeping. For supervisors, DLT can provide real-time control and supervision of financial markets; however, some designs can create risks to the natural environment, consumers, market integrity, financial integrity, and financial stability. Consensus mechanisms underpin

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.
Parma Bains

Title Page FINTECH NOTE Blockchain Consensus Mechanisms: A Primer For Supervisors Prepared by Parma Bains January 2022 Copyright Page ©2022 International Monetary Fund Blockchain Consensus Mechanisms: A Primer for Supervisors Note 2022/003 Prepared by Parma Bains Names: Bains, Parma, author. | International Monetary Fund, publisher. Title: Blockchain consensus mechanisms : a primer for supervisors / prepared by Parma Bains. Other titles: A primer for supervisors. | FinTech notes (International Monetary Fund). Description

Blockchain Consensus Mechanisms: A Primer for Supervisors VI. REFERENCES Bains, Parma, Nobuyasu Sugimoto, and Christopher Wilson. 2022. “BigTech in Financial Services― Regulatory Approaches and Architecture.” IMF Fintech Note, Washington, DC. https://0-www-imf-org.library.svsu.edu/ en/Publications/fintech-notes/Issues/2022/01/22/BigTech-in-Financial-Services-498089. Basel Committee on Banking Supervision. 2021. Principles for Operational Resilience. March. https://www. bis.org/bcbs/publ/d516.pdf. Bowman, Mic, Debajyoti Das, Avradip Mandal, and Hart Montgomery. 2021. On Elapsed Time

Parma Bains

. Comparative Evaluation of Consensus Mechanisms in Cryptocurrencies . https://0-onlinelibrary-wiley-com.library.svsu.edu/doi/full/10.1002/itl2.100 . Innerbichler , Johannes , and Violeta Damjanovic-Behrendt . 2021 . F ederated Byzantine Agreement to Ensure Trustworthiness of Digital Manufacturing Platforms . https://www.semanticscholar.org/paper/Federated-Byzantine-Agreement-to-Ensure-of-Digital-Innerbichler-Damjanovic-Behrendt/ca38ef0a24f59c6fbea9fb029a76f6d1fc77e4 . International Monetary Fund . 2021a . “ The Rise of Digital Money .” IMF Policy Paper , Washington, DC

Mr. Itai Agur, Jose Deodoro, Xavier Lavayssière, Soledad Martinez Peria, Mr. Damiano Sandri, Hervé Tourpe, and Mr. German Villegas Bauer

those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Publication orders may be placed online or through the mail: International Monetary Fund, Publication Services P.O. Box 92780, Washington, DC 20090, U.S.A. T. +(1) 202.623.7430 publications@imf.org IMFbookstore.org elibrary.IMF.org Contents Executive Summary I. Introduction II. Payment System Components III. Comparing Energy Use Across Crypto Assets Comparing Consensus Mechanisms: PoW and Non-PoW DLT Systems Impact

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.
Mr. Itai Agur, Jose Deodoro, Xavier Lavayssière, Soledad Martinez Peria, Mr. Damiano Sandri, Hervé Tourpe, and Mr. German Villegas Bauer

technologies (DLTs). This paper examines the implications for energy consumption from different forms of crypto assets based on their distinct design elements. It investigates how the takeaways from this evaluation can inform the design of environmentally friendly central bank digital currencies (CBDCs). The energy consumption of crypto assets can vary greatly depending on two design elements of the supporting DLT network . The first element is the consensus mechanism used to achieve agreement about the present state of the network. Resulting energy needs range from very

International Monetary Fund. Communications Department

financial system. In addition, decentralized blockchain technology cannot handle large volumes of transactions very well and does not accommodate transaction reversal, so it seems inevitable that intermediaries will emerge to streamline unwieldy decentralized services for users (especially because there are profits to be made by doing so). Without mincing words, economists at the Bank for International Settlements concluded that there is a “decentralization illusion” that is “due to the inescapable need for centralized governance and the tendency of blockchain consensus

Mr. Ghiath Shabsigh, Mr. Tanai Khiaonarong, and Mr. Harry Leinonen

payments and securities settlement arrangements. 3 A validation protocol defines how transactions are validated and included in the overall transaction history. The main objectives of the transaction history are to prevent double spending and reconcile the distributed parts of the ledger. Decentralized information could easily be copied and reused without a double-spending-prevention mechanism. The main differences between DLT protocols are in the construction of the consensus mechanism. 4 That is, how validation is done and by what kind of validators (for example