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Bank of International Settlements calls for Blockchain-based sustainable Finance Solutions

Bank of International Settlements calls for Blockchain-based sustainable Finance Solutions

The Bank of International Settlements (BIS), an organization that serves as a bank for central banks, has published a report on how blockchain technology can support sustainable finance. The report, titled “Blockchain and sustainability: A green role for distributed ledger technology?”, explores the potential of blockchain to address environmental, social and governance (ESG) challenges in the financial sector.

According to the report, blockchain can enable more transparent and efficient ESG reporting, verification and monitoring, as well as facilitate green bond issuance and trading, carbon credit management and climate risk assessment. The report also identifies some of the challenges and trade-offs that need to be addressed, such as the environmental impact of blockchain’s energy consumption, the regulatory and legal frameworks for blockchain-based ESG solutions, and the interoperability and scalability of different platforms.

The report concludes that blockchain can play a key role in advancing sustainable finance, but it also calls for more collaboration and coordination among stakeholders, including regulators, standard-setters, financial institutions and technology providers. The report states: “Blockchain is not a silver bullet for sustainability, but it can be a powerful tool to enhance ESG practices in the financial sector and beyond. To unlock its full potential, however, concerted efforts are needed to ensure that blockchain solutions are aligned with sustainability objectives, principles and standards.”

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The BIS has been actively researching and exploring the potential and challenges of blockchain technology, which underlies cryptocurrencies such as Bitcoin and Ethereum. Blockchain is a distributed ledger technology that allows multiple parties to record and verify transactions without the need for a central authority or intermediary. Blockchain promises to enhance transparency, efficiency and security in various domains of finance, such as payments, trade finance, securities settlement and identity verification.

However, blockchain also faces significant technical, economic and regulatory hurdles that limit its scalability, interoperability and adoption. For instance, the proof-of-work consensus algorithm used by Bitcoin and Ethereum consumes enormous amounts of energy and is vulnerable to attacks by malicious actors. Moreover, the legal status and regulation of blockchain-based assets and activities vary across jurisdictions and are often unclear or inconsistent.

The BIS has been advocating for a balanced and prudent approach to blockchain innovation that harnesses its benefits while mitigating its risks. The BIS has also been collaborating with central banks and other stakeholders to develop and test blockchain-based solutions for sustainable finance, cross-border payments and central bank digital currencies.

In September 2023, the BIS launched an initiative called COP28 UAE TechSprint, in partnership with the Central Bank of the UAE and the Emirates Institute of Finance. The TechSprint challenges developer teams to find solutions that address data verification gaps in sustainable finance using blockchain, artificial intelligence and the Internet of Things. The initiative is spearheaded by the United Arab Emirates’ COP28 presidency and aims to support the global efforts to combat climate change and achieve the Sustainable Development Goals.

In January 2019, the BIS published a working paper titled “Beyond the doomsday economics of “proof-of-work” in cryptocurrencies”, by Raphael Auer. The paper discusses the economics of how Bitcoin achieves data immutability and payment finality via costly computations, i.e., proof-of-work. The paper argues that proof-of-work is inherently inefficient and insecure, and that it will become unsustainable once the block rewards that incentivize miners are phased out. The paper suggests that alternative consensus mechanisms, such as proof-of-stake, or second-layer solutions, such as the Lightning Network, might help improve the scalability and finality of blockchain-based payments.

In March 2018, the BIS published a working paper titled “Central bank cryptocurrencies”, by Morten Bech and Rodney Garratt. The paper defines and categorizes different types of digital currencies, such as private or public, wholesale or retail, and account-based or token-based. The paper focuses on the potential role and design of central bank digital currencies (CBDCs), which are digital liabilities of the central bank that can be used as a medium of exchange and a store of value. The paper analyzes the benefits and costs of CBDCs from various perspectives, such as monetary policy, financial stability, payment efficiency and financial inclusion.

These are just some examples of how the BIS is contributing to the global dialogue and experimentation on blockchain technology. The BIS recognizes that blockchain is a dynamic and evolving field that requires continuous monitoring, assessment and collaboration among different actors. The BIS is committed to fostering innovation in finance that serves the public interest.

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