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Digitalisation and environmental sustainability are widely discussed topics. However, their nexus remains underexplored and can pose significant challenges for governments and industries alike. The environmental implications of digitalisation are becoming increasingly pertinent with the advent of central bank digital currencies (CBDCs) and their inherent energy consumption and production of e-waste. On the other hand, digitalisation could potentially support sustainability efforts. This begs the question of how systems of governance, such as regulatory frameworks and internal organisational governance, should harmonise digitalisation and sustainability goals. Such harmonisation entails ensuring that digitalisation processes are environmentally responsible while exploring how the application and features of digitalisation can help achieve environmental goals. By drawing insights from the case study of CBDCs, this article will utilise the paradigm of adaptive governance to seek potential solutions to the environmental implications of digitalisation. Heng Wang, “Addressing Governance Challenges of Digitalisation and Sustainability: The Case of Central Bank Digital Currency”, Review of European, Comparative and International Environmental Law, Vol. 33, Iss. 3, 2024

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ORIGINAL ARTICLE

Addressing governance challenges of digitalisation and

sustainability: The case of central bank digital currency

Heng Wang

1,2

Yong Pung How School of Law, Singapore

Management University (SMU), Singapore

School of Private and Commercial Law,

UNSW Law & Justice, Sydney, Australia

Correspondence

Heng Wang

Email: hengwang@smu.edu.sg

Funding information

Centre for Commercial Law in Asia at

Singapore Management University; Australian

Research Council, Grant/Award Number:

DP220101632

Abstract

Digitalisation and environmental sustainability are widely discussed topics. However,

their nexus remains underexplored and can pose significant challenges for govern-

ments and industries alike. The environmental implications of digitalisation are

becoming increasingly pertinent with the advent of central bank digital currencies

(CBDCs) and their inherent energy consumption and production of e-waste. On the

other hand, digitalisation could potentially support sustainability efforts. This begs

the question of how systems of governance, such as regulatory frameworks and

internal organisational governance, should harmonise digitalisation and sustainability

goals. Such harmonisation entails ensuring that digitalisation processes are environ-

mentally responsible while exploring how the application and features of digitalisa-

tion can help achieve environmental goals. By drawing insights from the case study

of CBDCs, this article will utilise the paradigm of adaptive governance to seek poten-

tial solutions to the environmental implications of digitalisation.

1|INTRODUCTION

The link between digitalisation and sustainability is nuanced and com-

plex. The discussion of sustainability in this article refers to the man-

agement of natural resources (e.g., improving energy efficiency,

reducing resource consumption) to ensure their continued availability

for current and future generations.

Digitalisation may negatively

affect sustainability, particularly through increasing energy demands

and e-waste. Nevertheless, technology can facilitate better under-

standing of environmental challenges and inform the development of

equitable solutions. This is evident in the proliferation of innovative

projects such as digital platforms that track and reduce emissions.

Such platforms point to the growing capabilities of digital tools to

safeguard environmental interests.

That said, there is a lingering

tension between digitalisation and sustainability. Fast-moving digitali-

sation, such as distributed ledger technology (DLT, including proof-

of-work [PoW] DLT and non-PoW DLT),

big data and generative

See, e.g., J Morelli, ‘Environmental Sustainability: A Definition for Environmental

Professionals’(2011)1 Journal of Environmental Sustainability 1, 5; Microsoft, Environmental

Sustainability: A Commitment to a Better Future < https://www.microsoft.com/en-us/

sustainability/learn/environmental-sustainability>.

United Nations Environment Programme, Sustainable Digitalisation <https://www.unep.

org/topics/digital-transformations/sustainable-digitalisation>.

See, e.g. M T Boçe and J Hoxha, ‘Blockchain Technology as a Catalyst for Sustainable

Development: Exploring Economic, Social, and Environmental Synergies’(2024) 13 Academic

Journal of Interdisciplinary Studies 151, 159; I Guandalini, ‘Sustainability through Digital

Transformation: A Systematic Literature Review for Research Guidance’(2022) 148 Journal

of Business Research 456, 456.

DLT is the shared record of information that enables computers (nodes) in different places

to add, validate, and synchronise transactions. PoW DLT is a consensus mechanism to

validate new transactions added to a DLT platform, and validators are rewarded for validating

the transactions. Non-PoW DLT includes proof-of-stake (PoS) DLT. For PoS DLT, validators

of a blockchain network lock their tokens as a stake on the blockchain for the chance to be

selected to validate a new block and thus earn transaction fees as a reward. If the validators

do not do the work, they could lose their blocked tokens. See City of London Corporation

et al, ‘Digital Currency Glossary’(2024) <https://www.ukfinance.org.uk/system/files/2024-

01/FDC%20Crypto%20Glossary.pdf> 6, 8; AN Didenko and RP Buckley, ‘Central Bank

Digital Currencies: A Potential Response to the Financial Inclusion Challenges of the Pacific-

Risks and Opportunities’(2021) 3 Issues in Pacific Development 1, 19.

Received: 1 October 2023 Accepted: 19 September 2024

DOI: 10.1111/reel.12571

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,

provided the original work is properly cited.

RECIEL. 2024;1–15. wileyonlinelibrary.com/journal/reel 1

artificial intelligence (AI),

may accelerate resource consumption and

pose long-term environmental risks. The environmental footprint of

different technologies can vary greatly—for example, the energy

intensity of crypto assets diverges significantly. Estimates suggest that

100 million transactions in one asset of the least energy-consuming

technology consume the same amount of energy as a single transac-

tion in an asset using the most energy-consuming technology.

More-

over, carbon-intensive digital infrastructure (e.g., infrastructure

supporting internet data transfers) could contribute to environmental

degradation.

Given the fundamental role of currency in today's world, the

focus of this article will be on central bank money. Central bank digital

currency (CBDC) is emblematic of the digitalisation of central bank

money.

CBDC is a digital national currency issued by each country's

central bank. Amid the dynamic challenges that digital currencies pose

to policymakers (e.g., potential financial stability risks),

CBDCs have

emerged as a potential option to serve as central bank money in the

digital age. Various types of CBDCs are currently under development.

Wholesale CBDCs are primarily used by financial institutions to settle

trades in financial markets and foreign exchange transactions,

while

retail CBDCs are intended for public use. By the end of 2023, 94% of

central banks surveyed by the Bank for International Settlements (BIS)

were involved in CBDC-related work.

An increasing number of juris-

dictions are exploring the feasibility of CBDCs,

which could under-

pin the monetary system in the digital future.

The development of

CBDCs, including research, pilot programmes, supporting infrastruc-

ture and eventual usage, would all carry an increased environmental

footprint.

The intersection of digital currencies and sustainability presents a

major and new challenge for policymakers and other actors (e.g., the

industry).

A survey of central bank laws of 174 International

Monetary Fund (IMF) members found that only about 40 countries

are legally allowed to issue digital currencies. Nearly 80% of 174 IMF

members either face an ambiguous legal framework in the issue of

digital currency or lack the legal authority altogether.

As a result,

there are limited regulations and laws focused on CBDCs, let alone

those concerning the intersection of CBDCs and sustainability. It is to

this gap in regulation and to the nexus between CBDCs and sustain-

ability (especially on issues of energy and e-waste) that this article

seeks to contribute. Given the dearth of existing regulation, the paper

focuses discussion on the broader governance and institutional envi-

ronment and issues at the CBDC-sustainability nexus itself.

Two related and fundamental questions comprise the nexus

between CBDCs and sustainability: firstly, how can we ensure that

CBDCs are environmentally responsible? To answer the first question,

focus should be placed on the development of environmentally

friendly or ‘green’CBDCs to minimise their environmental footprint.

Secondly, how can digitalisation contribute to environmental goals

(e.g., climate targets) through its usage and features

(e.g., programmability of CBDCs)? However, uncertainties exist

regarding these two fundamental questions (i.e., whether CBDCs can

be ‘green’and contribute to sustainability).

These uncertainties are exacerbated by the gaps in governance

(particularly a regulatory gap and a gap in internal organisational gov-

ernance). A regulatory gap exists, as, given their novelty, financial and

environmental law has not comprehensively addressed the possible

environmental impact of technological developments in digitalisation.

CBDCs are regulated mainly by financial law (including central banking

laws

and regulations

), and energy consumption and e-waste are

regulated mainly by environmental law.

If not properly managed by

active regulatory arrangements (e.g., environmental impact assess-

ment and tendering requirements concerning energy efficiency), envi-

ronmental risks arising from technological developments of

digitalisation (e.g., e-waste) may not be properly considered or

averted.

The paradigm of adaptive governance helps to address these

uncertainties.

The systems approach inherent in adaptive gover-

nance provides a valuable framework for addressing the regulation

and governance gap in digitalisation and sustainability. This is particu-

larly the case with learning by stakeholders (e.g., central banks and

other government departments) as their coordinated response.

See, e.g., D Chatterjee, ‘Role of A.I. in Central Bank Digital Currency’(2022) <https://

aijourn.com/role-of-a-i-in-central-bank-digital-currency/>.

I Agur et al, ‘Lessons From Crypto Assets for the Design of Energy Efficient Digital

Currencies’(2023) 212 Ecological Economics 1, 1.

I Agur et al, ‘Digital Currencies and Energy Consumptions’NOTE/2022/006 (International

Monetary Fund 2022) 4.

Examples of CBDC include the digital euro that is being explored by the European

Central Bank.

S Jahan et al, ‘Towards Central Bank Digital Currencies in Asia and the Pacific: Results of a

Regional Survey’(International Monetary Fund 2022) 10.

Bank for International Settlements (BIS), ‘Central Bank Digital Currency (CBDC)

Information Security and Operational Risks to Central Banks: An Operational Lifecycle Risk

Management Framework’(2023) 8; Clifford Chance, ‘Central Bank Digital Currencies: A New

Type of Intermediary’(2023) 3.

A Di Iorio, et al., ‘Embracing Diversity, Advancing Together –Results of the 2023 BIS

Survey on Central Bank Digital Currencies and Crypto’(2024) <https://www.bis.org/publ/

bppdf/bispap147.htm>1.

See, e.g., A. M. Mooij, ‘A Digital Euro for Everyone: Can the European System of Central

Banks Introduce General Purpose CBDC as Part of Its Economic Mandate?’(2023)

24 Journal of Banking Regulation 89, 89-104; Bank of England and HM Treasury, ‘The Digital

Pound: A New Form of Money for Households and Businesses?’(2023) <https://www.

bankofengland.co.uk/-/media/boe/files/paper/2023/the-digital-pound-consultation-

working-paper.pdf>; H Wang, ‘China's Approach to Central Bank Digital Currency:

Selectively Reshaping International Financial Order?’(2022) 18 University of Pennsylvania

Asian Law Review 77, 77-134; H Wang, ‘How to Understand China’s Approach to Central

Bank Digital Currency?’(2023) 50 Computer Law and Security Review 1, 1-17.

BIS Innovation Hub, ‘Lessons Learnt on CBDCs’(2023) 9.

I Agur et al, ‘How Crypto and CBDCs Can Use Less Energy Than Existing Payment

Systems’(International Monetary Fund, 2022) <https://www.imf.org/en/Blogs/Articles/

2022/06/16/how-crypto-and-cbdcs-can-use-less-energy-than-existing-payment-systems>.

C Margulis and A Rossi, ‘Legally Speaking, is Digital Money Really Money?’(2021)

<https://www.imf.org/en/Blogs/Articles/2021/01/14/legally-speaking-is-digital-money-

really-money>.

See, e.g., People's Bank of China, Law of the People’s Bank of China (Amendment Draft for

Consultation) (2020) < http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4115077/

2020102318443757476.doc> art 19.

See, e.g., E Howcroft and M Jones, Bahamas to Regulate Banks to Offer Cbank Digital

Currency(2024) < https://www.reuters.com/technology/bahamas-regulate-banks-offer-

cbank-digital-currency-2024-07-01/> (At the time or wring, it has been reported that the

Bahamas would likely adopt regulations concerning CBDC within the next two years).

See, e.g., European Parliament and Council Directive 2012/19/EU on waste electrical and

electronic equipment (WEEE) (recast) Text with EEA relevance [2012] OJ L 197.

T Dietz et al, ‘The Struggle to Govern the Commons’(2003) 302 Science 1907, 1907.

R Cooney and ATF Lang, ‘Taking Uncertainty Seriously: Adaptive Governance and

International Trade’(2007) 18 European Journal of International Law 523, 539.

K van Assche et al, ‘Adaptive Governance: Learning from What Organizations Do and

Managing the Role They Play’(2022) 51 Kybernetes 1738, 1746.

2WANG

20500394, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/reel.12571, Wiley Online Library on [20/10/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License

Originating from seminal work in 2003,

adaptive governance

encompasses interactions among public and private actors, networks

and institutions to enhance social-ecological systems.

In the same vein, there is a gap in internal organisational gover-

nance. Digitalisation and sustainability are handled by different agen-

cies or different departments of an institution (such as separate

currency, technology and sustainability departments of a central bank

or of an international organisation) with arguably limited coordination.

Existing governance frameworks have rarely grappled with CBDCs

and sustainability, especially the contributions of CBDCs to sustain-

ability. Such limited coordination makes existing internal organisa-

tional governance struggle to align digitalisation with sustainability in

a holistic and timely way.

The urgency of addressing CBDCs in tandem with sustainability

arises from the limited timeframe available to guarantee that CBDC

frameworks will actively promote sustainability. CBDCs need to be

designed within a certain time frame given pressures such as currency

competition. Once CBDCs have established their structural processes,

it may prove difficult to change. CBDCs therefore need to be

designed today with sustainability in mind.

The article continues, in Section 2, by exploring the underlying

challenges that governance systems face in aligning digitalisation

with sustainability. It argues that the governance systems for digita-

lisation and sustainability face various mismatches in terms of func-

tions (functional mismatches), governance levels (spatial

mismatches) and timescales (temporal mismatches). Adaptive gover-

nance can help to explore the solutions to these mismatches. As

discussed in Section 2, there is a lack of alignment in the gover-

nance of digitalisation on the one hand and sustainability on the

other. Section 3explores learning as the potential solution to the

governance gaps highlighted in Section 2, particularly given the

early stage of governing CBDCs. As a crucial aspect of adaptive

governance, learning is an important way to respond to uncer-

tainties.

Amid the evolving landscape, learning helps to address

the governance gaps by assessing the effect of digitalisation on

sustainability and breaking silos. Section 4concludes by further

considering how CBDCs may be harmonised with sustainability.

This article does not analyse the merits of CBDCs, which deserve

separate and careful analysis.

2|ADAPTIVE GOVERNANCE FOR

SUSTAINABLE CBDCS

Governance involves any collaborative initiative intended to

oversee public affairs, emerging through structured interactions

among public entities, private entities, and both formal and informal

institutions.

Mismatches in governance are among the major

reasons behind the challenges faced by socio-ecological systems,

and are arguably at the core of governance dilemmas.

These

mismatches occur horizontally between functions, vertically

across levels of governance

and across different timescales.

a major governance challenge concerning digitalisation and

sustainability, these mismatches reveal governance gaps in coordi-

nating different functions, and crossing governance levels and

timescales.

These mismatches highlight the tension between digitalisation

and environmental sustainability. The learning of adaptive gover-

nance is therefore needed to address this tension (as discussed in

Section 3).

Understanding these mismatches is key to unpacking

the complexity of governance in the digitalisation context, the diffi-

culties faced by existing governance arrangements, and the result-

ing ramifications for the digitalisation-sustainability nexus more

broadly.

The concept of adaptive governance originated from applying

ecological systems theory to natural resource management.

particular, adaptive governance analyses how a governance system

addresses uncertainties.

It serves as a valuable paradigm for

addressing challenges like climate change,

and has often been

adapted and applied by researchers and practitioners in different

and changing contexts. Adaptive governance addresses uncer-

tainties through learning (including learning in the policymaking pro-

cess).

The approach is critical in complex scenarios involving

multiple stakeholders, especially in situations where it is difficult to

determine the optimal course of action.

That said, adaptive gov-

ernance is not a silver bullet,

and adaptation brings both opportu-

nities (e.g., new connections) and challenges (e.g., the time

consumed in trust building among existing and new stakeholders).

These issues should also be carefully considered in governance pro-

cesses. This section provides a solid foundation for the analysis of

how adaptive governance can help design and improve governance

arrangements.

Dietz et al (n 19) 1907-1912.

BC Chaffin et al, ‘A Decade of Adaptive Governance Scholarship: Synthesis and Future

Directions’(2014) 19 Ecology and Society 1, 1.

C Wyborn et al, ‘Conceptualising the Science–Policy–Practice Interface of Adaptive

Governance’in S Juhola (ed) Handbook on Adaptive Governance (Edward Elgar 2023) 54, 68.

B Cosens et al, ‘Governing Complexity: Integrating Science, Governance, and Law to

Manage Accelerating Change in the Globalized Commons’(2021) 118 Proceedings of the

National Academy of Sciences of the United States of America 1, 2.

M Nikkanen and A Räsänen, ‘Spatial Data, Methods, and Mismatches for Adaptive

Governance Research’in S Juhola (ed) Handbook on Adaptive Governance (Edward Elgar

2023) 100.

S Juhola, ‘The Next Decade of Adaptive Governance Research: Concluding Remarks’in S

Juhola (ed) Handbook on Adaptive Governance (Edward Elgar 2023) 253.

M Janssen and H van der Voort, ‘Adaptive Governance: Towards a Stable, Accountable and

Responsive Government’(2016) 33 Government Information Quarterly 1, 3.

KJ Winkler et al, ‘Mismatches in the Ecosystem Services Literature—a Review of Spatial,

Temporal, and Functional-Conceptual Mismatches’(2021) 6 Current Landscape Ecology

Reports 23, 24.

ibid.

E Esener, ‘Adaptive Governance for Blockchain Networks’(2024) 7 Stanford Journal of

Blockchain Law and Policy 76, 101.

T Steelman, ‘Adaptive Governance’in C Ansell and J Torfing (eds), Handbook on Theories of

Governance (Edward Elgar 2022) 580, 581.

N Soininen et al, ‘Adaptive Governance, Law and Regulation’in S Juhola (ed) Handbook on

Adaptive Governance (Edward Elgar 2023) 35, 36.

Cooney and Lang (n 20) 524.

Janssen and van der Voort (n 28) 3.

BA Cosens et al, ‘Designing Law to Enable Adaptive Governance of Modern Wicked

Problems’(2020), 73 Vanderbilt Law Review 1687, 1731.

WANG 3

2.1 |Functional mismatches

The governance frameworks for digital currencies

and sustainability

address distinct functions and policy domains. The functional mis-

matches of these two domains extend to different knowledge types,

perceptions, networks and institutions.

These mismatches are fur-

ther compounded by distinct policy areas, regulatory environments,

and a limited history of collaboration among actors, all of which shape

their development.

A useful example is wholesale CBDCs, which

would potentially enhance the efficiency of international payments

(e.g., reducing the number of intermediaries). However, this process

would involve energy consumption.

In the broader context of finance and sustainability, there is

increasing coordination between regulators in both fields. Examples

include the Network of Central Banks and Supervisors for Greening

the Financial System (NGFS), the Task Force on Climate-Related

Financial Disclosures, the European Union (EU) Sustainable Finance

Disclosure Regulation, and the EU green bond standard. However,

such coordination remains limited, especially when it comes to

CBDCs.

CBDCs should be designed in a way that mitigates their environ-

mental ramifications. Regulatory development could incentivise or

encourage CBDCs to meet high standards of energy efficiency and

rely on sustainable energy to function. Energy consumption (including

the energy efficiency of CBDC infrastructure and payment instru-

ments) should be an integral element in the initial design and execu-

tion of CBDCs.

The G7 called for measures such as the careful design of retail

CBDCs and disclosure of CBDCs' environmental effects.

CBDCs

can set a benchmark for energy-efficient payment and settlement sys-

tems by integrating carbon-neutral and sustainable energy sources to

achieve ‘functional, performance, and resilience objectives’.

The

European Central Bank (ECB) has also indicated the need for environ-

mentally friendly CBDCs based on technological solutions that reduce

its environmental impact.

The design of the digital Euro is expected

to motivate and urge payment service providers to reduce the envi-

ronmental footprint of the existing payment system.

The Bank of

England (BoE) indicated that the design and issuance of its possible

CBDC should consider the climate strategy of the BoE.

Nonethe-

less, despite this explicit recognition, the sustainability implications of

CBDCs remain largely unclear. CBDCs would likely rely on technology

developments such as low-energy use hardware and software inter-

faces, as well as regulatory frameworks to be environmentally respon-

sible. CBDCs consume energy, especially when deployed not only

within domestic boundaries but also across borders. Against this back-

drop, solving functional mismatches in the fields of finance and sus-

tainability proves even more pertinent.

Meanwhile, as a first-mover, China is actively exploring the use of

its digital yuan or e-CNY to promote sustainability and may influence

the potential of using CBDCs to encourage environmentally friendly

activities. This is an example of where CBDCs and sustainability inter-

sect. The success of such an intersection depends on how well CBDCs

operate and how well regulatory and other issues, such as recovering

the cost of investing in the CBDC ecosystem, are dealt with. The

e-CNY is used in environmentally friendly activities such as cycling,

green business subsidy and discount transactions in the e-CNY pilot

programme.

Cyclists who opt for bicycle sharing can enjoy financial

benefits in the form of e-CNY, thereby encouraging zero-carbon

forms of transport.

This showcases CBDCs' ability to function as

viable financial rewards, which can further the execution and uptake

of green initiatives. China has since taken its incentivisation a step fur-

ther: recently, the digital yuan has been used in a domestic loan to

reduce carbon emissions in the energy sector.

The Postal Savings

Bank of China is also exploring the use of e-CNY in the rediscount of

green commercial bills,

where the bank buying these bills receives

another deduction from their debt amount for the prompt payment

before their due date. Nevertheless, it remains to be seen whether

and how functional mismatches (e.g., distinct policies and regulatory

environments) can be addressed here and what the long-term effects

of these efforts, such as scalability and cost recovery, would be.

Improving the coordination of different functions is essential for

narrowing the governance gap to harmonise digitalisation and sustain-

ability. Such coordination necessitates the construction of ‘bridges’

between prevailing governance structures, considering the traditions

(e.g., history, culture) of institutions, to effectively address the chal-

lenges posed by the evolving landscape.

It requires, among other

Here digital currencies include CBDCs, stablecoins, and other crypto assets. Stablecoins

and other crypto assets are not currencies in the strict sense and can be classified as a

financial asset (such as a security). CBDCs are national currencies issued by the central banks.

FATF, ‘Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset

Service Providers’(2021) <www.fatf-gafi.org/publications/fatfrecommendations/

documents/Updated-Guidance-RBA-VA-VASP.html> 24.

Winkler, et al. (n 29) 25, 28.

C Wang et al, ‘Towards a Typology of Adaptive Governance in the Digital Government

Context: The Role of Decision-Making and Accountability’(2018) 35 Government

Information Quarterly 306, 320.

Agur et al (n 7) 13.

A Baglioni, Monetary Policy Implementation: Exploring the ‘New Normal’in Central Banking

(Palgrave Macmillan 2024), 241-252.

G7, ‘Public Policy Principles for Retail Central Bank Digital Currencies’(2021) <https://

assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/

1025235/G7_Public_Policy_Principles_for_Retail_CBDC_FINAL.pdf> 11, 12.

ibid.

European Central Bank, ‘Report on a Digital Euro’(2020) < https://www.ecb.europa.eu/

pub/pdf/other/Report_on_a_digital_euro4d7268b458.en.pdf > 15.

ibid.

Bank of England, ‘The Bank of England’s Climate-Related Financial Disclosure 2021’

(2021) <https://www.bankofengland.co.uk/prudential-regulation/publication/2021/june/

climate-related-financial-disclosure-2020-21>.

M Gou, ‘Deepen Cross-Border Pilots, Continuously Expand Scenarios, and Take the E-CNY

Pilot Further’(2024) <https://baijiahao.baidu.com/s?id=1800531549771482800&wfr=

spider&for=pc>.

J Ouyang, ‘E-CNY Empowers “Dual Carbon”- Meituan Bike’s 3 Million Digital Currency

Users Have Ridden More Than 71.2 Million Kilometers' 2022)’(3 March 2022) <https://

www.cs.com.cn/5g/202203/t20220303_6246791.html>.

Postal Savings Bank of China, ‘Postal Savings Bank of China Launched the Country’s First

“Carbon-Reduction Supporting Tool +Sustainable Development Linkage +E-CNY”Loan’

(15 May 2023) <https://www.psbc.com/cn/gyyc/ycfm/ycdt/202305/t20230515_202500.

html>.

China Banking and Insurance News, ‘Rediscount +Green Bill Discount +E-CNY”Business

Launched in Guangdong’(18 April 2023) <http://www.cbimc.cn/content/2023-04/18/

content_482072.html>.

Chaffin et al (n 23) 9,

4WANG

things, the careful consideration of the effects of digitalisation in gov-

ernance design to align digitalisation with sustainability.

2.2 |Spatial mismatches

Mismatches between the governance levels at which problems need

to be addressed could lead to splintered governance.

These

mismatches could concern inconsistent scales.

Here scales refer to

analysing issues by applying a spatial dimension.

Regarding the

CBDC-sustainability nexus, the harmonisation of CBDC and sustain-

ability concerns the governance at the local (e.g., a local government

promoting environmentally friendly activities through CBDCs),

national (e.g., the role of central banks and other authorities in regulat-

ing and promoting green CBDCs), regional and international levels

(e.g., the coordination of efforts of different jurisdictions in developing

green CBDCs, including the energy efficiency of cross-border CBDCs).

For each of these examples, the scales of governance may not align

with real-world issues, leading to scale mismatches.

In light of this, it is critical to act and respond ‘at the scale of the

problem’.

Both sustainability and digitalisation concern local,

national, regional and global levels.

The cross-border use of CBDCs,

in particular, extends over two or more jurisdictions. As such, cross-

scale governance activities are necessary to accommodate the multi-

jurisdictional nature of both fields.

The self-organising aspect of adaptive governance may also be

reflected at smaller scales.

However, self-organisation at smaller

scales may prove insufficient to address the environmental implica-

tions of CBDCs. Given the challenges, such as global warming, that

energy consumption and e-waste impose, the nexus between CBDCs

and sustainability needs to be addressed not only at local and national

levels but also at regional and international levels. The phenomena

and issues being governed require a corresponding scale of gover-

nance (particularly jurisdictional scales) to avoid scale mismatches that

can occur with decentralisation. Further, the local governance may

struggle to address the complex large-scale, cross-scale or cross-level

issues

inherent in the governance of digitalisation and sustainability.

Therefore, such governance needs to simultaneously operate at the

local, national, regional and international levels.

2.3 |Temporal mismatches

Conflict can arise between the long-term and short-term consider-

ations of different actors. Systematic adaptiveness is therefore

needed to reconcile these temporal mismatches.

Digitalisation and

sustainability involve vastly different timescales. The environmental

impact of CBDCs is contingent upon technological designs and gener-

ally concerns the mid- to long-term consideration of climate change

and environmental degradation. Various elements contribute to the

energy use of CBDC, including data centres and digital wallets located

on devices, as well as the use of software that processes payments.

CBDC energy consumption is also affected by technology and techno-

logical designs (as discussed below). For example, CBDCs could adopt

blockchain technology to create an immutable transaction record,

but this would incur costs of computations and storage, leading to fur-

ther environmental impact.

The extent of energy consumption

regarding access to these ledgers may be affected by the nodes of the

network, particularly their number and location, software, and proto-

col.

To illustrate, with all else being equal, fewer nodes signal lower

redundancy and reduce energy consumption.

The energy efficiency

of software is thus linked to its carbon footprint.

Furthermore, technological design also has environmental impli-

cations. The diverse selection of technological designs among various

states may result in fragmentation and incompatibility of technical

standards. Such discrepancies can escalate energy consumption,

since more electricity would be needed due to incompatibility. Other

aspects like e-waste relating to digital infrastructure

and user pay-

ment means (e.g., digital wallets available on smart phones, payments

made by feature phones, related user hardware and software inter-

faces) could also carry broader environmental implications.

CBDCs

running on phones may, nevertheless, reduce dependence on card

networks and energy consumption, provided that CBDC transactions

can be conducted on low-energy devices and do not require more

energy-intensive payment methods.

These mid- to long-term environmental and sustainability consid-

erations may not always align with the short-term imperatives to roll

out CBDCs quickly, especially to acquire a first-mover advantage, or

R&D budgetary constraints for CBDC projects and technology. The

trade-offs inherent in design choices, encompassing factors like

See, e.g., A Mitha, ‘BigFintechs & Sustainability: A Necessary Convergence’(2021)

<https://www.undp.org/sites/g/files/zskgke326/files/2021-06/UNDP-UNCDF-Summary-

of-Technical-Paper-BigFintech-and-Sustainability-a-Necessary-Convergence-EN.pdf>; K

Charamba et al, ‘BigFintechs and International Governance, Policymaking and the United

Nations Sustainable Development Goals: The SDGs in the International Governance of

Finance’(2021) <https://www.undp.org/sites/g/files/zskgke326/files/2021-06/UNDP-

UNCDF-TP-3-2-BigFintechs-and-International-Governance-Policymaking-and-the-United-

Nations-EN.pdf> 16.

Nikkanen and Räsänen (n 26), 108.

Janssen and van der Voort (n 28), 3.

CC Gibson et al, ‘The Concept of Scale and the Human Dimensions of Global Change: A

Survey’(2000) 32 Ecological Economics 217, 218.

Nikkanen and Räsänen (n 26), 108-109.

Cosens et al (n 36) 1725.

GK Hovelsrud and H Westskog, ‘The Role of Adaptive Governance in Climate Mitigation

and Adaptation: A Local Perspective’in S Juhola (ed) Handbook on Adaptive Governance

(Edward Elgar 2023)194.

Cosens et al (n 36) 1727; DA DeCaro et al, ‘Legal and Institutional Foundations of Adaptive

Environmental Governance’(2017) 22 Ecology and Society 1, 10.

Nikkanen and Räsänen (n 26) 101.

Wang et al (n 39) 320.

Agur et al (n 7) 5.

A Abi Karam, ‘Central Bank Digital Currency (CBDC) and Blockchain Enable the Future of

Payments’(2023) <https://www.ibm.com/blog/central-bank-digital-currency-cbdc-and-

blockchain-enable-the-future-of-payments/>.

J Xu, ‘Developments and Implications of Central Bank Digital Currency: The Case of China

e-CNY’(2022) 17 Asian Economic Policy Review 235, 244.

Agur et al (n 14).

Agur et al (n 7) 5.

G Kerr, ‘Crypto’s Carbon Footprint’(2021) <https://en.irefeurope.org/publications/iref-

newsletter/article/crypto-s-carbon-footprint/>.

Agur et al (n 7) 13.

ibid 14-15.

WANG 5

performance (e.g., data flow), security advantages and energy usage,

are intricately tied to the competing overarching objective of digitali-

sation and sustainability.

Pursuing one goal could generate opportu-

nity costs for realising another.

Given currency competition, capital

costs and infrastructure development, some states may prioritise

short-term considerations in the research and development of CBDCs

over long-term environmental interests.

Mismatches could be exacerbated by the need for swift

responses not only to emergencies but also to innovations, developing

technology or user needs.

Taking spatial mismatches as an example,

the harmonisation of CBDC and sustainability at the local level may

move at a different pace compared with that at the national, regional

or international levels. In addition, a frequent gap in governance sys-

tems occurs when planning and funding arrangements are driven by

short-term perspectives rather than the long-term vision needed for

sustainability issues.

2.4 |Summary

The various mismatches discussed above highlight the significant and

overlapping challenges posed by existing governance arrangements to

sustainable CBDCs. Sustainability is a large-scale issue across space

and time involving mismatches in both governance levels and time-

scales. Adaptive governance, as outlined in Table 1, helps tackle mis-

matches and facilitates the collaborative endeavours of multi-level

institutions in ensuring that digitalisation is environmentally

responsible and contributes to a green economy. Functional and spa-

tial mismatches provide a prime example. In addressing functional

mismatches, adaptive governance aligns organisational governance

with the needs of the environment (including technical needs).

Given its capacity to address uncertainties involving a large number of

actors,

adaptive governance could be a useful tool in dealing with

the nexus between CBDCs and sustainability.

As a feature of adap-

tive governance

and as discussed below, learning provides a useful

way to organise an adaptive approach to further align digitalisation

with sustainability.

3|LEARNING AS A MAJOR GOVERNANCE

EFFORT

To respond to structural mismatches,

adaptive governance focuses

on fostering learning.

This can involve practices, ideas, values, key

questions and even assumptions.

Learning is the societal process of

adapting institutions to handle social and ecological change in a way

that improves the well-being of present and future generations.

This

in turn helps to reduce the gap in internal organisational governance.

Adaptive governance relies on the ability of actors to adapt to

changes

and requires coordination of actors at different levels

to effectively manage social-ecological systems.

Learning is also a

‘learn by doing’process for various stakeholders to jointly explore

S Lee and J Park, ‘Environmental Implications of a Central Bank Digital Currency (CBDC)’

(World Bank Group Korea Office 2022) 12.

ibid.

I De Bode et al, ‘CBDC and Stablecoins: Early Coexistence on an Uncertain Road’(2021)

<https://www.mckinsey.com/industries/financial-services/our-insights/cbdc-and-

stablecoins-early-coexistence-on-an-uncertain-road#> 5.

Janssen and van der Voort (n 26) 2.

C Alexandra et al, ‘Futures-Thinking: Concepts, Methods and Capacities for Adaptive

Governance’in S Juhola (ed) Handbook on Adaptive Governance (Edward Elgar 2023)

88, 88-89.

TABLE 1 Functional, spatial and temporal mismatches faced by digitalisation and sustainability

Arises across Considerations Examples Possible solutions

Functional

mismatches

Horizontal functions

(e.g., environment and

digitalisation)

Different knowledge types,

perceptions, networks and

institutions (e.g., regulators)

The tension between the benefits of

digitalisation (e.g., efficiency) and its

environmental impact (e.g., e-waste,

energy use)

Coordination between

functions, including linking

with existing governance

structures

Spatial

mismatches

Governance levels

(ranging from local to

international levels) and

scales

Different jurisdictions and

inconsistent scales

The difficulties of the

governance scales to fit with

real-life issues

The inability of local-level governance or

central banks to address global warming

on their own

Cross-scale and cross-level

efforts to address mismatches

Temporal

mismatches

Different timescales Short, mid- to long-term

timescales and

considerations

Tension between short-term imperatives

to roll out CBDCs quickly and long-term

environmental considerations

Making trade-offs based on

learning

Janssen and van der Voort (n 28) 2.

ibid.

E Boyd and S Juhola, ‘Adaptive Climate Change Governance for Urban Resilience’(2015)

52 Urban Studies 1234, 1241.

RP Bixler et al, ‘Adaptive Governance for Disaster Risk Reduction’in S Juhola

(ed) Handbook on Adaptive Governance (Edward Elgar 2023) 237.

Nikkanen and Räsänen (n 26) 100.

Cooney and Lang (n 20) 534.

S Munaretto et al, ‘Integrating Adaptive Governance and Participatory Multicriteria

Methods: A Framework for Climate Adaptation Governance’(2014) 19 Ecology and

Society 1, 4.

J Woodhill, ‘Sustainability, Social Learning and the Democratic Imperative: Lessons from

the Australian Landcare Movement’in C Blackmore (ed), Social Learning Systems and

Communities of Practice (Springer 2010) 57, 63.

M Fournier et al, ‘Flood Risk Mitigation in Europe: How Far Away Are We From the

Aspired Forms of Adaptive Governance’(2016) 21 Ecology and Society 1, 3.

L Schultz et al, ‘Adaptive Governance, Ecosystem Management, and Natural Capital’(2015)

112 Proceedings of the National Academy of Sciences of the United States of America

7369, 7369.

6WANG

solutions to address uncertainties,

which works to narrow the regu-

latory gap. As ‘the core of governance efforts’,

learning increases

knowledge (including new information through data collection) and

embraces different perspectives. Through learning, stakeholders could

transcend functional, spatial and temporal boundaries and work

together across those boundaries to build sustainable digitalisation.

To a certain degree, learning contributes to mitigating functional mis-

matches and other discrepancies, as central banks may not possess a

comprehensive understanding of the environmental ramifications

associated with CBDCs.

Understanding of the environmental implications of CBDCs needs

to be improved.

Notably, uncertainties exist in energy consumption

and e-waste issues (e.g., the long-term e-waste solutions) related to

fintech and other technical advancements. It is not easy to accurately

anticipate the far-reaching environmental impacts of digitalisation.

From an environmental perspective, the global environmental system

is a ‘complex adaptive system’, and learning is crucial to adapt to a

world experiencing increasingly fast environmental change.

Taken

together, rapid progress in practice as well as successful adaptation

both require learning.

Here learning encompasses insights into shifts

and impacts within governance environments, operational

expenditures and unforeseen consequences of digitalisation. With its

far-reaching range, learning will play a pivotal role in navigating the

intricate relationship between CBDCs and sustainability.

Learning needs to be integrated into decision-making processes

and should occur at all levels of governance (multi-level learning

Learning can be fostered in a number of ways. This includes effec-

tively preventing irreversible impacts (e.g., precaution in terms of pol-

icy and technological choices to prevent serious environmental

implications), closely reviewing the knowledge gaps underpinning

decisions (e.g., experimentation), critically assessing results (including

monitoring

and other assessment of environmental implications as

discussed in Section 3.1) and encouraging diverse perspectives in the

decision-making processes (including breaking silos as discussed in

Section 3.2).

These different ways of learning may overlap. For

example, experimentation of CBDCs includes sandboxes and pilot

projects. In this process, the public and private sectors should make

efforts to break silos of digitalisation and sustainability and explore

trade-offs between different policy objectives. To tackle spatial mis-

matches, sandboxes could be developed at a regional level to address

issues such as divergent regulations in different jurisdictions. Cur-

rently there are very few sandboxes, which have been established or

are planned at a country level.

A sandbox that works on the envi-

ronmental implications of CBDCs is still lacking and may be

considered.

Encouraging regulatory and technological experimentation, a

sandbox could focus on seeking solutions and building capacity

(including sharing knowledge) in aligning digitalisation with sustain-

ability. For the organisers of sandboxes, they could be international

and regional organisations (e.g., the BIS) and other actors (e.g., central

banks). For the focus of sandboxes, they should have a system to

monitor the environmental implications of CBDCs (e.g., data collection

and analysis, an early warning mechanism regarding environmental

impact) and encourage actors (e.g., the industry, such as software

developers) to explore use cases of the contribution of CBDCs to a

green economy. To illustrate, energy costs are a factor that central

banks are considering or will face regarding CBDCs.

Sandboxes may

endeavour to provide general guidance (e.g., initial technical docu-

mentation, test scripts, minimum energy efficiency requirements) and

serve as a hub to promote peer learning.

Sandboxes should engage

with as many stakeholders as possible, including regulators of the dif-

ferent levels, international organisations, industry and other stake-

holders (e.g., non-governmental organisations [NGOs]). This promotes

inclusiveness and iterative reflection.

3.1 |Starting from the assessment of

environmental implications of CBDCs

Learning could be promoted through not only technology but also

regulation (such as tendering requirements concerning energy effi-

ciency). A useful starting point for learning is the assessment of envi-

ronmental implications of CBDCs, which concerns both technological

and regulatory aspects.

3.1.1 | Technological aspects

CBDC-related technology could affect the environmental implications

of infrastructure and should be further explored to identify environ-

mentally friendly solutions. According to a recent study, central

D Armitage et al. ‘Adaptive Co-management and the Paradox of Learning’(2008) 18 Global

Environmental Change 86, 91.

M Janssen and H van der Voort, ‘Agile and Adaptive Governance in Crisis Response:

Lessons From the COVID-19 Pandemic’(2020) 55 International Journal of Information

Management 1, 2.

AH Elsayed and MA Nasir, ‘Central Bank Digital Currencies: An Agenda for Future

Research’(2022) 62 Research in International Business and Finance 1, 4.

F Berkes, ‘Environmental Governance for the Anthropocene? Social-Ecological Systems,

Resilience, and Collaborative Learning’(2017) 9 Sustainability 1, 1.

Nikkanen and Räsänen (n 26) 104.

C Wyborn, ‘Cross-Scale Linkages in Connectivity Conservation: Adaptive Governance

Challenges in Spatially Distributed Networks’(2015) 25 Environmental Policy and

Governance 1, 3.

C Pahl-Wostl, ‘A Conceptual Framework for Analysing Adaptive Capacity and Multi-Level

Learning Processes in Resource Governance Regimes’(2009) 19 Global Environmental

Change 354, 356.

Wyborn et al (n 24) 68.

Cooney and Lang (n 20) 534.

See, e.g., LV Schumacher, Decoding Digital Assets: Distinguishing the Dream from the

Dystopia in Stablecoins, Tokenized Deposits, and Central Bank Digital Currencies (Palgrave

Macmillan 2024) 164-165 (Fintech Regulatory Sandbox of the Bank of Jamaica that has

tested a prototype CBDC); A Davletov, et al., Regulatory Sandbox Guideline on Central Bank

Digital Currency for the Maldives Monetary Authority (Department of Economic and Social

Affairs of the United Nations Secretariat, Maldives Monetary Authority, Ministry of

Environment Climate Change and Technology, Maldives, and Economic and Social

Commission for Asia and the Pacific 2023) 1-13.

Agur et al (n 6) 6.

Bank for International Settlements and Bank of England, ‘Project Rosalind: Building API

Prototypes for Retail CBDC Ecosystem’(2023) < https://www.bis.org/publ/othp69.htm>

16, 25.

WANG 7

bankers consider CBDCs to be a greener option than cash.

Possible

reasons for this include the saving of cash transport, storage and man-

agement costs because trips to bank branches or ATMs are no longer

needed.

However, nuanced understanding is needed. For one, data

and IT systems (such as blockchain and data centres) are energy-

intensive.

The complexity and rapid evolution of CBDCs and their

ecosystems pose various governance challenges due to the uncer-

tainties of the environmental implications of technologies. Therefore,

a range of infrastructures should be explored to effectively restrict or

monitor resource usage.

100

The following analysis consists of two

parts: environmentally responsible CBDCs, as discussed in the several

points below, and the contribution of CBDCs to sustainability.

Besides factors like monetary functions, experimentation should

deepen the understanding and monitor the impact of technologies

(such as those for core processing and user payment in the context of

payment systems

101

) on sustainability. This helps to address issues

like energy consumption and e-waste.

102

The energy use of digital

currencies could be affected by technology and the features of

CBDCs.

103

Digital currencies may or may not use DLT. For CBDCs

that use DLT, theoretically these may include either permissioned

DLT (those that can only be accessed with permission) or permission-

less (available on an open network) DLT systems.

104

In fact, wholesale

CBDCs usually use permissioned DLT.

105

Retail CBDCs may adopt

non-DLT systems, permissioned DLT or hybrids that combine permis-

sioned DLT and non-DLT systems.

106

Notably, many of the techno-

logical issues discussed here apply not only to CBDCs but also to

other digital assets.

The energy consumption of CBDCs will be significantly deter-

mined by technology design. First, non-DLT based CBDCs might

exhibit greater efficiency than existing payment systems, provided

that central banks meticulously choose the platform, hardware and

other components of the CBDC ecosystem based on energy effi-

ciency.

107

Energy efficiency is arguably similar to ‘currency efficiency’,

which evaluates a currency's effectiveness in realising its functionality

(e.g., value secured, features like programmability, the ease of storage

and security) in exchange for its energy consumption.

108

Solely

utilising a centralised ledger may negatively affect the payment con-

venience offered by a CBDC because of the possible caps on peer-

to-peer and offline transactions.

109

However, employing a combina-

tion of centralised and decentralised ledgers increases the complexity

of the CBDC system

110

including the interaction between these led-

gers. Such complexity may carry energy use implications. Some central

banks, such as the Deutsche Bundesbank, are exploring other DLT-

compatible wholesale payment solutions as ‘alternatives to wholesale

CBDCs’.

111

Certain CBDC projects are considering non-DLT architec-

ture (such as novel central bank payment clearance systems like the

Eurosystem's TARGET Instant Payment Settlement).

112

The effects of

CBDC architectures deserve close attention.

Second, non-PoW permissioned networks may have a greater

ability to influence the energy consumption of the core processing

infrastructure.

113

DLTs designed in a permissioned setting

114

help

manage energy consumption, since many nodes can exist in permis-

sionless blockchains and increase energy consumption.

115

Permissioned networks also facilitate the promotion of software

updates and protocols that are more energy-efficient.

116

The high car-

bon footprint is a major challenge faced by public blockchains based

on PoW, which are permissionless.

117

Given the increasing complexity

of computational puzzles, PoW's energy consumption is unlikely to

decrease even with more energy-efficient infrastructure.

118

Some CBDC projects opt for non-PoW permissioned DLT, allow-

ing central banks to manage the number, the role and the geographic

location of the network participants.

119

Nodes could be located wher-

ever renewable energy sources are available or where surplus energy

is otherwise wasted,

120

but this would depend on factors like the

renewable energy capacity of jurisdictions.

121

CBDCs will rarely use

PoW DLT, which tends to be more energy-consuming than permis-

sioned or permissionless non-PoW DLT.

122

Generally, higher energy

efficiency for each transaction appears to be more strongly linked

with innovative systems rather than solely with DLT itself.

123

Third, the energy consumption of CBDCs is contingent on CBDC

dissemination design (e.g., the number of tiers and data infrastructure

of commercial banks that concern processing

124

), CBDC features

Central Banking staff, ‘Central Banks Are Bullish on Environmental Features of CBDC’

(22 February 2023) <https://www.centralbanking.com/benchmarking/fintech/7954563/

central-banks-are-bullish-on-environmental-features-of-cbdc>.

Monetary Authority of Singapore Economic Policy Group, ‘A Retail Central Bank Digital

Currency (CBDC): Economic Considerations in the Singapore Context’(2021) <https://www.

mas.gov.sg/-/media/mas/epg/monographs-or-information-paper/a-retail-cbdc---economic-

considerations-in-the-singapore-context.pdf> 10.

Intergovernmental Panel on Climate Change, 'Climate Change 2022: Mitigation of Climate

Change' (2022) < https://www.ipcc.ch/report/ar6/wg3/downloads/report/IPCC_AR6_

WGIII_FullReport.pdf> Chapter 1, 168.

100

Soininen et al (n 33) 38.

101

Agur et al (n 6) 3.

102

C Gola and J Sedlmeir, ‘Addressing the Sustainability of Distributed Ledger Technology’

(2022) Bank of Italy Occasional Paper No. 670, 1, 19.

103

Agur et al (n 7).

104

Agur et al (n 6) 5, 6.

105

V Sethaput and S Innet, ‘Blockchain Application for Central Bank Digital Currencies

(CBDC)’(2023) 26 Cluster Computing 2183, 2192.

106

Agur et al (n 6) 7.

107

Agur et al (n 7) 2.

108

MIT Digital Currency Initiative, ‘Currency Efficiency’(2024) <https://dci.mit.edu/

currency-efficiency>.

109

Bank of Canada et al, ‘Central Bank Digital Currencies: Foundational Principles and Core

Features’(Bank for International Settlements 2020) 15.

110

ibid.

111

PwC, ‘PwC Global CBDC Index and Stablecoin Overview 2022’(2022) 12.

112

Agur et al (n 7) 13.

113

ibid 2.

114

In permissioned DLTs, only participants approved can join the network and conduct

activities (e.g. reading transactions). City of London Corporation et al (n 4) 7.

115

Gola and Sedlmeir (n 102).

116

Agur et al (n 6) 6; I Manotas et al, ‘An Empirical Study of Practitioners’Perspectives on

Green Software Engineering’(Proceedings of the 38th International Conference on Software

Engineering, 2016) 237.

117

E Urbinati et al, ‘A Digital Euro: A Contribution to the Discussion on Technical Design

Choices’(Bank of Italy 2021) 25.

118

Gola and Sedlmeir (n 102),13.

119

Agur et al (n 7) 2, 13, 14.

120

ibid; MIT Digital Currency Initiative, ‘MIT Digital Currency Initiative –Currency Efficiency

Research’(2022) 14.

121

JR Jaimes Becerra et al, ‘Research of the Development of Green Central Bank Digital

Currency, CBDC’(2023) 1, 4, 7.

122

Agur et al (n 7) 9.

123

ibid 13.

124

Agur et al (n 6) 3.

8WANG

(e.g., features for compliance, security, integrity and universal

access

125

)

126

and other factors (e.g., transaction speed). In contrast to

intricate tiered systems, adopting a single-tier dissemination structure

would mitigate the duplication of energy consumption attributable to

multiple intermediaries.

127

However, central banks would likely opt

for more complex two-tier systems to rely on intermediaries to

address challenges such as the need to provide and manage payment

services for clients. Taking on a different perspective, compared with

crypto assets, CBDC dissemination architectures may be more com-

plex and result in increased energy consumption.

128

These factors concern entities and services within the CBDC eco-

system and their emission, payment-chain size and redundancies.

129

This includes the number of ecosystem actors and whether data cen-

tres adhere to high energy efficiency standards and utilise renewable

energy sources.

130

Energy consumption may fluctuate as new

research teams explore CBDCs, or in establishing bespoke arrange-

ments for regulatory compliance (e.g., anti-money laundering and

combating the financing of terrorism) and dispute settlement, or when

different infrastructures are interlinked for cross-border CBDCs. Sus-

tainability concerns could escalate with significant developments,

such as the interoperability of CBDCs with digital assets like stable-

coins.

131

In a broader context, energy consumption may also be rele-

vant in other activities related to digital currency (e.g., a potentially

large number of educational and promotional events,

132

the transpor-

tation of employees engaged by actors within the digital currency

ecosystem

133

The sustainability of CBDCs extends beyond energy consump-

tion. It encompasses broader issues including the efficient hardware

production methods with minimised consumption of rare metals and

water, the reduction of e-waste and the mitigation of negative envi-

ronmental implications of recycling such as the chemical effects on

landfills.

134

As CBDCs are likely to be integrated into the broader

global payment system, solutions are required to address the cumula-

tive environmental effect of digitalisation and underlying factors

(e.g., economic equilibrium affecting the choice of actors, energy

economies of scale), which might include higher costs of energy,

135

incentive-based measures

136

and improved environmental accounting

standards.

137

It is important to explore environmentally sustainable

CBDC design, including minting (the issuance of CBDCs

138

) and

redemption (an intermediary's current account deposits at the central

bank increased by the amount of CBDC that the central bank receives

from the intermediary

139

Having considered the potential impact of CBDCs on sustainabil-

ity, it is useful to explore the opportunities for CBDCs to contribute

to the green economy. To this end, the learning inherent in adaptive

governance should focus on seeking possible ways to promote the

contribution of digitalisation to sustainability (such as through CBDC

ecosystems). Incorporating digitalisation into responses to sustainabil-

ity challenges can be facilitated through the development of technolo-

gies for supervisory and regulatory compliance.

140

Possible data

functions of CBDC may help collect and share, for example, waste-

related data arising out of activities using CBDCs. The digital age has

witnessed ‘the convergence of payments and data’,

141

opening the

door for the environmental repercussions of CBDCs to be examined

through their digital footprints. However, it is imperative to ensure

these regulatory measures enhance privacy protection to maintain

system stability and public trust. Striking a meticulous balance is

essential, as concerns may also arise regarding the impact of CBDC

utilisation for social policy on the integrity of central bank currency.

Nevertheless, with careful management, sustainability considerations

can be integrated into the CBDC design and use. If done effectively,

CBDCs can become a valuable policy tool in the future, helping to

address uncertainties concerning environmental implications.

Moreover, innovative green economy financial instruments could

be designed to ensure that they are solely used to finance projects

and activities that promote a circular economy.

142

If there are no com-

plications, CBDCs hold the potential to contribute to the green econ-

omy. Ozili, for example, highlights that

[A] CBDC can be designed to offer a transaction cost

waiver for transactions that are channeled to waste

reduction activities or waste re-use activities. A CBDC

can also be designed to have features that give tax

rebates for transactions that are channeled to waste

reduction activities or waste re-use activities. A CBDC

can also be designed to exempt circular economy

transactions from being taxed so as to encourage more

circular businesses to use CBDC. This type of

specially-designed CBDC will offer huge incentives to

circular businesses, it can lead to cost savings, and can

help to grow the circular economy.

143

125

ibid 2.

126

MIT Digital Currency Initiative (n 108).

127

Agur et al (n 7) 15.

128

Agur et al (n 6) 7.

129

Agur et al (n 14)

130

Agur et al (n 6) 1, 7.

131

Ledger Insights, ‘Universal Digital Payment Network Targets Interoperable Stablecoins,

CBDCs’(20 January 2023) <https://www.ledgerinsights.com/udpn-universal-digital-

payment-network-stablecoins-cbdcs/>.

132

MIT Digital Currency Initiative (n 108).

133

Agur et al (n 6) 7.

134

Agur et al (n 7) 4, 14.

135

Gola and Sedlmeir (n 102); Agur et al (n 6) 6.

136

MIT Digital Currency Initiative (n 108).

137

Agur et al (n 6) 7.

138

Central Bank Digital Currencies Working Group, ‘Implementing a CBDC: Lessons Learnt

and Key Insights Policy Report’(2020) <https://www.cemla.org/fintech/docs/2020-

Implementing-CBDC.pdf> 11.

139

Liaison and Coordination Committee on Central Bank Digital Currency, ‘Interim Report’

(2022) < https://www.boj.or.jp/en/paym/digital/rel220705b.pdf>8.

140

R Auer et al, ‘Central Bank Digital Currencies: A New Tool in the Financial Inclusion

Toolkit?’(Bank for International Settlements 2022) 13.

141

J Cheng and J Torregrossa, ‘A Lawyer's Perspective on U.S. Payment System Evolution

and Money in the Digital Age’(4 February 2022) <https://www.federalreserve.gov/econres/

notes/feds-notes/a-lawyers-perspective-on-us-payment-system-evolution-and-money-in-

the-digital-age-20220204.html>.

142

PK Ozili, ‘Circular Economy and Central Bank Digital Currency’(2022) 2 Circular Economy

and Sustainability 1, 4.

143

ibid 11.

WANG 9

However, CBDCs also give rise to other issues that have to be

monitored, like privacy protection.

In other words, CBDC design could incentivise environmentally

responsible behaviour through preferential fee structures or rewards

programmes for eco-friendly transactions.

144

Other possible options

include CBDC-based green financing such as green bonds, loans

(e.g., micro-loans) and equity investments in renewable energy pro-

jects (e.g., renewable energy production and consumption).

145

Nota-

bly, China favours using technology to promote environmentally

friendly activities. A customer who uses Meituan, a Chinese shopping

platform, and engages in low-carbon consumption behaviours, such as

skipping disposable tableware when ordering takeout or carrying

one's own reusable bags when buying fresh food, might get rewards

in the form of e-CNY.

146

A smart recycling machine with digital yuan

function can also provide financial benefits in the form of e-CNY

based on recyclables in the domestic waste that it collects.

147

Never-

theless, the feasibility and methods of implementing these efforts on

a large scale remain unclear.

3.1.2 | Regulatory aspects

As discussed above, a gap exists in the regulation of CBDCs so that

they are environmentally responsible. Traditional regulatory tools

(such as taxes) are not always effective for CBDCs, given the role of

CBDCs as national currencies. For example, while energy usage could

traditionally be regulated by taxation,

148

the energy consumption of

CBDCs appears to fall through the gaps. This is because levying taxes

or surcharges on CBDC usage is unlikely due to its status as public

money. Beyond the notion that a national currency is not traditionally

taxed, the imposition of a tax on the public use of a CBDC is contrary

to the principal policy of enhancing financial inclusion, particularly in

developing economies.

149

Regulation should be carefully designed to address the environ-

mental implications of technology (including technological

complexities) and other considerations of digitalisation (e.g., financial

stability). CBDCs could learn from and iterate on existing regulatory

practices,

150

such as environmental impact assessment. This learning

would help address the regulatory gap between financial and environ-

mental law. To handle the aforementioned issue of taxing energy-

consuming activities, some have suggested technology companies

should promote sustainable consumption by continuously improving

their business models.

151

This is akin to certain approaches in environ-

mental law that require continuous improvement in the environmental

performance of products and industries (e.g., vehicular emission

requirements, minimum energy efficiency standards,

152

building

energy efficiency standards

153

). Other potential solutions include a

possible currency energy efficiency score.

154

Moreover, efforts are

needed to ensure proper rule enforcement as the borderless nature of

digitalisation poses challenges for enforcement.

155

In particular, regulators could learn from impact assessment and

disclosure in other fields (e.g., environmental impact assessment, data

protection impact assessment). Environmental impact assessment and

disclosure of digital currencies would provide a crucial foundation for

assessing their effect on sustainability, particularly their carbon foot-

print. It would also help encourage the race to the top. Regular assess-

ments of CBDCs' impact on the environment could be required at the

various stages of CBDC development, similar to the US National Cli-

mate Assessment required under the Global Change Research Act.

156

Fully-fledged impact assessments may necessitate accounting for all

actors and elements within payment systems, encompassing a com-

prehensive evaluation of various environmental impacts.

157

Relatedly,

disclosure of the environmental impact of CBDCs is crucial. As dis-

cussed above, a G7 foundational principle on CBDCs is that ‘[t]hose

central banks which publish climate-related disclosures (for example

disclosures consistent with the Task Force on Climate-related Finan-

cial Disclosure framework) should consider disclosure of the environ-

mental impact of CBDC operations in their reporting’.

158

Essentially,

it is critical to explore how CBDCs' environmental footprint would be

tracked, assessed and managed.

159

As an institutional framework con-

cerning group learning, such transparency also helps to disseminate

information, test the value concerning sustainability, and build

trust.

160

The assessment and management of relevant environmental

footprint (e.g., that of CBDCs) contributes to the learning concerning

the nature of the sustainability risks of digitalisation. Notably, privacy

protection needs to be balanced with data collection if the monitoring

of CBDCs' environmental footprint concerns the privacy of CBDC

users.

144

S Shilina, Central Bank Digital Currencies (CBDCs) and Their Far-Reaching Effects: An

Economic, Social, and Environmental Perspective (2024) <https://medium.com/paradigm-

research/central-bank-digital-currencies-cbdcs-and-their-far-reaching-effects-an-economic-

social-and-56bd8ea91c4a>.

145

PK Ozili, Using Central Bank Digital Currency to Achieve the Sustainable Development

Goals (2023) <https://www.researchgate.net/publication/368930860_Using_Central_Bank_

Digital_Currency_to_Achieve_the_Sustainable_Development_Goals>6.

146

B Xia, ‘Meituan: Participating in Green and Low-Carbon Consumption Behaviors Can

Receive Low-Carbon Rewards through E-CNY’(2021) <https://news.cnstock.com/news,

bwkx-202112-4797131.htm>.

147

Yema Financial, ‘Serving the People and Green Development, Bank of Communications

Actively Explores New Low-Carbon Life Scenarios through E-CNY’(2023) <https://www.

sohu.com/a/718211501_324659>.

148

See, e.g., J Truby, ‘Decarbonizing Bitcoin: Law and Policy Choices for Reducing the Energy

Consumption of Blockchain Technologies and Digital Currencies’(2018) 44 Energy

Research & Social Science 399, 400.

149

AN Didenko, et al., ‘After Libra, Digital Yuan and COVID-19: Central Bank Digital

Currencies and the New World of Money and Payment Systems’(2020) 65/2020 European

Banking Institute Working Paper Series 1, 46, 50; H Wang, Achieving Financial Inclusion

Through Digital Currencies (United Nations Development Programme 2024) <https://www.

undp.org/policy-centre/singapore/blog/achieving-financial-inclusion-through-digital-

currencies>; H Wang, How Can CBDCs Be Designed to Drive Financial Inclusion? (United

Nations Development Programme 2024) hhttps://www.undp.org/policy-centre/singapore/

blog/how-can-cbdcs-be-designed-drive-financial-inclusioni.

150

Wang (n 12) 4.

151

M Gossen and O Lell, ‘Sustainable Consumption in the Digital Age: A Plea for a Systemic

Policy Approach to Turn Risks into Opportunities’(2023) 32 GAIA 71, 74.

152

See, e.g., Energy Conservation Act 2012 (2020 Rev Ed), ss 26B, 40.

153

See, e.g., California Code of Regulations, Title 24, Part 6 (2022).

154

MIT Digital Currency Initiative (n 120).

155

Bank Indonesia, ‘Project Garuda: Navigating the Architecture of Digital Rupiah’(2022) 7.

156

Wyborn et al (n 24) 64.

157

Agur et al (n 7) 18.

158

G7 (n 42) 12.

159

World Economic Forum, ‘Central Bank Digital Currency Policy-Maker Toolkit’(2020) 24.

160

Armitage et al (n 85) 88.

10 WANG

As another example, regulators could learn to address informa-

tional challenges in governance, including access to information

(e.g., the environmental impact of new initiatives) by stakeholders,

161

as well as the limits of existing knowledge.

162

Procedural rules should

outline the procedures and infrastructure for the production of infor-

mation for decision making, the extent of investigation for adminis-

trative decisions, and the integration of information infrastructure

with management processes.

163

To illustrate, such a process to gen-

erate data on the environmental effects of new developments and

possible alternatives could be the EU's regulatory framework for

environmental assessments,

164

although these usually concern one-

off assessments.

165

Institutionally, management frameworks on water

and the marine environment (e.g., the Maritime Spatial Planning

Directive) require EU Member States to develop water status moni-

toring processes that are integrated into the formulation of the

future management of sea basins.

166

Similar data generation and

integration strategies may be considered by CBDC governance to

ensure effective planning such as risk assessment and management

(e.g., the possible minimum energy efficiency requirements of hard-

ware and software, the planning of e-waste treatment capacity

development to promote benefits like recovering valuable materials

from e-waste

167

In addition, regulators could learn to integrate sustainability into

CBDC ecosystems (such as app development) and different stages of

CBDCs (e.g., outsourcing, future-proofing). Legal frameworks can

solidify sustainability as a crucial factor in navigating digitalisation. It is

important to endow legal authorities with the capacity to institute pol-

icies and practices that encourage the alignment of sustainability and

digitalisation. In other words, the law can explicitly provide the rele-

vant authorities legal power to harmonise digitalisation and sustain-

ability, thus solidifying sustainability as a crucial factor in navigating

digitalisation.

Rules could be developed to align digitalisation with sustainability.

The outsourcing of CBDC activities and the future-proofing of CBDCs

provide valuable insight into the intersection between sustainability

and digitalisation. Both private (e.g., financial institutions) and public

actors (e.g., central banks) may outsource their activities to a vendor,

such as outsourcing the development of CBDC platforms to private

companies.

168

Separately, future-proofing a payment system would

mean improving system resilience and equipping it to deal with future

risks.

169

Rules (such as rules on disclosure of outsourced activities'

environmental impact) could be developed to mediate the behaviour

of actors in the CBDC ecosystem to ensure the activities are properly

outsourced and future-proof, with sustainability in mind.

In terms of the forms of rules, guidelines are often a good starting

point.

170

Guidelines may explain regulators' expectations for the

industry,

171

enhance the industry's understanding of regulators'

approach to enforcement,

172

help regulators to review industry

performance,

173

promote compliance

174

and develop a culture that

aligns digitalization with sustainability. In other words, guidelines

direct the behaviour of specified actors through outlining principles or

‘best practice standards’, and the adherence to these guidelines can

affect the regulator's risk evaluation of the actor.

175

Guidelines may

apply to not only the industry but also public actors.

In terms of the content of rules, rules should highlight the require-

ment to consider sustainability implications in decision-making. Com-

parable situations have emerged in various domains: consider the

privacy regulations imposed on app development in response to

the COVID-19 pandemic, which aligned data privacy considerations

with public health measures.

176

Guidelines could encourage financial

institutions (e.g., banks, asset managers) to identify, monitor and man-

age environmental risks.

177

In the same vein, regulations can learn

from such practice by aligning sustainability with digitalization through

requirements that track and mitigate environmental risks. Taking

future-proofing as an example, guidelines might cover the following

aspects: (i) the requirements in key aspects such as energy efficiency

of software, hardware and underlying technology to reduce energy

consumption; (ii) material sourcing to encourage using sustainable

materials in hardware, including servers and other devices; and (iii) e-

waste management to minimise e-waste and improve environmentally

sound e-waste collection and treatment.

178

161

Soininen et al (n 33) 44.

162

I Mukherjee, ‘Rethinking the Procedural in Policy Instrument “Compounds”: A Renewable

Energy Policy Perspective’(2021) 40 Policy and Society 312, 318.

163

Soininen et al (n 33) 44.

164

European Parliament and Council Directive (EU) 2014/52 amending Directive 2011/92/

EU on the assessment of the effects of certain public and private projects on the

environment Text with EEA relevance [2014] OJ L 124; European Parliament and Council

Directive (EC) 2001/42 on the assessment of the effects of certain plans and programmes on

the environment [2001] OJ L 197.

165

Soininen et al (n 33) 44.

166

ibid.

167

CP Baldé et al, ‘The Global E-waste Monitor 2024’(International Telecommunication

Union (ITU) and United Nations Institute for Training and Research (UNITAR) 2024) 7.

168

Bank for International Settlements (BIS), ‘Central Bank Digital Currency (CBDC)

Information Security and Operational Risks to Central Banks: An Operational Lifecycle Risk

Management Framework’(2023) 4.

169

G Soderberg et al, ‘Behind the Scenes of Central Bank Digital Currency’(International

Monetary Fund 2022) 4.

170

See, e.g., Monetary Authority of Singapore, Guidelines on Outsourcing (2018) <https://

www.mas.gov.sg/regulation/guidelines/guidelines-on-outsourcing>.

171

Reed Smith, Revised Outsourcing Guidelines for Non-bank Financial Institutions in

Singapore (2024) <https://www.reedsmith.com/en/perspectives/2024/02/revised-

outsourcing-guidelines-for-nonbank-financial>.

172

Monetary Authority of Singapore, Guidelines on the Regulation of Markets (2005) <

https://www.mas.gov.sg/-/media/MAS/resource/legislation_guidelines/securities_futures/

sub_legislation/Guidelines_Regulation_of_Markets.pdf>3.

173

Clifford Chance, MAS Publishes Revised Guidelines on Outsourcing (2016) <https://www.

cliffordchance.com/content/dam/cliffordchance/briefings/2016/08/mas-publishes-revised-

guidelines-on-outsourcing.pdf>1.

174

National Audit Office, Principles of Effective Regulation (2021) < https://www.nao.org.

uk/wp-content/uploads/2021/05/Principles-of-effective-regulation-SOff-interactive-

accessible.pdf> 21.

175

Monetary Authority of Singapore, Supervisory Approach and Regulatory Instruments <

https://www.mas.gov.sg/regulation/mas-supervisory-approach-and-regulatory-

instruments#::text=They%20have%20legal%20effect%2C%20meaning,direction%20is%

20a%20criminal%20offence.&text=Directives%20primarily%20impose%20legally%

20binding,institution%20or%20a%20specified%20person>.

176

Janssen and van der Voort (n 86) 5.

177

See, e.g., Monetary Authority of Singapore, Guidelines on Environmental Risk

Management (Banks) (2020) < https://www.mas.gov.sg/regulation/guidelines/guidelines-on-

environmental-risk-management> 4, 8; Monetary Authority of Singapore, Guidelines on

Environmental Risk Management (Asset Managers) (2020) < https://www.mas.gov.sg/

regulation/guidelines/guidelines-on-environmental-risk-management-for-asset-

managers>4,5.

178

See, e.g., CP Baldé et al (n 167) 13.

WANG 11

More broadly speaking, to proactively seek solutions by learning,

regulators should be explicitly authorised and encouraged to experi-

ment with the harmonisation of digitalisation and sustainability. Cur-

rently, there is little regulation of the nascent field of CBDCs.

Moreover, it seems that sustainability issues related to CBDCs are not

highlighted in financial and environmental regulation. The People's

Bank of China, for example, put forward the Law of the People's Bank

of China (Amendment Draft for Consultation) in 2020, which pro-

poses that China's digital yuan be accepted alongside the traditional

paper yuan as legal tender.

179

Moreover, the Pudong New Area, one

of China's major free trade zones, plans to pilot the use of digital yuan

in carbon trading and green power trading.

180

However, the nexus

between digitalization and sustainability needs to be more clearly

identified in laws and regulations.

Rules, such as those used for impact assessments, shape the envi-

ronment and parameters for governmental and nongovernmental

stakeholders involved in adaptative governance.

181

Regulatory frame-

works should therefore grant relevant authorities the flexibility to

experiment and coordinate across both jurisdictional and substantive

boundaries.

182

This is particularly important for the coordination

between digitalisation and sustainability. It is important to integrate

sustainability as a significant factor in digitalisation efforts through

environmentally responsible CBDCs, and conversely, to thoroughly

explore solutions to sustainability challenges through the lens of

CBDC development. These considerations should not be confined to

the initial design phases of digitalisation but should also extend

to subsequent stages, including the exploration of new use cases of

CBDCs.

3.2 |Breaking silos and developing capacity

To align digitalisation with sustainability, different stakeholders need

to work beyond silos and jointly develop their capacities. For adaptive

learning, it is essential to bridge the silos between digitalisation and

sustainability and enhance the capacity of stakeholders

(e.g., regulators) to adapt to the evolving financial landscape. The inte-

gration of diverse types of knowledge (including but not limited to the

latest scientific knowledge) is key.

183

Adaptive governance demands

an effective mechanism that enables stakeholders, including individ-

uals and institutions, to engage across various domains and gover-

nance levels. This fosters mutual interaction and cultivates a culture

of continuous learning.

184

The engagement between stakeholders

includes efforts to strengthen the networks of stakeholders as forums

of learning (e.g., multi-stakeholder platforms and initiatives to identify

knowledge gaps, develop nodes of expertise and jointly produce

knowledge

185

), to promote information dissemination across gover-

nance layers and to develop monitoring system and feedback loops

that promote learning.

186

Regulatory complexities (e.g., the complex-

ity of predicting, assessing and handling the environmental implication

of digitalisation), most of which are often new, need to be addressed

in this network of CBDC governance. Importantly, the engagement

between stakeholders requires trust-building.

Experts in different fields (e.g., technology, finance, law and sus-

tainability) should be consulted early in the CBDC development pro-

cess. The coordination of different goals is also important. A

collaborative approach should be adopted to support these experts to

learn from and work with each other. For example, a common lan-

guage across different fields could be established by collaboratively

creating a sustainability risk taxonomy of digitalisation from the begin-

ning. Moreover, CBDC projects should work closely with wider

reforms to address challenges in governance.

187

Yet, it is essential to

recognise the varying goals across different governance systems.

188

The recognition of different goals involves how environmental aims

interact with other considerations in CBDC design (e.g., privacy).

Notably, private sector incentives may not always match public policy

objectives, especially regarding system compatibility, privacy protec-

tion and user identification.

189

Through learning, different values or

incentives can be recognised, enabling the rethinking of aims and

means.

190

Adaptive governance also necessitates enhanced adaptive capac-

ity of actors to navigate uncertainties, including preparing for unex-

pected developments and expediting decision-making when urgency

is paramount.

191

In reality, however, there are constraints posed by

the ability of governments to adapt.

192

Capacity building could help

solve this problem. Capacity building includes not only the provision

of funding by governments but also contributing to knowledge (such

as knowledge creation, integration and sharing).

193

The utilisation of

internal and external capabilities is important,

194

including the capabil-

ities of central banks in both digitalisation and sustainability. Stake-

holders should not only offer assistance to other parties but also

enhance their own capacity. For example, given the complexities in

timelines and scale, support from international organisations and

arrangements, such as the BIS, United Nations, G20, Financial Stability

Board and NGFS, would be beneficial. These stakeholders are also

179

People's Bank of China, 'Explanation for the Law of the People’s Bank of China

(Amendment Draft for Consultation)' (2020) <http://www.pbc.gov.cn/goutongjiaoliu/

113456/113469/4115077/index.html> para 3.6; People's Bank of China, Law of the

People’s Bank of China (Amendment Draft for Consultation) (2020) < http://www.pbc.gov.

cn/goutongjiaoliu/113456/113469/4115077/2020102318443757476.doc> art 19.

180

www.gov.cn,‘The General Office of the CPC Central Committee and the General Office

of the State Council issued the Pudong New Area Comprehensive Reform Pilot

Implementation Plan (2023-2027)’(2024) <https://www.gov.cn/zhengce/202401/content_

6927503.htm> para 2.2.

181

DeCaro et al (n 59) 3.

182

Chaffin et al (n 23) 9, 10.

183

Esener (n 31) 104.

184

ibid 103.

185

Bixler et al (n 78) 238, 239.

186

Esener (n 31) 107.

187

Bank of Canada et al (n 109) 6.

188

RK Craig, et al., ‘Balancing Stability and Flexibility in Adaptive Governance: An Analysis of

Tools Available in U.S. Environmental Law’(2017) 22 Ecology and Society 1, 1.

189

C Catalini and J Massari, ‘Stablecoins and the Future of Money’(2021) <https://hbr.org/

2021/08/stablecoins-and-the-future-of-money>.

190

JS Levy, ‘Learning and Foreign Policy: Sweeping a Conceptual Minefield’(1994)

48 International Organization 279, 286.

191

Janssen and van der Voort (n 86) 3.

192

D Fitzpatrick, ’Towards Adaptive Property: Legal Design for a Climate-Affected Future’in

S Juhola (ed) Handbook on Adaptive Governance (Edward Elgar 2023) 226.

193

Cosens et al (n 36) 1728.

194

C Wang et al (n 39) 306.

12 WANG

improving their own capacity over time. While adaptive capacity

needs to be developed by governance at the lower levels,

195

it may

be advisable to make adaptive capacity as an objective of relevant

laws, including the ability of rules to calibrate to different contexts in

a more efficient way.

196

This is particularly salient when we face the

fast-changing digitalisation landscape.

Apart from enhancing capacities, it is essential to clarify the func-

tions of various agencies and strengthen coordination among different

actors (including dialogues and a decision-support mechanism for

evidence-informed policy). Clear rules on the role and scope of a

CBDC policy are desirable for promoting coordination between cen-

tral banks, other regulators and the private sector.

197

While central

banks typically lead CBDC initiatives, addressing sustainability issues

naturally goes beyond their jurisdiction. Even within a singular agency,

different departments, like the legal and sustainable development

departments within a central bank, should have well-defined roles to

best address sustainability issues. Adaptive governance emphasises

learning and cooperation to find solutions. Adaptive governance calls

for meaningful interactions among policy goals and the decision-

support mechanisms that consider different interests and incorporate

various kinds of knowledge to inform the problem definition and the

selection of measures.

198

Bridging the gap in existing governance

arrangements requires careful consideration of the bureaucratic struc-

tures that often prioritise stability and efficiency but may hinder inno-

vation and adaptability.

199

Well-managed bureaucracies can swiftly

enforce new policies and guarantee adherence to them.

200

Further

195

Janssen and van der Voort (n 86) 2.

196

Fitzpatrick (n 192) 227, 229.)

197

PL Siklos, ‘Central Bank Digital Currency and Governance: Fit for Purpose?’(Center for

International Governance Innovation 2021) 18.

198

Esener (n 31) 105.

199

Janssen and van der Voort (n 86) 5.

200

ibid.

TABLE 2 Problems and solutions concerning CBDCs and sustainability (non-exhaustive)

Examples Factors underlying the problems

Problems E-waste •Redundancy: CBDCs as an extra layer of the financial

system instead of replacing the existing financial

system

•Time sensitiveness: A narrow window of opportunity

for CBDC design given the fast development of

CBDCs

•Future: Possible expansion of CBDC use (domestically

and internationally) and increased resource use

Energy consumption such as that related to research and development,

operation (e.g., infrastructure like DLT and data centres) and features of

CBDCs (e.g., compliance, security, interoperability)

Non-energy resources (e.g., rare metals, water) to produce hardware

Lack of data, knowledge, regulation and cooperation concerning sustainability

and CBDCs

Solutions Experimentation, precaution and monitoring

Starting from the assessment of environmental implications of CBDCs,

including those of CBDC development and design:

•Endowing legal authority to authorities to align sustainability and

digitalisation

•Guidelines, standards and procedures to promote sustainability (e.g.,

CBDC tendering and outsourcing requirements on low-energy use

hardware and software, continuous improvement in environmental

performance of products) and to ensure access to information (e.g.,

disclosure of CBDC activities' environmental impact and CBDC energy

efficiency scores)

•Tracking energy consumption and waste

•Programmability to incentivise climate-friendly behaviour

•Integration of eco-friendly infrastructure

•Accounting standards

•Other incentives to use green energy or less resources

Addressing environmental implications of CBDCs

(environmentally friendly CBDCs)

Contribution of CBDCs to sustainability (while

considering other factors like privacy protection)

Breaking silos and developing capacity

•Engagement with experts from various domains (e.g., sustainability,

technology, finance, law) early in digitalisation and actions to foster

cooperation, starting with a sustainability risk taxonomy to arrive at a

common language

•Clear rules on the role and scope of a CBDC policy to promote

coordination between actors

•Networks across levels (e.g., different bodies, engagement with

stakeholders) and trust building to share information and solve problems

•Possible interaction with wider initiatives (e.g., NGFS, e-waste treatment

capacity development initiatives)

•Exploring the balance between factors such as privacy protection and data

collection

Abbreviations: CBDCs, central bank digital currencies; DLT, distributed ledger technology; NGFS, Network of Central Banks and Supervisors for Greening

the Financial System.

WANG 13

efforts are needed to advance understanding and collaboration in

addressing sustainability within CBDC governance frameworks. These

efforts include dialogues among stakeholders to understand the con-

ditions faced by the regulators and the needs of stakeholders

201

(e.g., the policy objectives, government support to sustainability initia-

tives, financial and technological capacity of regulators, the features

of payment systems, the local needs), and learning from experience,

such as the EKLIPSE project funded by the European Commission to

support better-informed decisions of governments, businesses and

other actors regarding biodiversity.

202

Although the EKLIPSE project

concerns biodiversity, its process design (including the call for

requests, knowledge and experts, and relatedly the development of

an open network of knowledge

203

) can provide a reference for CBDCs

in conducting learning. The EKLIPSE project develops a decision-

support mechanism for evidence-informed policy, involving experts

from science and society to integrate evidence and spot knowledge

gaps.

204

Meanwhile, peer review and open consultation are also

included. Such mechanisms can be adapted when possible and serve

as a starting point for developing processes to break silos and build

capacity. In this way, CBDC sandboxes would further engage with

knowledge holders to search for regulatory and technological tools to

solve problems.

Yet, traditional state-centric regulations may prove inadequate,

given the multitude of new and intricate issues involving numerous

stakeholders at domestic and international levels. In both the financial

and sustainability realms, regulators face the progressively uphill task

of regulation given factors including the increased complexity of prac-

tices, expanded scope of regulation and the higher demand of risk

management.

205

It is imperative to investigate the dynamics of inter-

actions among various stakeholders, such as central banks, other regu-

lators and the industry (e.g., commercial banks, payment operators,

technology companies, market makers, liquidity providers and third-

party service providers), in effectively managing uncertainties. The

efforts of these stakeholders should encompass the sharing of infor-

mation, leveraging knowledge exchange and fostering cooperation

across diverse subject matters (horizontal functions). Additionally, the

focus should extend to mechanisms promoting interaction, specifically

the flow of information (including addressing potential issues like

insufficient supply of information

206

), among distinct levels of gover-

nance. Sustained efforts are needed to harmonise digitalisation and

sustainability (as indicated in Table 2).

4|CONCLUDING REMARKS

For digitalisation to contribute to sustainability, institutions must

account for and mitigate ensuing environmental risks.

207

This requires

addressing the nexus between digitalisation and sustainability by rec-

onciling the functional, spatial and temporal mismatches that may oth-

erwise emerge between the short-term pressures to develop CBDCs

and longer-term environmental considerations.

Adaptive governance, particularly its core value of learning, can

help to address these mismatches. To best harmonise digitalisation

with sustainability, adaptive governance should prioritise two key

aspects: (1) the environmental implications of digitalisation to handle

the sustainability externalities problem; and (2) the contribution of

digitalisation to sustainability to realise environmental goals. If prop-

erly managed, learning can facilitate coordinated actions in gover-

nance and support flexible institutions. Experimentation, precaution

and monitoring are examples of collaborative learning efforts among

stakeholders (e.g., central banks, the industry, international organisa-

tions, NGOs, research institutions and the public). Actors should be

acutely aware of the need to conduct learning regularly.

208

Rules can

take various forms depending on the national context and start from

guidelines. These efforts help to improve governance, address new

challenges and adapt to a new landscape where new public and pri-

vate actors (e.g., new CBDC-issuing states) enter the CBDC system.

Looking ahead, there is a pressing need to advance our under-

standing, predictive abilities and responses to crucial questions con-

cerning digitalisation and its potential implications. Key issues range

from the careful consideration of parameters (e.g., the number and

location of network actors, their eligibility criteria, software and hard-

ware updates) relating to energy consumption of a digitalisation eco-

system

209

and the assessment of the feasibility of incorporating

sustainability goals in finance (including central banking) to the use of

incentives to promote learning

210

and the enforcement of policies

that promote digitalisation and sustainability.

211

ACKNOWLEDGEMENTS

This research is supported by the Sustainable Development and Com-

merce Initiative at the Centre for Commercial Law in Asia at SMU. It

is also supported partially by the Australian Research Council's Dis-

covery Projects funding scheme (project DP220101632). A previous

version or parts of this article have been presented at the 2023 SMU-

Sydney-HKU Law and Sustainability Conference, the Asian Develop-

ment Bank Institute and UNSW Sydney.

Some portions of this article have also been presented during the

keynote presentations of the author at the World Bank FCI (Finance,

Competitiveness and Innovation) Seoul Center's 10th Anniversary

Event and the Vaduz Roundtable. The author is grateful to the

201

Hovelsrud and Westskog (n 58) 197.

202

EKLIPSE endeavours to create a process to advice European policy on biodiversity and

related environmental issues. For example, dialogue is used between actors such as a process

facilitator and the requester of a certain policy. A Watt et al, ‘EKLIPSE: Engaging Knowledge

Holders and Networks for Evidence-Informed European Policy on Biodiversity and

Ecosystem Services’(2018) 15 Evidence and Policy 253, 254, 257; EKLIPSE, About, <

https://eklipse.eu/about/>

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ibid 258, 259.

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ibid 255.

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Ecosystems for Resilience, Innovation and Sustainable Development’(2022) 39 Banking and

Finance Law Review 5, 27.

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CBDC Network and Its Impact on Regulation’(2024) 18 Regulation and Governance

288, 296.

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M Barth et al, ‘Sustainable Digitalisation-Fostering the Twin Transformation in a

Transdisciplinary Way’(2023) 32 GAIA 6, 6.

208

Cooney and Lang (n 20) 534.

209

Agur et al (n 6) 6, 7.

210

Armitage et al (n 85) 86.

211

Shilina (n 144).

14 WANG

insightful comments of three anonymous reviewers, Michelle Lim,

Harro van Asselt, Fleur Johns, Barbara Cosens, Aiaze Mitha, Rolf

H. Weber, Paul Stern, Ross Buckley, Stefanie Schacherer, Nengye Liu,

Xia Ying, Weihuan Zhou, Tony Song and other participants of these

events. Thanks go to Layton Hubble, Enqi Liu, Heather Whelahan,

Guy Suttner and other research assistants for their valuable

assistance.

DATA AVAILABILITY STATEMENT

Data sharing not applicable to this article as no datasets were gener-

ated during the current study.

ORCID

Heng Wang https://orcid.org/0000-0003-2410-6144

AUTHOR BIOGRAPHY

Heng Wang is a Professor of Law and Lee Kong Chian Fellow at

the Yong Pung How School of Law, Singapore Management Uni-

versity, where he also serves as the Associate Dean (Faculty Mat-

ters & Research). He is also an adjunct professor at the Faculty of

Law & Justice, University of New South Wales (UNSW Law &

Justice). Prior to these appointments, he was a professor and

founding co-director of the Herbert Smith Freehills China Interna-

tional Business and Economic Law (CIBEL) Centre, UNSW Law &

Justice. Heng is a recipient of major grants and awards and has

been named as a top researcher in international law by The

Australian newspaper. His work has been cited in intergovernmen-

tal organisation documents. Heng has advised or been a keynote

speaker at events organised by many reputable organisations and

institutions (e.g., ADB, APEC and Korean Foreign Ministry, Bun-

desbank, CPMI/BIS, HCCH, ICC, ICSID, IMF, INTERPOL, MAS,

NAB, UNDP, UNICTRAL, World Bank, WTO) and the private sec-

tor. His current research focuses on the governance of digitalisa-

tion and sustainability, as well as the future of international

economic relationships.

How to cite this article: Wang H. Addressing governance

challenges of digitalisation and sustainability: The case of

central bank digital currency. RECIEL. 2024;1‐15. doi:10.1111/

reel.12571

WANG 15

ResearchGate has not been able to resolve any citations for this publication.

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Addressing Governance Challenges of Digitalisation and Sustainability: The Case of Central Bank Digital Currency

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