BIS Sets Out Argument for CBDC Future – At the Cost of Cryptocurrencies
Posted by Colin Lambert. Last updated: June 22, 2022
The Bank for International Settlements (BIS) has published a blueprint for a future digital monetary system based upon Central Bank Digital Currencies (CBDC), arguing such a framework would “foster innovation, while safeguarding stability and security”. The report, contained in the bank’s Annual Economic Report 2022also makes a point of highlighting recent turmoil in cryptocurrency markets, citing crypto’s financial vulnerabilities and “deeper structural inadequacies [that] have been apparent for some time”.
The report argues that a system grounded in a digital representation of central bank money could combine innovation with essential attributes such as safety, stability, accountability, openness and efficiency. Such a system would be capable of adapting continuously to serve the public interest, it adds, pointing out that the vision is “built on the foundation of trust in central banks, with a digital version of sovereign currencies at its core”.
The report examines the structural limitations of crypto and decentralised finance (DeFi), outlining the inherent risks in their design. Recent market turmoil and the collapse in the prices of major stablecoins are reminders that crypto is not sound money, the BIS argues, observing that unregulated or non-compliant intermediaries, and the structural limitations that prevent such currencies from scaling, introduce new financial risks.
“While innovations such as the ability to programme payments and transfers offer glimpses of technological possibilities, they cannot fulfil the high-level requirements, such as safety, accountability, efficiency, inclusion and openness, for a usable digital monetary system,” the BIS states.
The report notes that a digital version of money issued by the central bank could provide for many of the same features offered by cryptocurrencies and stablecoins. “These could be built on a sound nominal anchor and avoid the structural limitations and risks of crypto, which include congestion, high fees, fragmentation and pseudo-anonymity, characteristics that can also facilitate abuse and illicit activity,” the BIS says.
Recent advances in wholesale and retail central bank digital currencies (CBDCs) and retail fast payment systems could form the basis of an adaptable future monetary system that fosters private sector innovation, while enabling greater financial inclusion and user control over data, it adds.
The report says that in addition to the trust factor and stability brought by central bank participation, the private sector will provide customer-facing activities with new functions such as the tokenisation of money and financial instruments and instant retail payments through new interfaces. “This combination could bring about lower costs, greater financial inclusion, more user control over financial data, improved integrity and seamless cross-border activity, helping to overcome shortcomings in today’s arrangements,” the BIS argues. “Such innovations could open a new chapter in the global monetary system.”
Hyun Song Shin, economic adviser and head of research at the BIS, reinforces the message, by saying, “Innovation is not just a buzzword or latest fashion. It should never lose sight of the concrete needs of users in the real economy. Central banks are seeking to push the frontiers of what is possible, adopting new capabilities while ensuring financial services are stable and interoperable domestically and internationally.
“The metaphor for the future monetary system is that of a tree, whose solid trunk is the central bank,” he continues. “This tree boasts a rich and vibrant ecosystem of private sector service providers serving users to fulfil their economic needs. The ecosystem is rooted, figuratively speaking, in settlement on the central bank’s balance sheet.”
Although several initiatives are underway involving central bank experimentation with digital currencies and payments – most of which are in conjunction with the BIS’ Innovation Hub – there are still doubts about whether CBDCs can be developed tested and rolled out in a sufficiently quick timeframe. None of the Federal Reserve, European Central Bank, Bank of England and Bank of Japan are advanced with projects, meaning CBDCs in the dominant developed economies could still be years off, meaning for all the criticism of cryptocurrencies, they represent the best solution for the growing proportion of the world seeking more efficiency in how it moves money around.