In anticipation of the upcoming meeting of the G20 finance ministers and central bank governors, the Bank for International Settlements Innovation Hub (BISIH) released two significant reports on cryptocurrency and central bank digital currencies (CBDCs) on July 11. These reports present divergent perspectives on the technologies involved.
BIS favors CBDCs ahead of crypto
The shorter of the two reports, spanning 24 pages, focus on the crypto ecosystem, encompassing cryptocurrencies, stablecoins, and decentralized finance (DeFi). It offers a brief overview of these components but primarily highlights various structural flaws and risks associated with them. The report echoes some commonly discussed issues within the crypto sphere, such as the centralized nature of crypto trading, the instability of stablecoins, and the purported irreversibility of smart contracts.
Additionally, it sheds light on less frequently mentioned points, including the inevitable centralization of DeFi due to the reliance on oracles. An insightful observation made in the BISIH crypto report pertains to the influence of human nature on crypto investments. It highlights that crypto investors often exhibit tendencies to chase prices, engaging in a pattern of buying high and selling low, similar to what is observed in traditional finance.
However, the BISIH identifies the primary risk associated with crypto as its increasing interconnectedness with the real economy. Despite the challenges faced by the crypto market in the past year, institutional investors and households continue to display interest in cryptocurrencies. The report suggests that the tokenization of assets could further fuel the growth of the crypto market, potentially leading to the “cryptoisation” of economies, where traditional cash is gradually marginalized.
To gain a comprehensive understanding of crypto markets, the BISIH, in collaboration with the central banks of Germany and the Netherlands, has initiated Project Atlas, which aims to visualize cross-border crypto flows. However, the report concludes that further steps are necessary to conduct a holistic assessment of crypto markets. Ultimately, due to its inherent structural flaws, the BISIH believes that crypto is ill-suited to play a significant role in the monetary system.
The organization sees CBDCs as the future of money systems
In contrast, the BISIH’s report on CBDCs takes a markedly different tone. The report highlights that CBDCs could serve as the foundation for future monetary systems, paving the way for further innovations. It draws upon the insights gained from the BISIH’s implementation of 12 CBDC proofs-of-concept or prototypes over the past three years, out of a total of 29 projects. The report explores the variables associated with wholesale versus retail CBDCs, assessing their desirability, feasibility, and viability. It presents a comprehensive summary of the findings from the 12 CBDC projects and suggests ways in which the information can be utilized.
The report emphasizes the need for a research gap analysis and suggests that BISIH projects can promote a modular approach, where components such as payment systems, foreign exchange mechanisms, and compliance protocols can be decoupled for broader application. The BISIH remains committed to further CBDC projects, with a promise of more initiatives on the horizon. By underpinning the future monetary system, CBDCs are seen as catalysts for driving subsequent innovations in the financial landscape.
The reports from the Bank for International Settlements Innovation Hub present contrasting viewpoints on cryptocurrency and CBDCs. While the report on crypto highlights inherent risks and structural flaws, it also points to the growing interconnectedness between crypto and the real economy. In contrast, the report on CBDCs emphasizes the potential of these digital currencies to serve as the foundation for future monetary systems, fostering innovation and modularity. These reports contribute to a broader understanding of the evolving landscape of digital finance and its implications for global financial systems.
