Future monetary policy is about CBDCs, not crypto – BIS report

(Kitco News) “Anything cryptocurrencies can do, CBDCs can do better” is the phrase that describes the Bank for International Settlements’ vision for the future monetary policy system.

The future of money is all about central bank digital currencies (CBDCs), not cryptocurrencies. And that’s because of all the flaws that cryptocurrencies present, especially the ones that came to light in the most recent crash, the BIS said in the pre-released chapter of its annual economic report on Tuesday.

“Anything cryptocurrency can do, CBDCs can do better. They can do it without selling coins to users and without all the other structural flaws,” said economic advisor and head of research at BIS, Hyun Song Shin.

Encryption shortcomings

In laying out its blueprint for the future global monetary system, the BIS identified major flaws in the cryptocurrency universe, pointing to the recent market sell-off.

“The cryptocurrency sector offers a glimpse of promising technological possibilities, but it cannot [fulfill] all the high-level goals of a digital currency system,” the report said.

Some of the encryption weaknesses listed were security risks, high fees, scalability issues, and lack of regulation.

“It’s especially current as the cryptocurrency world is in turmoil. Prices have dropped dramatically. Seeing the hidden leverage and illiquidity of the cryptocurrency ecosystem being severely tested,” Shin said. “Falling prices and runs on cryptocurrency shadow banks highlight the risks to financial stability and their potential spillover into the mainstream financial system. They also highlight gaps in investor protection that need to be addressed.”

The two critical cryptographic flaws that the BIS highlighted in the report were the use of stablecoins and the fragmentation in the cryptocurrency universe.

“The fact that stablecoins play such an important role indicates that cryptocurrencies are looking for the nominal anchor. The explosion of the Terra stablecoin has shown that they are generally far from stable and not good units of account,” Shin said. “The most serious problem is the fragmentation of the cryptographic universe, which means that cryptocurrency cannot serve the purpose of money in the sense that it does not recreate this virtuous circle of greater acceptance for greater use.”

According to the BIS, cryptocurrencies and stablecoins fail to achieve the full network effects that are normally expected of money. “We all accept money because we expect others to accept it. Cryptocurrency, on the other hand, in pursuit of its decentralization, achieves the exact opposite, namely fragmentation. This is because cryptocurrency is established by consensus among validators”, described Shin.

For example, Bitcoin or Ethereum miners capture rewards for their activities so that the system can continue to function properly. “And a way they capture [this] it is through congestion. When a platform is used intensively, transaction costs and rewards increase. In a way, congestion is a feature, not a bug. This is the opposite of the virtuous circle of greater use and greater acceptance. Network effects mean more is better. But cryptographic files are just the opposite. It’s a case of the more, the sadder,” Shin added.



What the BIS proposes

So, instead of cryptocurrencies, the BIS looks for CBDCs to be the solution for the future.

“We see the system as the fusion of enhanced technical capabilities around the core of trust provided by central bank money. Money issued by central banks serves as a unit of account in the economy. And it is the means to the ultimate end of payment using the central bank’s own balance sheet,” Shin said.

A CBDC would allow most of the functionality that cryptos and stablecoins offer without the pitfalls.

“For example, the ability to schedule payments and transfers according to certain conditions. And also combine different operations into one package. Another capability we discussed was tokenization, which is creating a digital representation of money, bonds, or even real assets. like houses,” Shin said.

The BIS report also discussed a multi-CBDC platform that would allow multiple CBDCs from multiple central banks to transact on the same platform.

The full BIS report will be published on June 26 and will address stagflation risks.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article are not responsible for losses and/or damages arising from the use of this publication.

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