The Bank for International Settlements keeps bashing cryptocurrencies, such as bitcoin (BTC), and stablecoins, while preparing the ground for central bank digital currencies (CBDC), saying that they “open a new chapter for the monetary system.”
Central bank interest in CBDCs comes at a critical time when three major recent developments placed certain “potential innovations” involving digital currencies “high on the agenda,” the BIS, owned by central banks, said in its annual economic report. These developments are:
- the growing attention received by BTC and other cryptoassets;
- the stablecoin debate;
- and the entry of big techs into payment services and financial services more generally.
When it comes to stablecoins, the BIS claims that, to the extent that their backing involves conventional money, they are “ultimately only an appendage to the conventional monetary system and not a game changer.”
Also, the BIS says that for them, “it is clear” that cryptoassets are speculative assets rather than money, used in many cases for financial crimes. “Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint,” they reiterated previous claims by BTC skeptics that have been rebutted by bitcoiners on multiple occasions.
In either case, the BIS claims that CBDCs are moving away from simply being a concept.
Hyun Song Shin, the BIS’s Economic Adviser and Head of Research, is quoted as saying that “CBDCs are a concept whose time has come,” and that they “open a new chapter for the monetary system by providing a technologically advanced representation of central bank money.” The press release added that CBDCs are “moving from concept to practical design and renew the institution of money in a new form designed for the digital age.”
Also, the ‘CBDCs: an opportunity for the monetary system’ goes to make several conclusions in regards to the CBDCs design and practical use, in the context of central banks’ four key roles in the monetary system:
- providing the unit of account;
- providing the means for ensuring the finality of wholesale payments by using their own balance sheets as the ultimate means of settlement;
- ensuring that the payment system works smoothly;
- and overseeing the payment system’s integrity, while upholding a competitive level playing field – as BIS writes.
Per the BIS, CBDCs are best designed as part of a two-tier system where the central bank focuses on operating the core of the system by ensuring sound money, liquidity, and security, while the private sector focuses on innovation and using their “creativity” to serve customers better.
“By preserving the two-tier system, the central bank keeps its financial system footprint small, just as cash does today [and its] money can then retain its core attribute of neutrality,” they said.
The BIS also advocates for the “most promising” design, from a practical perspective, which is “an account-based CBDC, rooted in an efficient digital identity scheme for users.” It would be tied to a digital identity that would require users to identify themselves to access funds. Per the report, this would work to protect users against the abuse of a huge volume of personal data collected as an input into business activity, while also protecting the payment system against illicit activities.
The authors of the report also stressed that “international cooperation on design will be vital if central banks are to harness the full benefits of CBDCs, and to improve cross-border payments while countering foreign currency substitution.”
Also, they mentioned a possible concern that “a foreign jurisdiction’s CBDC could magnify the risk of currency substitution.” But an account-based CBDC would have built-in safeguards against an “encroachment” of that kind, they claim.
“Above all, no payment system exists separately from the underlying economic transactions. International currencies have developed as a result of the transactional needs of their users. A currency is unlikely to achieve international status merely because it is in digital form,” the BIS said.