BIS says crypto’s structural flaws make it an unsuitable basis for a monetary system. Instead, central bank digital currencies offer a better solution for settlements, transfers and payments.
With the recent market collapse showcasing how volatile the unregulated world of cryptocurrencies is, central bank digital currencies (CBDCs) offer a more stable monetary solution, according to the Bank for International Settlements (BIS).
BIS, an association of the world’s major central banks, laid out a blueprint for the future of the global monetary system in its annual report released on Tuesday.
Crypto’s security risks, high fees and scalability issues, including its “unregulated intermediaries that pose financial risks,” are growing concerns in today’s financial system, BIS said.
“The crypto universe lacks a nominal anchor, which it tries to import, imperfectly, through stablecoins,” the report said. “These structural shortcomings are unlikely to be amenable to technical fixes alone. This is because they reflect the inherent limitations of a [decentralised] system built on permissionless blockchains.”
Stablecoins – cryptocurrencies pegged to the value of assets like sovereign currencies – are the crypto world’s solution for such an anchor, Hyun Song Shin, an economic advisor and head of research at BIS, said in a press statement, adding that stablecoins attempt to “piggyback on the stability of real money issued by central banks.”
While some of crypto’s underlying technical features like programmability and tokenisation can be useful, it falls short of providing a viable monetary alternative.
“The crypto sector provides a glimpse of promising technological possibilities, but it cannot [fulfill] all the high-level goals of a digital monetary system,” BIS said.
Decentralised finance (DeFi) in particular “poses risks related to investors’ high leverage, liquidity mismatches, the lack of shock-absorbing capacity and the built-in connectedness of the ecosystem.”
BIS notes DeFi’s key feature of decentralisation “struggles to live up to its promise,” and that DeFi platforms require a degree of centralisation to “ensure they can adapt to unforeseen events.”
“Our broad conclusion is captured in the motto, ‘Anything that crypto can do, CBDCs can do better,’” Shin said.
CBDCs, BIS argues, can play the role of stable digital currencies used in settlements, transfers and payments. The monetary system should be built on the division of roles between the central band and private sector entities, the institution added.
“Programmability, composability and tokenisation are not the preserve of crypto, but instead be built on top of [CBDCs], fast payment systems and associated data architectures,” the report stated.
Many CBDC projects are still in the early stages in most economies, with China’s digital yuan ahead of the curve and rolled out during the Beijing Winter Olympics this February.
Earlier this month, Israel’s central bank announced a partnership with the Hong Kong Monetary Authority and BIS’ Innovation Hub to test the feasibility of a retail CBDC.
Also this month, Jamaica’s Jam-Dex became the first CBDC to be recognised as legal tender. Several other countries, including India, Brazil and Kenya are also exploring the technology. Last year, Nigeria launched its own CBDC called the e-Naira. This March, the US announced it began researching a future digital dollar.
Türkiye too is at the research and development phase of its own digital lira.
BIS highlighted that countries were increasingly choosing to issue CBDCs despite having their own robust payment systems.
“You know, India has one of the best retail fast payment systems in the world. It’s called UPI. And its led the way in actually showing the way on how these systems will actually operate. But India has decided to go to the final step and actually roll out a retail CBDC,” Shin said, referring to a CBDC that can be used by consumers for transactional purposes.