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The future monetary policy is all about CBDCs, not crypto - BIS' report

Kitco News

(Kitco News) "Anything that crypto can do, CBDCs can do better" is the sentence 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 crypto. And that's because of all the flaws that cryptocurrencies pose, especially those that came to light in the most recent crash, the BIS said in the pre-released chapter of its annual economic report Tuesday. 

"Anything that crypto can do, CBDCs can do better. They can do this without selling coins to users and without all the other structural flaws," said BIS' Economic Adviser and Head of Research Hyun Song Shin.

Crypto shortcomings

In laying out its blueprint for the future global monetary system, the BIS identified key flaws in the crypto universe, pointing to the recent market selloff.

"The crypto sector provides a glimpse of promising technological possibilities, but it cannot [fulfill] all the high-level goals of a digital monetary system," the report said.

Some of the crypto shortcomings listed were security risks, high fees, issues with scalability, and lack of regulation.

"It is especially topical, as the crypto world is in turmoil. Prices have fallen dramatically. Seeing hidden leverage and illiquidity of the crypto ecosystem being put to a severe test," Shin said. "Crashing prices and runs on crypto shadow banks highlight the risks to financial stability and their potential spillover to the conventional financial system. They also highlight then gaps in investor protection that needs to be addressed."

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

"The fact that stablecoins play such an important role indicates that crypto searches for the nominal anchor. Blowup of the Terra stablecoin has shown that they are often far from stable and are not good units of account," Shin said. "The more serious problem is the fragmentation of the crypto universe, which means that crypto cannot serve the purpose of money in the sense that it doesn't recreate this virtuous circle from greater acceptance to greater use."

According to the BIS, crypto 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. Crypto, on the other hand, in search of its decentralization, achieves exactly the opposite, namely fragmentation. That's because crypto is settled through consensus among validators," Shin described.

For example, Bitcoin or Ethereum miners capture rewards for their activities so that the system can continue to run properly. "And one way that they do capture [this] 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 the more, the merrier. But crypto archives exactly the opposite. It's the case of the more, the sorrier," Shin added.


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What the BIS proposes

So, instead of crypto, the BIS looks for the 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's the means for the ultimate finality of payment by using the central bank balance sheet itself," Shin stated.

A CBDC would enable most of the functionalities that cryptos and stablecoins offer without the pitfalls.

"For example, the ability to program payments and transfers according to certain conditions. And also to combine different operations into one bundle. Another capability we discussed was tokenization, which is the creation of a digital representation of money, securities, or even real assets such as houses," Shin said.

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

The BIS' full report will be published on June 26 and will deal with stagflation risks.

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