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Fiat wins, crypto loses, according to BIS head Agustin Carstens

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(Kitco News) - Agustin Carstens, the head of the Bank for International Settlements (BIS), has declared victory in the battle between cryptocurrencies and fiat currencies, saying that “That battle has been won” during an interview with Bloomberg TV on Wednesday.

According to Carstens, the events of 2022 – which resulted in more than $2 trillion in value disappearing from the crypto market – prove the argument that crypto is a viable alternative to fiat currency has been settled, noting that “A technology doesn’t make for trusted money.”

The BIS chief went on to say that “Only the legal, historical infrastructure behind central banks can give great credibility” to money, and thinks that crypto is a financial activity that can really only exist “under certain conditions.” He anticipates a “strong statement” from the Group of 20 for strengthened regulation of the digital asset sector.

CBDCs and the creation of a unified ledger

Also on Wednesday, Carstens gave a speech to the Monetary Authority of Singapore (MAS), during which he delved into the topic of central bank digital currencies (CBDCs), tokenized assets, including tokenized deposits, and the creation of a fast payment system that can facilitate cross-border transactions.

Carstens called for the creation of a “unified ledger” to help facilitate the integration of new technologies into the existing financial infrastructure. “To fully realize the transformative potential of these new financial technologies, we need some way to bring them all together. In this regard, there is great promise in developing the idea of a "unified ledger" with a common programming environment,” he said.

He defined a unified ledger as “a digital infrastructure with the potential to combine the monetary system with other registries of real and financial claims,” and said that it would need to be established as a public-private partnership with a clear division of roles. This system would also rely on the central bank for “underpinning the trust in money.”

The creation of a unified ledger would allow the various components to work seamlessly together, he explained, while its open architecture would promote financial inclusion and greater competition.

“Such a ledger allows for the use of smart contracts and composability,” Carstens elaborated. “A smart contract is a computer program that executes conditional "if/then" and "while" commands. Composability means that many smart contracts, covering multiple transactions and situations, can be bundled together, like ‘money lego.’”

These new functionalities would allow the automation and seamless integration of any sequence of transactions using programmable money. Carstens said this “reduces the need for manual interventions that delay transactions and reduces dependency on intermediaries, and also allows for simultaneous and near-instant payments and settlement.”

While the central bank has an important role to play in the governance of a unified ledger, it would do so “in partnership with other public agencies as well as with private sector participants,” Carsten noted.

“So, a guiding principle for the unified ledger is to preserve this partnership between the central bank and the private sector. The aim is to tap into private sector creativity and ingenuity to develop new products and services.”

In his understanding, CBDCs and tokenized deposits are not new types of money; they simply “replicate existing forms of money in a technologically superior way.” He sees CBDCs playing the role that central bank money plays in the current system, while tokenized deposits will serve as commercial bank money.

This is where the creation of a unified ledger comes into play. “CBDCs and tokenized deposits would appear in separate partitions in the unified ledger,” Carstens said. “Because they share a common ledger, they can be brought together and used in an efficient way, through smart contracts. This would facilitate inclusion and lower transaction costs.”

The BIS chief suggested combining a unified ledger with programmability and compostability would create additional functionality that “could open up a whole new range of services that impact our daily lives,” such as enabling micro-payments on social media platforms, which are currently not economical.

“Tokenized deposits and CBDCs could also open the door for more efficient payment arrangements in business settings or for larger purchases,” he said. The ultimate goal is to “put complementary things (central bank money, commercial bank money, digital assets) in the same place so that they can interact in efficient ways – like apps on a smartphone.”

Carstens referred to this process as “tokenization” and said that it could make buying, selling, and transferring assets faster, cheaper and more transparent. “Indeed, it could even make delayed settlement of different assets like bonds, stocks and foreign exchange a thing of the past. The level of certainty in financial markets would increase markedly,” he added.

BIS launches new stablecoin project, crypto and DeFi monitoring platform

Stablecoins have unique technical capabilities

On the topic of stablecoins, the BIS head said the biggest takeaway from their prevalence in the crypto industry is the technical capabilities they provide, which cannot be met by existing forms of money.

He called on central banks to incorporate these capabilities into their infrastructure to satisfy this demand and “ensure that stablecoins do not harm investors and consumers, or contribute to a fragmentation of the monetary system that undermines the singleness of money.”

In conclusion, Carstens called on central banks to embrace innovation in order to keep pace with the evolution of money.

“Facilitating the existence of CBDC and tokenized deposits would provide the technological representation of money that further innovation needs,” he said. “Bringing them onto a unified ledger would have a catalytic effect on further innovation conducted by the private sector.”

The ultimate goal, according to Carstens, “is to build a future monetary system that is adaptable and enables innovation by the private sector in a safe and sound way – in whichever form it may come.”

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