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BIS backs CBDCs to win out against bitcoin, stablecoins and Big Tech

BIS backs CBDCs to win out against bitcoin, stablecoins and Big Tech

The Bank for International Settlements has firmly thrown its weight behind the development of central bank digital currencies (CBDC), billing the monetary shift as a public good against the twin evils of Big Tech and bitcoin.

Central bank interest in CBDCs comes at a critical time. Several recent developments have placed a number of potential innovations involving digital currencies high on the agenda. The first of these is the growing attention received by bitcoin and other cryptocurrencies; the second is the debate on stablecoins; and the third is the entry of large technology firms into payment services and financial services more generally.

Writing in the BIS' annual economic report, head of research and economic advisor Hyun Song Shin, dismisses the role of cryptocurrencies: "By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes. Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint."

He describes stablecoins as "an appendage to the conventional monetary system and not a game changer", noting also that they are only as good as their governance arrangements and have the potential to fragment the liquidity of the monetary system.

On Big Tech, Song Shin says the network effects inherent in their platforms impels the market for payments towards further concentration.

"Authorities have recently addressed concerns about anti-competitive practices that exclude competitors in associated digital services such as e-commerce and social media," he says. "This concentration of market power is a reason why authorities in some economies are increasingly turning to an entity-based approach to regulating Big Techs, as a complement to the existing activities-based approach."

By way of contrast, Song Shin says CBDCs would build on the central bank's traditional roles in the payment system, to ensure that payments are final and certain; that there is enough liquidity for the payment system to function; and that the playing field is level, by making central bank money available on an equal basis to all parties.

"CBDCs are a concept whose time has come," he says. "They open a new chapter for the monetary system by providing a technologically advanced representation of central bank money. In doing so, they preserve the core features of money that only the central bank can provide, anchored in the foundation of trust in the central bank."

BIS analysis finds that CBDCs would best function as part of a two-tier system where the central bank would operate the core of the system and ensure its safety and efficiency, while the private sector, such as banks and payment service providers, would compete to develop innovative use case to serve customers.

From a practical perspective, the BIS says the most promising CBDC design would be one tied to a digital identity, requiring users to identify themselves to access funds. A careful design would balance protecting users against the abuse of personal data with protecting the payment system against money laundering and financial crime.

In addition, the BIS sstresses 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.

Comments: (4)

Nick Ogden
Nick Ogden - RTGS.global - London 23 June, 2021, 17:181 like 1 like

The impact of CBDC's in the wholesale interbank money market is instanteously significant. Had this option existed in 2006, the impacts of the Global Financial Crisis could well have been diminished. 

Joan McGowan
Joan McGowan - SAS - Cary 23 June, 2021, 17:271 like 1 like

There is so much more to CBDCs than is stated in this article. Central Bank Digital Currencies would inherently bypass banks, lenders (that's the purpose - it owns the network). Deposits and digital money will sit in the central bank vaults with access through an app such as Venmo or maybe even a central bank app -  who cares it's a front end only. Because China is driving their e-yuan (500,000 users) other countries cannot afford to abstain. Ad DCs are networks they do not stop at geographical or currency borders. 

On the plus side, CBDCs will cut the cost of managing money and provide easier acces to 1.7 billion underbanked. But the level of intimate intelligence a govt will have on your finances in scary. They will be the ones make credit allocation decisions and, moreover, it's not impausible to imagine a govt efining you and garnishing your salary for that parking fine. But by far the most ominous threat is a cyber attack on a digital currency.  The network goes down but the banks no longer hold the cash. Lots to think about. 

Graham Smith
Graham Smith - Volopa Financial Services (Scotland) Limited - Mayfair, London. 23 June, 2021, 19:22Be the first to give this comment the thumbs up 0 likes

Such a wide and growing subject that is taking us all down many paths as the juices begin to flow.  

For my two penneth, the assumption that the CBDC would bypass banks and lenders suggests there are not the requisite checks, balances, segregation, or thoroughly thought through model in place. This would leave the CB totally exposed and vulnerable without the layered system below and cannot be the way forward.

I can’t see the govt being interested in the coffee I’ve just purchased, any more than they are today. But if they wanted to, they could go to my Bank and see everything I do digitally today to assess the level of parking fine. They don’t even need to go to the Bank, HMRC has it all at their fingertips.

I completely agree that a cyber attack is the most likely and damaging threat, which is why the strengths of the existing cash and banking environment should be learnt from and built upon to prevent a massive impact from an attack and to immediately identify any issues arising.

We have to assume that such an attack would happen; enabling the requisite digital vault doors to be slammed shut is a must-have upon detection, as is a digital sprinkler system to handle the digital equivalent of a fire at the Royal Mint. The list goes on and all the brains applying themselves to the CBDC opportunity must prepare to expect the unexpected, whilst building something that can bring so much value and opportunity, including securely enabling the underbanked.

The bank level segregation could be enhanced so each bank can identify the DC it has received from the BoE, also what it and its clients have touched. What an incentive for the CB to encourage a greater number of regulated entities (banks, fintechs etc), to help control/monitor the flow of funds at their level with their fingerprint on it.

The opportunity in the digital world for CDBC to provide clear visibility of money paths, origin, destination could seriously damage current fraudsters. This has to be a prime benefit, ultimately affecting all of us, whilst also making it easier and safer for the average Joe to do what they do today.

Daniel Louw
Daniel Louw - Private - Stellenbosch 24 June, 2021, 07:19Be the first to give this comment the thumbs up 0 likes

Does someone have a good artikel to share explaining the impacts of CBDCs and how it will change the payments and banking industry?