CBDCs, not cryptocurrencies, will be the backbone of the monetary system of the future, says BIS – Cryptocurrencies

The structural flaws of cryptocurrencies make them an inadequate foundation for a monetary system, the Bank for International Settlements (BIS) says in a report published on Monday. For the BIS, on the other hand, monetary systems can be built around central bank digital currencies (CBDC), which are digital representations of national currencies.

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The BIS, an association of the world’s leading central banks, devoted 42 pages of the 2022 Annual Economic Report to outlining a blueprint for the future of the global monetary system. According to the entity, there is room for only some of the technical features brought by cryptocurrencies, such as programming and tokenization – but not exactly the cryptocurrencies themselves.

“Our broader conclusion is captured in the motto: ‘Anything cryptocurrencies can do, CBDCs can do better,’” Hyun Song Shin, economic advisor and head of research at the BIS, said during a press conference held yesterday.

The chapter, which will be published today ahead of the full report, due for release on Sunday (26), identifies a number of limitations of cryptocurrencies, including the lack of a stable nominal anchor. In monetary policy, this is a variable – such as an exchange rate peg – that can be used to control price levels.

Stablecoins, cryptocurrencies pegged to the value of assets like sovereign currencies, are the crypto world’s search for that anchor, Shin said. Stablecoins try to “hold on to the stability of real money issued by central banks”.

For the consultant, the recent crash of TerraUSD (UST), a stablecoin that had a market capitalization of $18 billion at the beginning of May and that quickly lost its peg to the dollar, illustrated how stablecoins, despite their name, are , actually unstable and do not serve as units of account.

Unlike other stablecoins like USD Coin (USDC) and Tether (USDT), which are supposedly backed by dollar-denominated reserves, TerraUSD was an algorithmic stablecoin backed by another cryptocurrency (in this case, LUNA) with an algorithm to regulate the exchange rate. stablecoin supply and demand and maintain its parity with the US currency.

“The second important finding is that cryptocurrencies and stablecoins fail to achieve the full network effects we normally expect from money,” Shin said.

Money, Shin said, is the perfect example of a virtuous circle of greater use and greater acceptance. The decentralized nature of cryptocurrencies, on the other hand, achieves the exact opposite, namely fragmentation.

In early June, economists at the BIS published an article arguing that cryptocurrencies cannot fulfill the role of money because expensive transactions and scalability constraints drive the cryptocurrency world to split into competing blockchains and ecosystems.

“Network effects mean ‘the more the better,'” the document stated.

CBDCs are better, argues the BIS

For the BIS, CBDCs play the role of stable digital currencies in the currency systems of the future, used in settlements, transfers and payments. But, CBDC projects are still in early stages in most major economies, with China at the forefront of the movement with its digital yuan.

The consultant views CBDCs with optimism, citing the progress made so far by the BIS’ own experiments, noting that countries are choosing to issue CBDCs despite having robust payment systems.

“India has one of the best fast retail payment systems in the world. It’s called UPI. And led the adoption [de CBDCs] by showing how these systems will actually work. But, India decided to go to the final stage and actually launch a retail CBDC,” Shin said, referring to a CBDC that can be used by consumers for transactional purposes.

The BIS text acknowledges cryptocurrency’s contributions to technological advances, calling the industry’s innovations a “radical departure” from existing systems. However, according to the report, the technical capabilities that have emerged from cryptos will only serve to strengthen the monetary system of central banks.

“Programmability, composition, and tokenization are not unique to cryptocurrencies, as they can be built using central bank digital currencies (CBDCs), rapid payment systems, and associated data architectures,” the report said.

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