As the shock waves of this year’s cryptocurrencies crash reverberate, one organisation suggests the future of the monetary system will be in tried-and-tested institutions combined with the latest technologies to create central bank digital currencies.
The Bank for International Settlements (BIS) says the future of monetary systems lies in “digital representation” of central bank money, using private-sector innovation to provide essential requirements of a currency system: safety, accountability, efficiency, inclusion and openness.
According to Hyun Song Shin, economic adviser and head of research at BIS, a future digital monetary system should be viewed as a tree “whose trunk is the central bank”.
Innovation is not just a buzzword, or latest fashion
“This tree boasts a rich and vibrant ecosystem of private-sector service providers serving users to fulfil their economic needs. The ecosystem is rooted, figuratively speaking, in settlement on the central bank’s balance sheet.”
Shin’s comments come in a special chapter of the BIS Annual Economic Report 2022 comparing cryptocurrencies to work under way among central banks to create their own digital currencies.
Cryptocurrency has had a torrid time over the past year. Bitcoin is around 70% below its peak value of November while Ether, another cryptocurrency, has shrunk by about 80%. One cryptocurrency, TerraUSD, has been delisted from exchanges.
So tumultuous have the past few months been that observers have dubbed it a ‘crypto winter’. The dark moniker has failed to turn all observers. Some believe cryptocurrencies will revive because, unlike in previous crises, there is now more infrastructure – technology, expertise and legal arrangements – in place. Others believe cryptos are as vulnerable to wider economic travails as any other currency.
BIS makes its case for a central bank-led monetary system via a stiff critique of cryptocurrencies and highlighting a number of flaws. BIS says “market turmoil” and the collapse in prices signal cryptocurrencies are “not sound money”, and market participants – intermediaries – lack regulation.
Cryptocurrencies also suffer from an acute structural contradiction, BIS argues. To achieve its aim of decentralisation – no central body in charge – anonymised ‘validators’ record details of a crypto transaction on the blockchain for a fee. The only way fees can incentivise integrity is if they are higher than the potential gains from cheating.
To maintain the fee levels, the capacity of the blockchain – the public ledger for crypto transactions – has to be limited. This centralises control in fewer hands and means the blockchain cannot be scaled to handle more transactions. In the end, BIS argues, cryptocurrencies cannot achieve all three key properties: scalability, security and decentralisation.
As far as Shin is concerned, central banks can harness new technology – tokenisation of money, instant retail payments and new interfaces – while providing “trust”.
“Innovation is not just a buzzword, or latest fashion,” says Shin. “It should never lose sight of the concrete needs of users in the real economy. Central banks are seeking to push the frontiers of what is possible, adopting new capabilities while ensuring financial services are stable and interoperable domestically and internationally.
Gavin Hinks is a business and financial journalist
This article was taken from Issue 3, 2022 of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership