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

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

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

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

The chapter, which will be released today ahead of the full report, due out on Sunday (26), identifies a number of limitations of cryptocurrencies, including the lack of a stable nominal peg. In the context of monetary policy, it is a variable – such as an exchange rate anchor – that can be used to control the level of prices.

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

For the consultant, the recent fall of TerraUSD (UST), a stablecoin that had a market capitalization of $18 billion in early May and 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 Attach (USDT), which would be backed by dollar-denominated reserves, TerraUSD was an algorithmic stablecoin backed by another cryptocurrency (in this case, the LUNA) with an algorithm to regulate the supply and demand of stablecoins and maintain its parity with the US currency.

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

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

In early June, BIS economists published a paper claiming that cryptocurrencies cannot fill the role of money, as costly transactions and scalability constraints drive the cryptocurrency world to split into chains. of competing blocks and ecosystems.

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

CBDCs are better, says BRI

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

The consultant views CBDCs with optimism, citing progress made so far by the BRI’s own experiences, noting that countries are opting 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] showing how these systems will actually work. But India has decided to take the final step and launch a retail CBDC,” Shin said, referring to a CBDC that can be used by consumers for transactional purposes.

The BIS text acknowledges the contributions of cryptocurrency to technological advancements, 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, compounding, 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,” indicates the report.

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