The promise of the BIS charts and the risks of the central bank’s digital currency

Days after taking a cautious eye on ESG investing, the club of some of the world’s major central banks took a look at central bank digital currencies.

Some of the world’s major central banks and the Basel-based Bank for International Settlements have embarked on another debate on the arguments for or against digital currencies, saying policymakers need to keep pace with innovation but not not crush commercial banks. Days earlier, the BIS had targeted yet another hot trend, warning of a “bubble” in ESG investing.

The rise of bitcoin and other digital assets in recent years increases the risk that central bank issuers of state fiat money – which in almost all cases are no longer backed by gold – may lose in the face of new monetary models. More than a decade of massive central bank printing of money, intensified by the pandemic, has raised concerns about rising inflation. Policymakers are also concerned that cryptocurrencies are vectors of criminal activity and tax evasion.

Separately, the use of central bank digital currencies (CBDCs) could undermine the privacy benefits of cryptos, perhaps even at odds with privacy protocols such as EU GDPR rules. The Chinese central bank has launched an electronic payment in digital currency (DCEP). Critics may be concerned about how this fits with the Asian country’s social credit watch on citizen behavior. China, which has cracked down on cryptocurrency mining and trading, was not included in the club of seven central banks working with the BIS on the study. The other central banks involved in the BIS study are the US Federal Reserve, Bank of England, European Central Bank, Bank of Canada, Bank of Japan, Sveriges Riksbank, and Swiss National Bank.

Another concern for central banks could be that if fiat currencies are bypassed, their ability to set interest rates and monetary policy could be seriously weakened. (Arguably, this is already the case.)

“As history has shown, the evolution of money and payments offers new opportunities and new business models, as well as new challenges. Our economies are becoming increasingly digital, user needs are rapidly changing, and innovation is reshaping financial services. Many of our jurisdictions are seeing the transactional use of cash decline and new forms of digital currency issued by the non-bank private sector (such as stablecoins) are emerging, ”said the BIS. “These developments have accelerated since the start of the COVID-19 pandemic. Today, central banks are exploring how they can continue to meet their public policy goals, ensuring that they are able to respond to a future system that appears to be changing rapidly.

Central banks have said that “retail” CBDCs for public use must leverage public and private actors to integrate with existing payment systems.

The Bank of England and the British Treasury have launched a task force to examine this area and the US Federal Reserve is also exploring the area.

The BIS report touched on the subject of “stablecoins”. According to one definition, stablecoins are cryptocurrencies that attempt to relate their market value to an external benchmark. Stable coins can be linked to a currency like the US dollar or to the price of a commodity like gold.

Discussing the potential risks, the organization said: “A significant shift from bank deposits to CBDCs (or even some new forms of digital currency issued by the private sector) could have implications for lending and intermediation by the sector. banking. However, our analysis also suggests that these impacts would likely be limited for many plausible levels of CBDC participation, if the system had the time and flexibility to adapt.

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