Crypto’s structural flaws make it an unsuitable basis for a monetary system, according to the Bank for International settlements (BIS). Instead, monetary systems could be built around central bank digital currencies (CBDCs), which are digital representations of central bank money.
The BIS, an association of the world’s major central banks, dedicates a 42-page chapter in its "2022 Annual Economic Report" to laying out a blueprint for the future of the global monetary system. In that vision, there is room for only some of crypto’s underlying technical features, like programmability and tokenization, not for cryptocurrencies themselves.
“Our broad conclusion is captured in the motto, ‘Anything that crypto can do, CBDCs can do better,’” said Hyun Song Shin, an economic adviser and head of research at the BIS, during a press briefing on Monday.
The chapter, which will be published Tuesday ahead of the full report, identifies a number of limitations of crypto, including the lack of a stable nominal anchor. In monetary policy that is a variable – such as a currency 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 such an anchor, Shin said. Stablecoins attempt to “piggyback on the stability of real money issued by central banks.”
Shin said the recent crash of terraUSD, a dollar stablecoin with a market capitalization of $18 billion in early May that rapidly lost its peg, illustrated how stablecoins, despite their name, are unstable and don’t make good units of account. Unlike other leading stablecoins, such as USDC and USDT, which are reportedly backed by dollar-denominated reserves, terraUSD is an algorithmic stablecoin backed by another cryptocurrency (in this case LUNA) with an algorithm in place to regulate supply and demand of the stablecoin and maintain its peg.
“The second important finding is that crypto and stablecoins fail to achieve the full network effects that we normally expect of money,” Shin said.
Money, Shin said, is the perfect example of a virtuous circle of greater use and greater acceptance. Crypto’s decentralized nature, on the other hand, achieves exactly the opposite, namely fragmentation.
In early June, BIS economists published a paper arguing that crypto cannot fulfill the role of money because costly transactions and scalability restrictions lead to the crypto world splitting into competing blockchains and ecosystems.
“Network effects mean ‘the more, the merrier.’ Crypto achieves the opposite: ‘the more, the sorrier’.”
CBDCs can do it better
In the BIS blueprint for future monetary systems, CBDCs play the role of stable digital currencies used in settlements, transfers and payments. But CBDC projects are still in early stages in most major economies, with China ahead of the curve with its digital yuan.
At the briefing, Shin responded with optimism to questions on his confidence in CBDCs and the progress made so far in BIS’ own experiments, noting that countries were choosing to issue CBDCs despite having robust payments systems.
“You know, India has one of the best retail fast payment systems in the world. It's called UPI. And it's led the way in actually showing the way on how these systems will actually operate. But India has decided to go to the final step and actually roll out a retail CBDC,” Shin said, referring to a CBDC that can be used by consumers for transactional purposes.
The paper acknowledges crypto’s contributions to technological advances, calling new developments a “radical departure” from existing systems. However, according to the report, technical capabilities that arose from innovations in the crypto space will only serve to strengthen the central bank monetary system.
“Programmability, composability and tokenization are not the preserve of crypto, but can instead be built on top of central bank digital currencies (CBDCs), fast payment systems and associated data architectures,” the report said.
The full report will be published June 26.
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