In preparation for the upcoming G20 finance ministers and central bank governors meeting, the Bank for International Settlements Innovation Hub (BISIH) has submitted two reports on cryptocurrency and central bank digital currencies (CBDCs). The reports present divergent conclusions regarding these technologies.
The BISIH’s Report on Cryptocurrencies
The BISIH’s report on cryptocurrencies provides an overview of the crypto ecosystem, including cryptocurrencies, stablecoins, and decentralized finance (DeFi), while also highlighting various structural flaws and risks associated with them. It emphasizes issues such as the centralization of crypto trading, instability of stablecoins, irreversibility of smart contracts, and the inescapable centralization of DeFi due to oracles. Furthermore, the report points out the risk posed by human nature, as investors tend to chase prices. Moreover, it highlights the growing interconnectedness of crypto with the real economy and the potential for tokenization of assets to further expand the crypto market, potentially leading to the “cryptoisation” of economies.
The BISIH’s CBDC Report
On the other hand, the BISIH’s CBDC report takes a more positive stance, considering CBDCs as the foundation for future monetary systems and subsequent innovations. The report discusses wholesale versus retail CBDCs and explores their desirability, feasibility, and viability. It summarizes the findings from 12 CBDC proofs-of-concept or prototypes implemented over the past three years. The report suggests a research gap analysis and proposes a modular approach for CBDC projects, where components like payment, foreign exchange, and compliance can be decoupled for broader use. The BISIH affirms its commitment to additional CBDC projects in the future.
While the BISIH acknowledges the risks and limitations of cryptocurrencies, it sees potential in CBDCs as a means to underpin the future monetary system. By presenting these contrasting outlooks, the reports highlight the need for further evaluation and research regarding both crypto and CBDCs. The BISIH’s continued efforts in exploring CBDC projects aim to inform policymakers and foster innovation in this evolving landscape.
As finance ministers and central bank governors convene at the G20 meeting, these reports provide valuable insights into the ongoing discussions surrounding cryptocurrencies and CBDCs, helping to shape financial policies and regulations in the years ahead.