The Bank for International Settlements (BIS) has published a special chapter of its Annual Economic Report 2022, in which it presents a blueprint for a future digital monetary system. The BIS is an international organization that serves as a bank for central banks and fosters cooperation among them. The report explores the challenges and opportunities of digital innovation for central banks and the global financial system.
The limitations of crypto and DeFi
The report examines the structural limitations of cryptocurrencies and decentralized finance (DeFi), which are based on blockchain technology and aim to create alternative forms of money and financial services. The report warns that these innovations are not sound money, as they lack a stable nominal anchor and are prone to volatility, congestion, fragmentation and abuse. The report also points out that crypto and DeFi do not fulfil the high-level requirements for a usable digital monetary system, such as safety, accountability, efficiency, inclusion and openness.
The potential of CBDCs and fast payments
The report argues that a digital version of money issued by the central bank could provide for many of the same features offered by crypto and DeFi, while avoiding their risks and drawbacks. These features include programmability, interoperability, scalability and privacy. Central bank digital currencies (CBDCs) are digital representations of sovereign currencies that are issued and backed by the central bank. Fast payment systems are platforms that enable instant and low-cost transfers of money across different payment service providers.
The report envisions a two-tiered monetary system, in which CBDCs and fast payments form the core public infrastructure, while private sector innovation builds on top of it. This system could enhance efficiency and financial inclusion, while safeguarding stability and security. The report also highlights the importance of international coordination and cooperation among central banks to ensure interoperability and avoid fragmentation of the global monetary system.
The role of central banks in the digital age
The report concludes that central banks have a key role to play in shaping the future of money and finance in the digital age. Central banks need to balance the benefits and risks of digital innovation, while preserving their mandate and public trust. Central banks also need to adapt continuously to serve the public interest, by fostering innovation, competition and diversity in the financial system.
The report is based on the research and analysis of the BIS Innovation Hub, which is a network of centres that collaborate with central banks and other partners on innovative solutions for central banking. The report also draws on the input and feedback from various BIS committees, working groups and forums that involve central bankers from around the world.
