Central banks to lead way for digital currencies: BIS

London

CENTRAL banks will lead the way in the issuance, control and regulation of digital currencies. This is the key message in a significant chapter on central bank digital currencies (CBDC) in the Bank for International Settlements' (BIS) latest annual report on Wednesday.

Digital cryptocurrencies such as bitcoin and other crypto assets aim to mirror traditional money - a means of payment, a store of value, and a unit of account.

Digital tokens cover a wide range of financial instruments with different technical, legal and practical characteristics.

But the BIS stresses that bank-to-bank digital transactions in the wholesale banking market and retail digital payments of individuals and businesses should be secure.

It is in the public interest that digital payments should have the ultimate protection of central banks, the lenders of last resort.

The key takeaways of the chapter are that CBDCs will become part of a regulated and safe monetary system.

Statistics from the BIS show that in developed and other sophisticated nations, the general public is moving away from cash.

CBDCs, in digital form instead of cash, can be regarded as the same as other central bank money, offering "settlement, liquidity and integrity, in other words an advanced representation of money for the digital economy".

The aim of CBDCs is to also ensure open payment platforms and a competitive level playing field that is conducive to innovation.

The benefits of adopting this new payment technology will depend on the competitive structure of the underlying system, governance of data and privacy, the BIS stated.

It is also wary about the large tech firms offering digital currencies.

"Technology that can encourage a virtuous circle of greater access, lower costs and better services might equally induce a vicious circle of data silos, market power and anti-competitive practices" it warned, adding that CBDCs and open platforms are the "most conducive to a virtuous circle".

Also, CBDCs built on digital identification could improve cross-border payments, and limit the risks of currency substitution.

The BIS has made it clear that it wishes to end a free for all uncontrolled issuance of cryptocurrencies: "By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes," the report said.

Numerous cryptocurrencies have been issued but the main ones these days include Bitcoin and Ethereum.

Bitcoin's price of US$5,600 in March last year soared to a peak of US$65,172 a few weeks ago, then swiftly plunged to US$29,200 before reviving to around US$33,963 on Wednesday. Ethereum has been even more volatile.

"Bitcoin, in particular, has few redeeming public interest attributes, when also considering its wasteful energy footprint," the BIS said.

There are also so-called "stablecoins" that "attempt to import credibility by being backed by real currencies but are only as good as the governance behind the promise of the backing".

"CBDCs could form the backbone of a new digital payment system by enabling broad access and providing strong data governance and privacy standards. They are the best way to promote the public interest case for digital money," said Benoit Coeure, the head of the BIS Innovation Hub.