The Bank of International Settlements (BIS) has issued a comprehensive report on the potential for central bank cryptocurrencies.
If central banks issue cryptocurrencies, the implications on Bitcoin and altcoins could be considerable. For a start, regulation is already tightening. Risks are high for large numbers of new virtual currency arrivals. They may well fall by the wayside in coming years. On the other hand, central bank digital currencies will only compete with the free market, if the size of their issues are limited. If they are used to increase money supply, they will be same as fiat currencies.
The BIS is the central banks’ central bank. Its Committee on Payments and Market Infrastructures (CPMI) and Markets Committee conducted the study.
The Monetary Authority of Singapore is currently undergoing a trial of a central bank digital currency (CBDC). The New York Federal Reserve Bank, Bank of England and Bundesbank have also been conducting intensive studies. The Bank of China is also considering one.
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The BIS report examines two types of CBDC. They are a wholesale currency limited to select financial institutions and a general purpose currency accessible to the public. The report leans more in favour of the wholesale issue to financial institutions.
“The underlying technologies might hold more promise for wholesale payments, clearing and settlements,” the joint report states.
The report analyses CBDC implications in three core central banking areas: payments, monetary policy and financial stability.
“Central bank digital currencies could help make securities and foreign exchange settlements more efficient in the future,” said Benoît Cœure, chair of the CPMI. “But more work and experimentation is needed to explore these benefits.”
CBDC could have an impact commercial bank deposits and financial stability, said Jacqueline Loh, chair of the Markets Committee. Mark Carney, chair of the Financial Stability Board added that the immediate priority is how to use these new technologies. They have to meet demand for “fully reliable, real-time payments”.
Implications of Central Bank Issuance
Key aspects of the study are:
- CBDC would be another form of central bank reserves. They would be an addition to commercial bank reserves & settlement balances. Two main CBDC variants are analysed: a wholesale and “general purpose” one for the public.
- Wholesale CBDCs, combined with “distributed ledger technology”, may enhance settlement efficiency for securities and derivatives transactions.
- Since cash is rapidly disappearing in their jurisdiction, some central banks are analysing CBDCs for the public. They would serve as an alternative, safe, and convenient payment instrument.
- Issuance of a CBDC would not alter the basic mechanics of monetary policy. This includes central banks’ use of open market operations. CBDC would be introducing a new type of central bank money.
- Implications are more pronounced for monetary policy and financial markets, if a CBDC becomes an attractive asset. As a liquid and creditworthy asset, a wholesale variant could suit institutional investors. It would be a safe asset similar to short maturity government bills.
- A general purpose CBDC might be an alternative to cash and compete with guaranteed bank deposits. The danger is a financial crisis. Flight towards central banks may occur on a fast and large scale. This would be a challenge for commercial banks that are under stress.
- Central banks would have to ensure that the CBDC is not used for tax evasion, money laundering, terrorism financing and other criminal activities.
- It is unlikely that central banks would issue an anonymous general purpose CBDC. They would be concerned that it could be used for illegal transactions.
© copyright Neil Behrmann
This article was first published in The Business Times, Singapore
Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, will be published in coming weeks. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
Research and writing take time, but articles on this blog are free. They are here to give you in depth information and ideas. In return, kindly browse the books pages. Please read the blurb and preliminary reviews of my latest book, Jack of Diamonds . It will soon be published. The thriller is a stand alone sequel of Trader Jack-The Story of Jack Miner which had excellent reviews. Butterfly Battle-The Story of the Great Insect War is very different. It is anti-war and for boys & girls, 8-12. School teachers, librarians praised it and children loved it.