BASEL, Switzerland (AN) — The global financial institution that supports central banks has a new blueprint for the world's future monetary system, and it's not based on crypto.
The future, says the Swiss-based Bank for International Settlements, will be built around central bank digital currencies, or CBDCs, which are digital representations of central bank-issued money.
That's according to a 42-page chapter simply entitled, "The future monetary system," tucked away in BIS' 2022 Annual Economic Report released on Tuesday.
It says the digital era's burst of creativity around money and payments is "opening up vistas" that serve the public interest, but the crypto universe has an unstable nominal anchor, unregulated intermediaries, and other flaws that pose too much risk.
The global financial institution's warnings about the dangers of decentralized digital money are playing out now in the once high-flying cryptocurrency markets, which recently crashed back to Earth and erased more than $2 trillion in value in just months.
"The whole system is in search of a nominal anchor," said Hyun Song Shin, an economic adviser and head of research for BIS. "So if central bank money didn't exist, it would need to be invented, as it were. The more serious problem is the fragmentation of the crypto universe, which means that crypto cannot serve the purpose of money in the sense that it doesn't recreate this virtuous circle from greater acceptance to greater use."
'Money is a social construct'
Though some of crypto’s technical aspects — namely "programmability, composability and tokenization" — are useful for the future, BIS argues those benefits "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."
As the world’s oldest international financial institution, BIS was founded in 1930 to increase cooperation among central banks and other government agencies working to create financial and monetary stability.
It had a key role in reparation payments imposed on Germany following the World War I and, while it does not supervise or regulate banks, its banking services are exclusively for central banks and international financial institutions.
The bank's conclusions about digital currencies and the future monetary system mirror those it published earlier this month about blockchain technology. That report said the use of public blockchains leads to fragmentation that renders crypto unsuitable for payments, because users will seek alternatives as transactions costs rise.
"Fragmentation without interoperability implies that cryptocurrencies cannot fulfil the role of money as a coordination device," it said. "Fundamentally, money is a social construct, as people accept money in the expectation that others will do so in the future."