BIS presents a vision for the future monetary system

  • A monetary system based on central bank public goods, using a digital version of sovereign currency as its foundation, could foster innovation while safeguarding stability and security.
  • As part of a two-tiered monetary system, central bank digital currencies and fast payments systems could enhance efficiency and financial inclusion, while buttressing data privacy.
  • Recent turmoil in the crypto universe is a reminder of cryptocurrencies’ financial vulnerabilities, but their deeper structural inadequacies have been apparent for some time, the report warns.

The Bank for International Settlements (BIS) today set out a blueprint for a future digital monetary system. In a special chapter of its Annual Economic Report 2022, the BIS said a system grounded in a digital representation of central bank money could combine innovation with essential attributes such as safety, stability, accountability, openness and efficiency. Such a system would be capable of adapting continuously to serve the public interest. This vision is built on the foundation of trust in central banks, with a digital version of sovereign currencies at its core.

The report examines the structural limitations of crypto and decentralised finance (DeFi), outlining the inherent risks in their design. Recent market turmoil and the collapse in the prices of major stablecoins are reminders that crypto is not sound money1. Unregulated or non-compliant intermediaries, and the structural limitations that prevent such currencies from scaling, introduce new financial risks. While innovations such as the ability to program payments and transfers offer glimpses of technological possibilities, they cannot fulfil the high-level requirements, such as safety, accountability, efficiency, inclusion and openness, for a usable digital monetary system.

A digital version of money issued by the central bank could provide for many of the same features offered by cryptocurrencies and stablecoins. These could be built on a sound nominal anchor and avoid the structural limitations and risks of crypto, which include congestion, high fees, fragmentation and pseudo-anonymity, characteristics that can also facilitate abuse and illicit activity.

Recent advances in wholesale and retail central bank digital currencies (CBDCs) and retail fast payment systems could form the basis of an adaptable future monetary system that fosters private sector innovation, while enabling greater financial inclusion and user control over data.

The BIS argues that the future monetary system should be the fusion of new capabilities around the core of trust provided by the central bank. The private sector will provide customer-facing activities with new functions such as the tokenisation of money and financial instruments and instant retail payments through new interfaces. This combination could bring about lower costs, greater financial inclusion, more user control over financial data, improved integrity and seamless cross-border activity, helping to overcome shortcomings in today’s arrangements. Such innovations could open a new chapter in the global monetary system.

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