Central Bank Digital Currencies May Not Replace Crypto, BIS Says

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Central banks are jostling with private sector stablecoin operators to dominate digital currency and protect consumers, the global body of policymakers said.

Private digital assets could coexist with potential digital currencies exploited by central banks, the Bank for International Settlements said Thursday in a report. Versions of central banks would rely on banks and other financial institutions to act as intermediaries to create credit and help preserve financial stability, he added.

The document reflects growing concern among policymakers that the rapid growth of cryptocurrencies and private sector initiatives around payments could lead central banks to lose control over their money.

The study is the BIS ‘second report on central bank-backed digital currencies, which is in part an effort by national authorities to address the threat to their role. The report is an update of the fundamentals of central bank digital currencies laid out by a group of seven central banks in October of last year. The latest results come from the same group, which includes the central banks of the United States, the EU, the United Kingdom and Japan.

“The central banks contributing to this report have already identified that a CBDC could be an important instrument to ensure that they can continue to meet their public policy goals even as the financial system evolves,” the study said.

Stablecoins are crypto tokens native to blockchain technology that typically claim to be one-for-one backed by traditional assets such as dollar debt. They offer cryptocurrency traders a relatively easy way to enter and exit coins such as bitcoin and ethereum, and are often touted as a potential crypto-based alternative to traditional currencies such as the dollar as the medium. of payment.

The fast-growing stablecoins – the largest of which are Tether and USD Coin – are worth nearly $ 130 billion, according to CoinGecko, a specialist website. In a global context, it is a small part of the financial system.

Nonetheless, rating agency Fitch warned in July that stablecoin operators could trigger contagion in credit markets if they were forced for any reason to unwind their reserves. International regulators are expected to publish minimum standards for private stablecoins in the coming weeks.

The BIS report found that significant adoption of stablecoins could lead to fragmentation and “excessive market power”.

The document acknowledged that there were also risks associated with the alternatives supported by the central bank, but said private initiatives would have “inferior public benefits” because they would not be interchangeable with other forms of currency and because that they did not have the protections provided with national currencies. .

“Central banks have a responsibility to ensure that citizens have access to the safest form of money – central bank money – in the digital age,” said ECB President Christine Lagarde, President of the reporting group of central bank governors.

The efforts of global central banks to create digital currencies are uneven. While China, Sweden and the Bahamas are at an advanced stage, key policy makers in Europe and the United States have only committed to exploring the possibility of launching theirs. The latest BIS study brings together the principles and design ideas that the seven central banks consider desirable.

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The study suggests that policymakers are hopeful that their version of digital currency will trump private offerings because of their reach and ability to integrate into existing financial systems and infrastructure.

The latest recommendations call for central bank digital currencies to rely on commercial banks to create credit for consumers. Any credit created by a central bank would be recycled back into the payment system, according to the report.

Separately, Isda, the trading body for the derivatives industry, announced Thursday that it is setting up a task force to develop legal documentation for trading in digital asset derivatives. The organization’s framework agreements underpin billions of dollars in derivative contracts around the world.

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