Cryptocurrencies and blockchain technology have sparked polarizing arguments for their implications in almost every industry they become associated with. For global central banks, the topic runs deeper than whether or not to handle cryptocurrencies such as with other financial institutions or businesses looking to diversify. For central banks, it has become a niche debate on the creation and or use of CBDC (central bank digital currencies).
BIS Lack of Clarity
Ongoing research of both activity amongst other central banks, as well as within the organization itself has stirred uncertainty for the stance on CBDCs for BIS. In January their data on the technology revealed strong interest amongst their industry. BIS operates as a central bank between other major central banks. They found that roughly 70% of central banks are conducting research into CBDC issuance and 50% are currently running CBDC research, pilot projects or proof-of-concepts, which is a 15% increase since their report in 2017.
However, last week one of the bank’s general managers cautioned strongly against implementing the technology in a speech held at the central bank of Ireland. Agustin Carstens warned that this type of change would lead to a one-tier system, where the same type of transactions would be used between individuals, as with between global financial institutions. He referenced a historical example of a one tier-system:
“There are historical instances of one-tier systems where the central bank did everything. In the socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But I do not think we can hold up that system as something that will serve customers better.” - Agustin Carstens
Wholesale vs. Retail
This distinction of a tier system would not be involved in every instance of a central bank issuing a digital currency. Traditional cryptocurrencies are based on open, public networks supported by public mining systems. CBDCs would operate on a centralized network, but be able to interact with public networks. BIS themselves delineated two forms of CBDCs in their January report:
Wholesale - restricted-access digital tokens for wholesale transactions between banks
Retail - “general purpose” - functioning similar to fiat, but digital
Retail - “account-based” - operating similar to exchange traded products
Overall BIS has the goal of making monetary policy more predictable and transparent their 60 central bank members. CBDCs could prove useful in this pursuit for two main reasons. Second, hey have the ability to regulate capital adequacy, meaning that tokenized assets would make it easier to maintain the checks and balances for equity and capital assets of central banks. First, they could cement reserve transparency, meaning that using digital ledgers, it would be much easier to ensure liquidity, and prohibits banks from creating money in specific industries or regions without limit. Yet, this side of the topic was not cited.
“So far, experiments have not shown that new technologies would work any better than existing ones. There is no clear demand for CBDCs on the part of society. There are huge operational consequences for central banks in implementing monetary policy and implications for the stability of the financial system.” - Agustin Carstens
By: BGN Editorial Staff