Anything that crypto can do, central bank digital currencies (CBDCs) can do better.
That is the broad conclusion reached by the Bank for International Settlements, which prereleased the long, crypto-focused chapter of its “2022 Annual Economic Report” on Tuesday (June 21). Hyun Song Shin, head of research and an economic adviser to the BIS, announced the release at a press conference, CoinDesk reported.
Arguing that cryptocurrencies have fundamental flaws that make them unsuitable as the basis of a monetary system, the BIS said that while tokenization and programmability are genuine advances, private, decentralized blockchains are not needed to reap their benefits.
These “can instead be built on top of central bank digital currencies (CBDCs), fast payment systems and associated data architectures,” the BIS concluded.
In doing so, the central-bank-owned financial institution has launched a direct attack on the core goal of all cryptocurrencies from bitcoin on: decentralization and the bypassing of financial intermediaries, most notably banks.
Read more: Blockchain Basics Series: What’s Bitcoin, and How Did It Get That Way?
“Rather than relying on central bank money and trusted intermediaries, crypto envisages checks and balances provided by a multitude of anonymous validators so as to keep the system self-sustaining and free from the influence of powerful entities or groups,” the report said.
Instead, it relies on decentralized finance (DeFi) platforms — of questionable decentralization — to replicate the services traditional financial institutions offer.
See also: DeFi Series: What Is DeFi?
However, there is “a vast gulf between the crypto vision and its reality,” the BIS said. “Contrary to the decentralization narrative, crypto often relies on unregulated intermediaries that pose financial risks.”
Stablecoin Flaws
But its structural flaws run deeper. The central bank argued that the “decentralization narrative” falls apart under scrutiny in a number of ways.
Most notably, the BIS pointed to dollar-pegged stablecoins and the central role they play in the cryptocurrency economy as proof of the inherent failures of cryptocurrencies like bitcoin.
Stablecoins like Tether’s USDT and Circle’s USDC are the lubricant of crypto trading, used in most cross-blockchain trades, and have recently begun to see broader use as a payment currency. They are also a way for speculators to park funds in a nonvolatile currency between trades.
“Providing the unit of account for the economy is the primary role of the central bank,” the BIS said. “The fact that stablecoins must import the credibility of central bank money is highly revealing of crypto’s structural shortcomings.”
The $45 billion collapse of the TerraUSD stablecoin and its partner token LUNA following a run “underscored the weakness of a system that is sustained by selling coins for speculation,” rather than on the trust in a central bank.
The need for stablecoins to bridge the gap between the 10,000 or more existing cryptocurrencies shows “another important structural flaw with crypto — namely the fragmentation of the crypto universe, with many incompatible settlement layers jostling for a place in the spotlight,” it said, adding that money is — or should be — “a coordination device that serves society through its strong network effects.”
Crypto’s Lessons
The BIS reveals a vision for the future of money, using CBDCs to “meld new technological capabilities” with the core trust provided by central banks’ fiat currencies.
With the trust in central bank money “at its core” combined with new digital technologies, it can make great strides in interoperability and network effects, allowing “new payment systems to scale and serve the real economy … [and] adapt to new demands as they arise.”
A public-private partnership built on the integration of crypto’s technologies with central banks’ trust “could make the monetary system more adaptable and open across borders,” it concluded. “A decade hence, users may take real-time, low-cost payments for granted, and payments across borders may be as seamless as the cross-border exchange they support.
“Consumer choice in financial services should be increased, and innovation will continue to push the frontiers of what is possible.”
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