The Bank for International Settlements Innovation Hub (BISIH) penned an open letter to the G20 ministers. The letter captures the bank’s findings addressed to the finance ministers and governors of central banks from the G20 alliance as they meet later this month.
BIS letter signals preparation for the meeting with two reports submitted. BISIH indicated that reports conveyed on Tuesday, July 11, draw different conclusions on the cryptocurrency and central bank digital currencies (CBDCs)technologies.
Cryptocurrencies Adoption Grows Amidst Riks and Structural Flaws
The BISIH findings on crypto capture a recap of the ecosystem of decentralized finance (DeFi) and stablecoins. It outlines the structural flaws and risks arising in the crypto ecosystem.
BISIH revisits several common issues that characterize the crypto ecosystem. In particular, it reviews the centralization risk in crypto trading, stablecoin instability, and reported irreversibility of smart contracts. Specifically, the 24-page report highlights several little-discussed aspects of inescapable DeFi centralization prompting the oracle requirement.
BISIH report considers human nature attracts comparatively rare insight into research despite the risk it poses within the crypto ecosystem. BISIH Crypto investors often lean towards chasing prices, as seen in conventional finance, by professing to purchase high and sell low culture.
BISIH considers crypto a real risk, given the increased interconnectedness with the real economy. The risk is aggravated as more households and institutional investors portray increased interest in digital assets. The report shows that last year’s event of prolonged crypto winter is not slowing down the uptake of crypto by institutions.
Tokenization and Stablecoins Threatens to Trigger Cryptoisation
The report acknowledges that widespread tokenization assets could trigger crypto market growth. Nonetheless, the BIHIS report offers scanty information concerning the tokenization mechanism.
BIHIS reveals that stablecoins have the capability to bring economies of cryptoisation. The situation could arise by squeezing the cash out from regular use.
The reports coincide with the period when BISIH partners with Germany and Netherlands’ central banks. The partnership is drawn to the Project Atlas initiated to visualize the viability of executing cross-border crypto flows. The report acknowledges the need for executing a holistic assessment of its viability in crypto markets. Specifically, the report warns that cryptos suffer inherent structural flaws making them unsuitable to have a significant input within the monetary system.
The second report illustrates that the BISIH has implemented 12 CBDC prototypes and proofs-of-concept since 2020. It targets implementing 17 more projects leveraging the valuable lessons from the dozen prototypes implemented. Further, the report captures variables in retail and wholesale CBDCs relative to desirability, viability, and feasibility.
BISIH Positive of CBDCs Role in Monetary System
A review of the CBDCs report indicates the tone differs markedly from that utilized in the crypto text. The BISIH report on CBDCs drops the critical text adopted in the cryptocurrency report. The bank considers that CBDCs can influence future developments in the monetary system. BIHIS describes CBDCs as capable of becoming the foundation of future monetary innovations.
The report summarizes BHIS and partner banks’ findings while implementing the 12 projects. The information offers suggestions as well as grounds for subsequent research gaps. Primarily, the report acknowledges that experimenting within the BISIH ecosystem allows the CBDCs projects’ execution to become iteratively on one another.
BISIH urges central banks to consider utilizing the modular approach to decouple various components, including compliance, payment, and foreign exchange. Their separation from general use would expedite the project execution. BISIH promised to unveil additional CBDC projects in the future.