Economists at the Bank for International Settlements (BIS) analyzed the risks inherent in the crypto ecosystem and proposed a seemingly novel solution. โDevelop an alternativeโ, they say. advised in a newsletter published on January 12. What they had in mind was central bank digital currency (CBDC).
The authors of the newsletter, led by BIS Senior Economist Matteo Aquilina, said they sought lessons from the crypto winter that descended in 2022. Recent failures in crypto asset markets underscore the need to address the risks posed by cryptocurrencies before those markets become "systemic". ," they said.
Both centralized and decentralized finance in the world of cryptocurrencies โshare many of the vulnerabilities that are familiar from traditional (TradFi) finance,โ the authors said. However, the risks resulting from high leverage, liquidity and maturity mismatches, and substantial information asymmetries are higher in crypto.
Crypto is unlikely to go away on its own, despite the problems it presents, the authors noted. They placed potential risk mitigation actions into the categories of specifically banning crypto-enabled, holding crypto in isolation from โthe real economy,โ and regulating crypto โin a TradFi-like manner.โ Them provide a separate appendix that breaks down the national and international crypto regulatory initiative within that framework.
Related: Central banks to set standards on banks' cryptocurrency exposure: BIS
Each option has relative advantages and disadvantages, they noted. A ban, for example, "could conflict with the fundamental principles of society," among other things. However, all three approaches can be applied simultaneously:
โGiven their public policy mandates, central banks may want to do more. By fostering strong innovation at TradFi, they could contribute to a more efficient monetary system.โ
Improving the speed and profitability of payments could be an important component of that strategy:
"Innovation that is present in certain areas of crypto could be harnessed to improve the way services are delivered on TradFi."
One of the best ways to do this would be through CBDC, which, according to the authors, offers a number of benefits:
โThey could help reduce the cost of payments, improve financial inclusion, strengthen system integrity, and promote user control over data and privacy.โ
International and supranational organizations have provided platforms for growing opposition to cryptocurrencies. Fabio Panetta, member of the executive board of the European Central Bank (ECB) recently advanced a similar argument for CBDC development at the expense of cryptocurrencies. The same ECB blog had published an article stating cryptocurrency was on "the road to irrelevance" shortly before that. The International Monetary Fund has been criticized for his anti-crypto stance as well.
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