BIS Economists Propose CBDCs as the Answer to Crypto’s Flaws

Understanding the Current Crypto Landscape

Recent turmoil in the cryptocurrency markets has led economists at the Bank of International Settlements (BIS) to suggest a radical shift in financial strategy. With failures throughout 2022 pointing to systemic risks, it seems crypto isn’t just a passing trend but a problem that begs for resolution.

Lessons from the Crypto Winter

In a bulletin dated January 12, BIS senior economist Matteo Aquilina and his team analyzed the fallout from what many are calling the “crypto winter.” They concluded that the risks from both centralized and decentralized finance in the crypto space bear a striking resemblance to those found in traditional finance (TradFi), but with an added layer of complexity. The liquidity issues, leverage, and information asymmetries in crypto are far more acute. This is the kind of financial pothole that could spell disaster if unaddressed.

A Complex Solution: Central Bank Digital Currency (CBDC)

The BIS proposed a solution that might sound familiar yet refreshing: developing a Central Bank Digital Currency (CBDC). This tool could remedy many of the challenges that plague the crypto landscape while offering a way to encourage sound innovations in traditional finance.

How CBDCs Could Change the Game

• Cost Reduction: CBDCs could slice transaction costs down to size, making digital payments more affordable.
• Enhanced Financial Inclusion: By providing easier access to digital funds, CBDCs could elevate those underserved by traditional banking systems.
• System Integrity and Trust: With central banks overseeing these currencies, the inherent risks tied to cryptocurrencies could be significantly mitigated, providing users with more trust.
• Control Over Data: CBDCs could empower users by enhancing their control over personal financial information and privacy.

Regulatory Balance: Finding the Right Approach

As the authors noted, banning cryptocurrencies outright could go against the fundamental principles of modern society. Why don’t we let people, uh, have some fun with their digital assets? This chance for growth means regulations need to be thoughtful. The BIS outlines three possible paths:

1. Ban specific crypto activities
2. Contain crypto’s effects on the traditional economy
3. Implement regulations akin to those seen in TradFi to level the playing field

According to the BIS, these approaches aren’t mutually exclusive. By concurrently pursuing these options, central banks can maintain their public policy mandates while fostering innovation.

Global Perspectives on Crypto and CBDCs

Opposition to cryptocurrency is gaining traction worldwide, with operations in European and international bodies suggesting that CBDCs have the potential to render cryptocurrencies obsolete. Just recently, ECB executive Fabio Panetta declared that cryptocurrencies may be on a path toward irrelevance and backed the development of CBDCs as a superior alternative.