The Bank of International Settlements (BIS) has revealed that two chapters of its upcoming annual economic report will be on cryptocurrencies. This is a testament of the effect that cryptocurrencies are having on the global economy.
Cryptocurrencies have been around for a decade now but burst onto the scene last year when more people began to know about Bitcoin and other digital currencies. They are now used in virtually all countries of the world as they now constitute global currencies.
This rise in popularity and use have made cryptocurrencies something of interest to financial institutions and central banks all over the world. Researches are now being conducted by independent researchers and institutes as they aim to gain more understanding of cryptocurrencies and their underlying technology, blockchain.
The BIS, which is considered as the central bank of central banks, has revealed that two chapters of its next economic report will be dedicated to the issue of cryptocurrencies. The bank added that the two chapters will be published tomorrow, June 17 while the full paper will be published on the 24th of June.
This report comes just some few weeks after the bank released its latest quarterly reviews where it warned cryptocurrency investors that “many cryptocurrencies are ultimately get-rich-quick schemes.”
According to the review;
What makes currencies credible is trust in the issuing institution, and successful central banks have a proven record of earning this public trust. The short experience of cryptocurrencies shows that technology, however sophisticated, is a poor substitute for hard-earned trust in sound institutions.
The BIS further added that the report also discussed the opinion piece written in part by Markets Committee chair Jacqueline Loh in March. The article by Jacqueline and Benoit Coeure, Member of the Executive Board of the European Central Bank (ECB), was of the view that public cryptocurrencies don’t have what it take yet to become strong options for a cashless society.
Loh commented back in March that while “cash will not be king forever,” the future of money wouldn’t be tied to the existing cryptocurrencies since she claims they are “poor imitations of money.” She added;
Almost nobody prices goods in Bitcoin, few use them for payments, and, as a store of value, they are no better than gambling in a casino. Policymakers are rightly worried about consumer and investor abuses, as well as illicit use.
The two, however, believed that the current crop of cryptocurrencies could pave the way for the future, just like “Palm Pilots paved the way for today’s smartphones.” This has led the duo to now explore the idea of Central Bank Digital Currencies (CBDC) and how this could potentially work under the current financial system.
Central bank issued cryptocurrencies could carry unwelcome side-effects
Central bank issued cryptocurrencies, known as CBDCs, is an idea that many central banks are currently working on. The BIS, however, claimed that digital currencies issued by central banks could carry unwelcome side-effects. One of such negative effects is that it could make making periods of financial instability worse as it would make it easy for customers to funnel their money from their bank accounts faster.
The BIS stated;
A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large-scale, challenging commercial banks and the central bank to manage such situations.
This warning might be coming late as some central banks are already working on their CBDC. In our recent report, the U.S Federal Reserve has been asked to prioritize the development of FedCoin, a cryptocurrency to be issued by the Fed. This advice was given by the former head of the U.S. government’s deposit insurance corporation, Sheila Bair who stated If it does not stay ahead of this technology, not only could banking be disrupted — but the Fed itself could also be at risk.
Similarly, the Bank of England (BOE) Governor, Mark Carney, has continued to talk about the bank’s desire to develop state-backed cryptocurrency despite the challenges faced by cryptocurrencies. This led the BOE to form a research group that was tasked with looking into the possibility of a state-backed cryptocurrency that would provide stiff competition to industry leaders Bitcoin and Ethereum.
Switzerland also formed a research group that is currently studying the effects of a state-owned ‘e-franc’ cryptocurrency, even though the Swiss National Bank isn’t excited about the idea of a state-backed cryptocurrency as they consider it to be even riskier than the privately owned cryptocurrencies. Sweden and Russia are two other nations that are also thinking about launching their own cryptocurrencies in the form of e-krona and cryptorubble respectively.
With the report by BIS on cryptocurrencies to be published tomorrow, investors, traders, and analysts might be looking forward to hearing what the world’s central bank think about cryptocurrencies and the journey of the industry so far.