The future of money might be closer than you think

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A year ago, bitcoin was trading under US $ 10,000. It peaked last month at US $ 63,000 before falling below US $ 35,000. That still gives it a market cap of around $ 650 billion. The global cryptocurrency market is worth around US $ 1.4 trillion, up from a peak of US $ 2.5 trillion last month.

While this volatility tends to underlie the BIS ‘rejection of cryptocurrencies, and bitcoin in particular, as mere vehicles of speculation – such volatile assets can never be widely accepted mediums of exchange and legitimate – they, and stablecoins issued by the private sector, represent a large and unregulated growing slice of the monetary system.

They can be used for money laundering, tax evasion, criminal and terrorist transactions and, if unregulated and countered, could potentially have implications for the liquidity and stability of the global financial system.

While giving a government agency insight into the day-to-day financial transactions of individuals may be attractive to an authoritarian regime, it would not be tolerated in most developed economies.

The new seriousness with which previously complacent central bankers are taking these threats was reinforced earlier this year when the UK announced it had created a task force to explore the potential of a digital currency issued by the Bank of ‘England – a “Britcoin” – to protect against cryptocurrencies and improve the UK payment system.

The BIS seems particularly concerned about the potential of Big Techs to leverage their customer data and network effects to drive acceptance of their cryptocurrencies and strengthen their market power.

He cites the experience of China (which led to a major crackdown on its tech sector and helped accelerate the development of the digital yuan), where two big tech companies – Tencent and Alipay – account for 94% of the mobile payments market. .

the UK has announced that it has created a task force to explore the potential of a digital currency issued by the Bank of England to protect the pound against cryptocurrencies and improve the UK payment system.Credit:PA

The main questions central bankers have grappled with for nearly a decade when examining CBDCs are their potential to generate payments system efficiencies and increase competition for incumbent institutions against their implications for the bank. security and stability of the monetary system and for the privacy of end users.

Having recognized that if they do not respond to the emergence of digital currencies with their own versions and that a critical public policy issue is who will own and have access to customer data – big tech, central banks or intermediaries regulated – the BIS seems to have moved beyond the question of whether there will be CBDCs to any of the design details.

Detail is vital. There are two main options central banks can follow to create a digital version of their currency. They can make it available at a wholesale level – by issuing it to banks and other authorized institutions – with existing institutions retaining ownership of customers and their data.

Another, more radical option would be to create retail CBDCs, effectively creating a digital version of physical currencies and issuing them directly to the public.

Retail CBDCs would remove credit risk from the financial system, as they are a direct claim on the central bank and would likely increase competition and innovation, but could create existential problems for existing institutions, such as banks. , which depend on customer deposits and create enormous challenges for the central bank in trying to administer individual accounts.

There are also governance and data privacy issues that must be resolved before a CBDC is operational, whether it is a wholesale, retail or hybrid version.

While giving a government agency insight into the day-to-day financial transactions of individuals may be attractive to an authoritarian regime, it would not be tolerated in most developed economies.

Privacy and financial stability concerns will shape the design results and likely lead to wholesale CBDCs that use existing financial system infrastructure to manage customers and their data, manage credit scores and risk management, and secure themselves. comply with anti-money laundering and other regulatory requirements. .

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The BIS favors account-based, identity-linked CBDCs, with protections for privacy and security, although this would require many ongoing decisions about the role of banks and other intermediaries and the vexatious central issue of l ‘access to data.

In passing from “should we?” Quietly from discussions of the past to an acceptance of the inevitability of digital currencies issued by the central bank, the BIS is helping to bring the future of money and the future financial system closer and brings with it its generally reluctant members.

A radical overhaul of an ever-evolving but centuries-old monetary system – the first central bank was established in the 17th century – is increasingly looming as external pressures to change sponsored digital currencies intensify. and issued by the private sector.


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