Crypto unfit as basis for monetary system, bank for central banks says

The Bank for International Settlements (BIS), known as a bank for central banks, issued a scalding report on crypto, adding to the institutional FUD.

The BIS Tower in Basel, Switzerland. Source: the BIS media kit

The Bank for International Settlements (BIS), known for its longstanding disapproval of Bitcoin and other cryptocurrencies, released a document “outlining the monetary system of the future, combining digital features with trust in central banks.” The report is a part of the BIS’s annual economic report due for publication later this week.

Headquartered in Basel, Switzerland, the BIS is co-owned by 63 central banks, including 35 in Europe, the US Fed, and the People’s Bank of China. The BIS’s main responsibilities include facilitating collaboration between central banks and supporting monetary and financial stability. In practice, it means providing financial services to central banks, conducting research, and recommending regulatory standards.

Not so decentralized

The newly released chapter focuses on digital payments and financial innovation, denouncing crypto as a “radical departure” from the monetary system reliant on central banks. “Recent events have revealed a vast gulf between the crypto vision and its reality,” the document adds, referring to the collapse of Terra and speculative cryptocurrency trading.

“Contrary to the decentralization narrative, crypto often relies on unregulated intermediaries that pose financial risks,” the report says, pointing out that some the most popular DeFi protocols, including Terra, as well as the biggest crypto exchanges, do not abide by the decentralized ethos.

The BIS goes on to propose stricter regulations on crypto, suggesting that exchanges that fail to comply with KYC requirements should be “fined or shut down.”

Bearish on crypto, bullish on CBDC

Despite an openly critical stance on crypto, the BIS reiterated its support for central bank digital currencies (CBDCs). According to a survey published by the institution earlier this year, in 2021 86% of central banks were researching the potential for CBDCs, 60% were experimenting with the technology, and 14% had already begun rolling out pilot projects.

According to a new study referenced by the BIS’s report, CBDCs could boost financial inclusion in developing economies with features such as “simplified due diligence, electronic KYC arrangements, and tiered wallets,” becoming available to isolated communities or those distrustful of financial institutions by third party agents.

Graph showing inclusive CBDC features: simplified due diligence, multitude of user interfaces, and interoperability.
Source: BIS Annual Economic Report 2022

The BIS does see a future for decentralization, provided that it’s harnessed to facilitate transactions in assets released by multiple central banks. A separate division of the bank, the BIS Innovation Hub, is currently engaged in a number of CBDC-related research initiatives, including mCBDC Bridge for cross-border transactions and the Aurum project exploring tiered architectures for the distribution of retail CBDC, among others.

The annual economic report, which serves as the BIS's main economic review of the year, is expected to discuss the risks of stagnation and the inflationary process. It's scheduled for publication this Sunday.