Crypto’s lessons for the monetary system
Overall, the crypto sector provides a glimpse of promising technological
possibilities, but it cannot fulfil all the high-level goals of a digital monetary system.
It suffers from inherent shortcomings in stability, efficiency, accountability and
integrity that can only be partially addressed by regulation. Fundamentally, crypto
and stablecoins lead to a fragmented and fragile monetary system. Importantly,
these flaws derive from the underlying economics of incentives, not from
technological constraints.
And, no less significantly, these flaws would persist even
if regulation and oversight were to address the financial instability problems and
risk of loss implicit in crypto.
The task is not only to enable useful functions such as programmability,
composability and tokenisation, but to ground them on more secure foundations
so as to harness the virtuous circle of network effects. Central banks can provide
such foundations, and they are working actively to shape the future of the monetary
system. To serve the public interest, central banks are drawing on the best elements
of new technology, together with their efforts to regulate the crypto universe and
address its most immediate drawbacks.
Institutional investors play a growing role in crypto Graph 6
A. Assets on Coinbase are largely institutional, and offbalance sheet
B. Investments of large banks in crypto-active firms are
still limited1
USD bn USD mn %
1 See technical annex for details.
Sources:
Aramonte et al (2021); Auer et al (2022b); Bloomberg; Coinbase.
A strong canopy supports the global monetary (eco)system Graph 8
API = application programming interface; CBDC = central bank digital currency; PSP = payment service provider.
Source: BIS.
125
100
75
50
25
0
2020 2021
Retail Institutional
300
200
100
0
1.5
1.0
0.5
0.0
Nomura
BBVA
ING
MUFG
Barclays
Goldman Sachs
JP Morgan
Morgan Stanley
BNP Paribas
UBS
Citi
BNY Mellon
Standard Chartered
Investments: Values (lhs) % of Core Tier 1 capital (rhs)
90 BIS Annual Economic Report 2022
Vision for the future monetary system
The future monetary system should meld new technological capabilities with a
superior representation of central bank money at its core. Rooted in trust in the
currency, the advantages of new digital technologies can thus be reaped through
interoperability and network effects. This allows new payment systems to scale and
serve the real economy. The system can thus adapt to new demands as they arise –
while ensuring the singleness of money across new and innovative activities.
Central banks are uniquely positioned to provide the core of the future
monetary system, as one of their fundamental roles is to issue central bank money
(M0), which serves as the unit of account in the economy. From the basic promise
embodied in the unit of account, all other promises in the economy follow.
The second fundamental role of the central bank, building on the first, is to
provide the means for the ultimate finality of payments by using its balance sheet.
The central bank is the trusted intermediary that debits the account of the ultimate
payer and credits the account of the ultimate payee. Once the accounts are debited
and credited in this way, the payment is final and irrevocable.
The third role of the central bank is to support the smooth functioning of the
payment system by providing sufficient liquidity for settlement. Such liquidity
provision ensures that no logjams will impede the workings of the payment system
when a payment is delayed because the sender is waiting for incoming funds.
The fourth role of the central bank is to safeguard the integrity of the payment
system through regulation, supervision and oversight.
Many central banks also
have a role in supervising and regulating commercial banks and other core
participants of the payment system. These intertwined functions of the central bank
leave it well placed to provide the foundation for innovative private sector
services.24
The future monetary system builds on these roles of the central bank to give
full scope for new capabilities of central bank money and innovative services built
on top of them. New private applications will be able to run not on stablecoins, but
on superior technological representations of M0 – such as wholesale and retail
CBDCs, and through retail FPS that settle on the central bank balance sheet. Central
bank innovations can thereby support a wide range of new activities. Because
central banks are mandated to serve the public interest, they can design public
infrastructures to support the monetary system’s high-level policy goals (Table 1,
final column) from the ground up.
This vision entails a number of components that require both formal definitions
and examples. The section first introduces and explains these components. It next
gives a metaphor for what the future system will look like, both domestically and
across borders. Finally, it dives into the specifics of reforms to central bank money
at the wholesale, retail and cross-border level, before reviewing where central banks
stand in achieving this vision.
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