Published: Wed, March 14, 2018
Industry | By Terrell Bush

BIS Warns Central Banks On Digital Currency Issuance

BIS Warns Central Banks On Digital Currency Issuance

"The introduction of a central bank digital currency (CBDC) would raise fundamental issues that go far beyond payment systems and monetary policy transmission and implementation", the BIS said in its report.

Jacqueline Loh, chair of the markets committee at the BIS, said: "A general objective central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications for financial stability".

The committee on payments and market infrastructures at the BIS, often referred to as the central banks' central bank, analysed the options for a digital currency targeted only at wholesale banks as well as one available to the entire population. "Any step towards a possible launch of a CBDC should be subject to careful and thorough consideration", added Loh, deputy managing director of the Monetary Authority of Singapore.

In separate comments on the report's findings, European Central Bank and BIS executives Benoît Cœuré and Jacqueline Loh said that decentralized digital currency, specifically Bitcoin, was "not the answer to the cashless economy".

The Basel, Switzerland-based BIS cautioned that much more "experimentation and experience" would be needed before the introduction of central-bank digital currencies, or CBDCs, could even be considered.

The report says digital currencies could change the way money is offered, strengthen payment systems, and be a reliable method to carry out transactions if the use of cash decreases.

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The BIS urged central banks to continue their studies of digital innovations and also consider the implications of not issuing CBDCs. They already use money in an electronic form in the reserve accounts at the central bank that can be held only by banks and other designated financial institutions. The Fed's Powell said past year that "governance and risk management will be critical" for cryptocurrencies.

The report said that blockchain - the distributed ledger technology (DLT) that underpins cryptocurrencies - could make settling trades of securities and foreign exchange more efficient. "DLT is where the action is", said Coeure, an European Central Bank executive board member.

The report comes ahead of the Group of 20 meeting in Buenos Aires later this month which will set about addressing the issue of Bitcoin and cryptocurrency regulations.

Central bank cryptocurrencies could cause deposits to flow out of traditional banks and endanger the stability of the financial system at the next crash, according to an influential central bank body.

Weidmann said he believes that central banks will eventually create their own digital currencies to reassure average citizens that such currencies are safe and stable, but in doing so could increase the risk of bank runs in future crises.

The report noted that any virtual currency would have to comply with requirements aimed at stopping money laundering and financing of terrorism.

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