bank for international settlements

BIS Newest Quarterly Report: What Potentials Do CBDCs and Distributed Ledger Technology Hold?

The Bank for International Settlements (BIS) has released its newest quarterly report on the changes in the payment industry, including the market impact of the recent coronavirus outbreak.

Some of the trends mentioned in the report include stablecoins, tokenized securities, central bank digital currencies (CBDCs), cross-border payments, and peer-to-peer payments.

The pace of change and innovations’ potential for disruption in the payments industry was one of the key takeaways of the report. In turn, this has propelled payment systems to the top of policymakers’ agenda, according to the BIS.

Technology and cross-border payments

“The most transformative option for improving payments is a peer-to-peer arrangement that links payers and payees directly and minimizes the number of intermediaries. Many peer-to-peer arrangements use distributed ledger technology (DLT),” read the report.

Bitcoin and Libra have also caught the institution’s attention, while the BIS acknowledged that central banks are increasingly exploring the “desirability and feasibility of establishing their own peer-to-peer systems through digital currencies.

Central bank digital currencies

The current challenge of central bank digital currencies, as explained in the report, is the design of the digital currency that “combines the virtues of a direct claim on the central bank with the convenience offered by intermediaries.”

Some of the key areas CBDCs that the report covered is that CBDCs should be secure, accessible, and offer retail convenience while protecting users’ privacy.

The results based on the study by Auer, Cornelli, and Frost (2020) found that the results of the CBDC projects are mixed; some projects have determined the costs for creating a CBDC exceed the benefits.

The report mentioned Project Inthanon-LionRock,a CBDC study by the Bank of Thailand and the Hong Kong Monetary Authority in 2020, where a proof of concept was completed for wholesale payments. One of the key findings from the study concluded that due to the highly efficient and trusted retail and wholesale payment infrastructures in Hong Kong, there is not an urgent need for a CBDC at both the retail and wholesale levels. Although there is little value in developing a CBDC for retail payments, the study found that there has been an increase of interest in cross-border payments in funding solutions. The two authorities hope the study will help both jurisdictions in terms of trade.

Previously reported by Blockchain.News, Sweden is currently one of the least cash-dependent countries in the world, with banknotes only taking up 1 percent of the Swedish GDP, according to Riksbank’s data.The data also showed compared the Swedish’s cash GDP against 11 percent in Europe, 8 percent in the United States, and 4 percent in the UK.

The BIS also designed the CBDC pyramid, addressing the needs of the consumer if a CBDC is offered.

Source: BIS

Although bankers have been in dispute over DLT and CBDC, BIS researchers say that existing trials have “not always been encouraging,” although central banks such as the People’s Bank of Chinahave been pushing forward with CBDC trials.

Tokenization: The future of securities settlement

The BIS mentioned that currently, traders are used to the inefficiencies of the settlement systems, although these inefficiencies are regarded as limitations. Blockchain could be used to disrupt the systems to remove the need for intermediaries, and the resulting efficiencies could be a game-changer for markets.

However, there is a catch – “Market participants might not want to move to shorter settlement cycles, as this could increase liquidity requirements and give market-makers less time to source the cash or securities needed for settlement,” the report said.

These issues, along with legal requirements must be dealt with before the BIS decides that a distributed ledger-based technology would be suitable for a new securities system.

Bank of International Settlement Revealed Positive Outlook on Central Bank Digital Currencies

The Bank for International Settlements (BIS), a coalition of 62 central banks, has weighed in on the trending topic of central bank digital currencies (CBDCs).

The global central bank noted a positive interest by central banks to develop their state-backed digital currencies. This observation was contained in a special chapter it released ahead of its forthcoming annual report. The report reiterates the desire of central banks to stay relevant in discharging its duties in helping to maintain the safety and integrity of the payment system.

BIS’ position on CBDCs

As a global organization, the BIS has a mission to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas, and to act as a bank for central banks. In discharging its vested duties, the Bank for International Settlement releases on an annual basis, a report detailing the advances in monetary policies and technological adoption by central banks. This report is usually formulated with data released by member bodies.

The BIS reaffirms the flexibility of central banks in embracing digital innovation that is dynamically changing the payment services landscape. One of the major innovations is in the development and the eventual digitization of fiat currencies to wade off existing cryptocurrencies and the proposed Facebook Libra.

BIS also strengthens members to harness their roles as operators, overseers, and catalysts in the financial system of their country to fast-track the creation of their own CBDC. A BIS survey conducted in 2019 revealed that about 70% of central banks under its umbrella were exploring the option of a CBDC. Seeing the trend, the apex bank felt obligated to lend its support.

Subtle concerns about CBDC

The blockchain technology that CBDCs are proposed to be built upon has a pseudo-anonymous framework. Experts believe the privacy current currencies offer may be masked out with centralized control that would come into effect with CBDCs. While the proposed CBDCs will help central banks regain full authority of the financial ecosystem, its prospects are not so enticing to the independent investor.

New BIS Report Advocates Using Embedded Monitoring Trackers For Stablecoins

A new report from the Bank for International Settlements (BIS) has advocated the deployment of ‘Embedded Systems’ in the monitoring of global stablecoin projects such as Facebook’s proposed Libra.

The report noted that the emergence of distributed ledger technology has caused a paradigm shift in payment systems particularly with the rollout of stablecoins.

The coming of stablecoins also served as a wake-up call for Central Banks around the world who are saddled with providing the needed regulations for these fast-emerging digital currencies that aim to overhaul global payment systems. This new BIS report proposes the use of embedded monitoring systems as one of the viable means to employ in the tracking and regulation of stablecoins.

“Global stablecoins should take into account the potential of other stablecoin uses, such as embedding a robust monetary instrument into digital environments, especially in the context of decentralized systems,” the BIS report reads. “Looking forward, in such cases, one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems themselves, allowing for “embedded supervision.”

According to the Bank for International Settlements (BIS), besides the integration of embedded monitoring systems into stablecoin projects, Central Bank Digital Currencies (CBDCs) could also serve as an effective way in curtailing the global dominance that private global stablecoins like Libra may bring.

To date, some countries have made remarkable advances in developing their own CBDC with the BIS confirming that a good number of Central Banks have a positive outlook to Central Bank Digital Currencies. While those countries with positive disposition are at a varying stage with respect to their CBDC developments, nations like the Bahamas and China have rolled out an actual CBDC that is being used in transactions. The launch of the Bahamas Sand Dollar is official while that of China is in its advanced trial stages.

The BIS appears to have confidence in ‘Embedded Supervision’ systems. A BIS economist prior to this time once suggested the use of Embedded supervision to enhance the transparency of tokenized markets.

The Bank for International Settlements Gives CBDCs Full Backing

The Bank for International Settlements (BIS) announced its full support for developing central bank digital currencies (CBDCs) in pursuing financial and monetary stability through international cooperation with the mandate and support by central banks.

CBDCs are crucial in modernising finance

The BIS acknowledged that CBDCs must modernise finance and keep ‘Big Tech’ in check not to control money.

Benoit Coeure, a member of the BIS, warned:

“Without CBDCs, digital money would become increasingly dominated by big tech firms, as they would leverage enormous social media user bases.”

CBDCs are digital assets pegged to a real-world asset and backed by the central banks, meaning that they represent a claim against the bank exactly how banknotes work. Furthermore, they are blockchain-enabled, representing a new technology for issuing central bank money at the wholesale and retail level.

According to the announcement:

“As part of its upcoming annual report it estimated that at least 56 central banks and monetary authorities, representing around a fifth of the world’s population, are now looking at digital currencies as commerce shifts online.”

The issuance of CBDCs seems to be a race against time; many nations believe owning a CBDC is instrumental in having control of the global markets.

The Bahamas- the first nation to launch a CBDC

The Bahamas launched the Sand Dollar in October last year, making it the first country in the world to release a CBDC beyond the testing phase officially.

As more nations reveal their interest in CBDCs, the BIS noted that authorities would have to decide whether citizens require digital IDs to use them or choose the token-based route, making transactions more anonymous.

In November 2020, the International Monetary Fund (IMF) advised central banks not to overlook some essential legal frameworks needed for a CBDC to work.

Once rolled out, CBDCs are expected to drive the financial inclusion of nearly 1.7 billion people left out of the banking system.

Four Countries to Conduct Cross Border CBDC Payment Trials

The Bank for International Settlements (BIS) has joined forces with the central banks of South Africa, Malaysia, Singapore, and Australia to kick start a project dubbed Dunbar aimed at testing the use of central bank digital currencies (CBDCs) in cross border payments.

Per the announcement on Thursday:

“Led by the Innovation Hub’s Singapore Centre, Project Dunbar aims to develop prototype shared platforms for cross-border transactions using multiple CBDCs. These multi-CBDC platforms will allow financial institutions to transact directly with each other in the digital currencies issued by participating central banks.”

By rolling out the trial, the central banks intend to enable financial institutions to cut the time and cost of transactions and eliminate the need for intermediaries.

CBDCs represent the digital form of a nation’s fiat money. They are controlled directly by the country’s central bank and are backed by national credit and government power.

To stabilise the control over the supply and demand of currency for the seemingly inevitable cashless society in the future, countries are now launching experiments to test the workings of CBDC.

Enhancing the G20 roadmap for cross-border payments

According to the report:

“Project Dunbar’s work will explore the international dimension of CBDC design and support the efforts of the G20 roadmap for enhancing cross-border payments.”

The CBDC payment trials facilitate seamless multi-currency fund transfers, which is a significant step towards the global vision of making payments cheaper and faster.

In October 2020, the BIS released a report identifying the foundational principles necessary for any publicly available CBDCs to help central banks meet their public policy objectives. Some of the principles entailed CBDCs coexisting with cash and other types of money in a flexible and innovative payment system.

G20 Announces Standards for Global Crypto Regulation

The Financial Stability Board (FSB), the International Monetary Fund (IMF), and the Bank for International Settlements (BIS) have been tasked with establishing standards for a global cryptocurrency regulatory framework, according to an announcement by the Group of 20 (G20) on February 25th, 2023. The G20, comprised of the world’s 20 largest economies, has recognized the need for a coordinated international effort to address the risks associated with cryptocurrencies and establish clear regulatory guidelines for their use.

The announcement comes in response to the rapid growth of cryptocurrencies and their increasing use in global financial transactions. The FSB, IMF, and BIS will deliver papers and recommendations on the regulation, supervision, and oversight of stablecoins, crypto asset activities, and markets by July of this year. The recommendations are expected to establish clear guidelines for the use of cryptocurrencies and help prevent their misuse for criminal activities, such as money laundering and terrorist financing.

The G20 has also recognized the potential benefits of cryptocurrencies and the underlying blockchain technology. The use of cryptocurrencies could offer advantages such as increased efficiency, faster and cheaper transactions, and greater financial inclusion, particularly for the unbanked population. However, the G20 also acknowledges the risks associated with cryptocurrencies, including volatility, market manipulation, and cyber threats.

The regulatory framework is expected to strike a balance between the risks and benefits of cryptocurrencies, ensuring their safe and responsible use. The recommendations are likely to address issues such as licensing requirements, anti-money laundering and counter-terrorism financing (AML/CFT) measures, consumer protection, and market integrity. The G20 recognizes the need for a coordinated international effort to establish these standards and promote global financial stability.

In conclusion, the G20’s announcement marks a significant step towards establishing a global regulatory framework for cryptocurrencies. The recommendations from the FSB, IMF, and BIS will provide clear guidelines for the use of cryptocurrencies, ensuring their safe and responsible use while promoting financial stability. As cryptocurrencies continue to gain in popularity, it is essential to establish clear regulatory guidelines to prevent their misuse and ensure their potential benefits are fully realized.