The Bank for International Settlements (BIS), in its quarterly report, has focused on "Trends in payment infrastructure".
In the 151-page report, the Swiss-based institution deals with, among other things, tokenized securities, central bank digital currencies (CBDCs), cross-border payments and peer-to-peer innovations.
In his introduction to the report, BIS Director General Agustin Castens makes the following points:
The most transformative option for improving payments is a peer-to-peer agreement that directly links payers and payees and minimises the number of intermediaries.
More efficiency not necessarily desirable
With regard to tokenisation, the report mentions the marking of securities, which should make it possible to rationalise the settlement cycle. If a system based on distributed ledger technology eliminates intermediaries, the resulting efficiencies could well change the "back-end" realities of the market. The institution notes that market participants may not wish to move to shorter settlement cycles, as this would reduce the time needed to obtain liquidity and securities.
Legal conditions and operational processes must be defined
Looking to the future, the institution's team has highlighted a number of potential problems. These are dominated by ongoing legal issues concerning securities tokens, but also by issues relating to operational risks. Blockchain technology, with its smart contracts, is not yet fully tested in the world of clearing and settlement. The experts see the key to success in allowing the tokenised systems to interact with the account-based systems.
The much discussed CBDCs will play a major role in the future
One of the major issues addressed in the report is digital money issued by central banks. Should the currencies be geared to the retail or wholesale sector? Account or token-based? Are CBDCs even necessary?
In the section "The technology of digital currencies in central banks' retail banking", the BIS addresses these questions. However, no definitive answers can be found, only reflections by experts. These make it clear, for example, that there is no point in developing digital money that offers no advantages over existing payment systems. For consumers to use CBDCs, they must be no less convenient to use than cash or credit cards. Another problem is the consensus mechanism, which can slow down transaction throughput. This in turn inevitably leads to problems in retail, where many millions of small payments are made.
Decentralized CBDC's not advantageous
Decentralisation with regard to CBDC systems is also questionable, according to the BIS experts. Decentralisation eliminates the risk of a central point of failure, but increases the possibility of new weaknesses. According to the report, the main potential weakness of a conventional architecture is the failure of the top node, which can be triggered by a hacker attack, for example.
A guidance document on CBDSs for policy makers from the World Economic Forum, aims in a similar direction. It points out that CBDCs are not intended by central banks to be public and unauthorized crypto-currencies. The DLT-based CBDCs would work best within a closed 'allowed' network of pre-identified validation parties.
BIS Chairman Augustin Carstens tends to be critical of crypto-currencies
According to BIS head Carstens, Libra has brought central bank developments to a heady pace, although it remains unclear what this development will ultimately bring, or whether Stablecoins could even be harbingers of financial ruin. Carstens has been critical of crypto-currencies in the past. In February 2018, he said in his function as General Manager of the Bank for International Settlements
The authorities must be prepared to act against the invasive proliferation of crypto-currencies in order to protect consumers and investors. New technology is not the same as better technology or economic progress. This is clearly true of Bitcoin: what was perhaps originally intended as an alternative payment system without state involvement has now become a mixture of financial bubble, Ponzi scheme and environmental disaster.
BIS opens Innovation Hub headed by Benoît Cœuré
With the Innovation Hub, the BIS aims to work with bankers and policymakers to develop a framework for digital innovation. Its head, Benoit Coeure, member of the Executive Board of the European Central Bank, said at a conference in Luxembourg that private "stablecoins" could challenge the global supremacy of the dollar. The report now published marks the launch of the Innovation Hub. It will deal with issues such as digital innovations in the areas of payment or settlement.
Just recently, a survey conducted by the BIS revealed that around 80% of central banks are currently working on their own digital currency.
