BIS: 90% of central banks exploring the utility of CBDCs

The report highlighted the programmable nature of cryptos and borderless nature of DeFi as elements making them capable of integrating with CBDCs

By Shashank Bhardwaj

Image: Shutterstock

Bank of International Settlements (BIS), in its new annual economic report, cited the inclination of 90 percent of the central banks across the globe to embrace central bank digital currency (CBDC) and explore the possibilities of the same.

In its report, BIS called attention to an assorted mix of factors that encourage as well as discourage the central banks in adopting the central bank digital currency in the monetary system.

According to the report, digital currency cannot reflect the trust associated with the fiat money circulated by central banks, nor can it assure price stability. BIS said crypto assets’ “structural flaws” may hinder the soundness of the financial system. And that cryptos cannot carry out the fundamental obligations of money. However biased these statements sound, BIS also earmarked some utilities that would help integrate cryptos with CBDCs.

BIS suggested that the integration of digitalisation with the monetary system can resolve the problems of the increasing need for financial services, especially expensive cross-border transactions, without the necessity of intermediaries. With the growing need for efficient financial services, some major reforms are required in the financial system, which blockchain technology can bring about.

The report highlighted the emergence of decentralised finance (DeFi). It suggested that DeFi is charting a “key development” in the crypto universe using smart contracts through decentralised applications(dApps). The DeFi feature of the crypto world can be a beneficial addition to the current financial system. However, BIS pointed out that the stablecoins, a chief constituent in the DeFi universe, are not as stable as they are claimed to be.

Another major problem stated by the report was fragmentation. As per the report, there is no apparent unison in the settlement system of the DeFi ecosystem and layer-1 blockchains as incapable of addressing such drawbacks.

Further, the report addressed the recent collapse of Terra (LUNA), aka Terra Classic (LUNC), in the DeFi universe, as well as the finite expandability of blockchains like Ethereum (ETH), causing transaction fees to skyrocket due to network congestion. Nonetheless, as per BIS, financial institutions and banks worldwide are eager to adopt central bank digital currency (CBDC).

Another problem posed by the report is the increasing number of hacking incidents during the past year, which raised concerns about the safety of digital assets.

Shashank is the founder of yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash

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