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Bank for International Settlements Warns Against Central Bank Digital Currencies

bank for international settlements

In a recently published press release, the Bank for International Settlements (BIS) outlined the risks associated with central banks looking to issue their own digital currencies. In doing so, the BIS continues its role as a collaborative global financial institution, bringing together central banks for the purpose of financial cooperation.

Included in the BIS members list of 60 monetary authorities is the European Central Bank and the U.S. Federal Reserve. It also includes the Bank of Canada, which has itself explored the possibility of creating a digital currency in the past.

An unclear impact

“General purpose central bank digital currencies could revolutionise the way money is provided and the role of central banks in the financial system, but these are uncharted waters, with potential risks,” said Benoît Coeuré, Chair of the Committee on Payments and Market Infrastructures (CPMI). “This report is a starting point for further discussion and research and will help countries make choices given their own circumstances.”

The report in question accompanies the press release, and explores the rise in interest of central bank digital currencies (CBDCs). Further, the report warns central banks of potential risks associated with the emerging technology, stating that its impact on payments, monetary policy, and financial stability is not yet clear.

“The introduction of a CBDC would raise fundamental issues that go far beyond payment systems and monetary policy transmission and implementation,” the report stated. “A general purpose CBDC could give rise to higher instability of commercial bank deposit funding.”

Further, the report added that the introduction of a central bank digital currency “could result in a wider presence of central banks in financial systems,” which would involve banks having to allocate a larger amount of economic resources. The report speculates that this could put central banks at risk of loss, political interference, and in “uncharted territory.”

Countries evaluating central bank digital currencies

The report was released ahead of a meeting of the Group of 20 (G20) central bank governors and finance ministers that will take place in March. Additionally, the report arrives at a time when global digital currencies are a topical point of discussion amongst central banks.

Despite critics both internal and external to the country’s government, Venezuela’s President, Nicolás Maduro, recently launched a state-backed digital currency called Petro, which is claimed to be backed by crude oil. Previously, other countries including Russia and Estonia explored similar possibilities in creating their own state-backed digital currencies.

In December 2017, Canada’s central bank released a paper exploring the benefits and risks of creating a central bank digital currency. The Bank of Canada’s publication explored various potential increases to its efficiency, as well as the prospect of saving money for consumers. However, the paper also voiced potential areas of concern, concluding that more research is necessary to decide if a state-backed digital currency is a viable option for Canada.

Ultimately, this seems to align with the findings of the BIS, which stated that “any steps towards the possible launch of a CBDC should be subject to careful and thorough consideration.”

“Central banks and other authorities should continue their broad monitoring of digital innovations, keep reviewing how their own operations could be affected and continue to engage with each other closely,” it added.

 

Image credit: BIS logo

 

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