The Bank for International Settlements (BIS), an organisation owned by the world’s central banks, is calling for digital currencies to be implemented by central banks to supplant cryptocurrencies.
Making the argument that cryptocurrencies are speculative assets rather than money, a recent BIS report claims that bitcoin and the like are used to facilitate money laundering, ransomware attacks and other financial crimes.
Still, the report notes that there are clear data advantages in digital monetary systems, which can automatically collect and collate large amounts of data while tracking payments between individuals and companies, which can then be used for the benefit of both parties.
Using central-bank digital currencies (CBDCs) would supposedly bring these benefits without the criminal anonymity of cryptocurrencies. BIS argues that central banks can ensure money is transferred smoothly globally, without logjams, and are better trusted by consumers compared to big tech firms, or cryptocurrencies.
In its words, central banks are “accountable public institutions that play a pivotal role in payment systems, both wholesale and retail”.
Digital currencies remain a double-edged sword in the financial services sector, as large tech firms can use the data to keep growing until they have concentrated enough market power to prevent any new providers from shaking up the system. BIS calls this a ‘walled garden’ ecosystem, using the example of China, in which 94% of the mobile payments market is controlled by two firms.
BIS notes the potential of digital currencies to simplify the current international banking system, and break up entrenched market power by some of the biggest firms in the payment sector.
This includes the high merchant fees associated with credit and debit card payments. Despite decades of ever-accelerating technological progress, reducing the cost of equipment and bandwidth, the cost of debit and credit cards remain high. These costs are taken on by merchants, it argues, who then pass them on to consumers as an indirect taxation.
Some central banks are creating digital currencies tied to their dollar, known as ‘stablecoins’, but the BIS notes that these are supplementary options, and therefore not a “game changer”.
The pseudonymous creator of bitcoin, ‘Satoshi Nakomoto’, explicitly created the decentralised, encrypted currency to circumvent the central banking system. For many enthusiasts and investors, this is a key part of its appeal.
As it becomes increasingly expensive and resource-heavy to run the bitcoin backend, its decentralised nature is one of the few genuine reasons beyond speculative investment to hold bitcoin.