Sun. Sep 20th, 2020

Planet Compliance

Innovation & Regulation in Finance

International watchdog issues critical view of Cryptocurrencies, trust being main issue

2 min read

The Bank for International Settlements (BIS), the international financial institution owned by 60 central banks, has issued a critical view of Cryptocurrencies, claiming to look beyond the hype of Blockchain and DLT application in the token space. BIS objective is 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 this function it has published a its Annual Economic Report and dedicated a full chapter to cryptocurrencies. In this chapter, the report argues that cryptocurrencies promise to replace trusted institutions with distributed ledger technology, but in fact, it would be hard to identify a specific economic problem, which they currently solve. The report states that transactions are slow and costly, prone to congestion, and cannot scale with demand. Furthermore, the decentralised consensus behind the technology is also fragile and consumes vast amounts of energy.

On an upside though, the author, Hyun Song Shin, Economic Adviser and Head of Research at BIS, admits that distributed ledger technology could still have promise in other applications and demands that policy responses need to prevent abuses while allowing further experimentation. The chapter gives an introduction to the history of money and an overview of the current monetary and payment system before analysing cryptocurrencies in detail. The author explains distributed ledger technology in cryptocurrencies and assesses the economic limitations of permissionless cryptocurrencies. He also provides a view beyond the bubble and how to make use of distributed ledger technology as before he concludes with an analysis on policy implications like the regulatory challenges posed by cryptocurrencies.

The full report also looks at a number of different aspects of the financial sector. Like the monetary policy normalisation in the major economies, which raises tough challenges, exemplified by continued loose financial conditions, or the way forward for macroprudential frameworks that have strengthened the resilience of the financial system and moderated credit growth.

The full text and related information is available here.

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