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Bank of International Settlements

Cryptocurrency Storm, Shaking Financial Paradigms Tight: BIS

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The Bank of International Settlements (BIS) recently published a report based on cryptocurrency risks and key elements. The report delves into an extensive analysis of cryptocurrencies and their potential implications for the financial system.

The BIS report critically examined the phenomenon of cryptocurrencies, moving beyond the surface-level excitement and hype surrounding cryptocurrency. It aims to provide a more comprehensive understanding of the underlying technology and its potential implications for the financial landscape.

The report acknowledged the rapid growth and widespread interest in cryptocurrency, driven by factors such as decentralization, anonymity, and the promise of quick, low-cost transactions. However, it also highlighted several key concerns and challenges associated with these digital currencies.

Cryptocurrency Volatility: Risks and Instability Explored

One prominent concern was the inherent volatility and instability of digital assets. The report emphasized that their values could fluctuate dramatically within short periods, posing risks to both individual investors and the broader financial system. Additionally, the BIS discussed the potential for cryptocurrencies to facilitate illicit activities, citing instances of money laundering, fraud, and ransomware attacks.

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The publication further delved into the limitations of the blockchain technology that underlies cryptocurrencies. It pointed out that scalability issues and energy consumption associated with blockchain-based systems present significant hurdles to achieving widespread adoption and efficiency.

Moreover, the BIS report raised concerns about the regulatory and legal frameworks surrounding cryptocurrencies. It emphasized the need for coordinated international efforts to address issues such as consumer protection, market integrity, and cybersecurity.

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While acknowledging the potential benefits of financial innovation, the BIS urged caution and called for a balanced approach toward cryptocurrencies. It suggests that central banks and regulators should closely monitor developments in this space to ensure the stability and integrity of the financial system.

In conclusion, the BIS publication provided an in-depth analysis of cryptocurrency, shedding light on its advantages, challenges, and potential risks. By exploring beyond the hype, it emphasizes the importance of a cautious and well-informed approach to harness the benefits of these digital assets while effectively addressing the associated risks.

BIS to develop multi-CBDC platform prototypes; collaborates with 4 central banks

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The Bank for International Settlements (BIS) Innovation Hub collaborated with central banks from Australia, Malaysia, Singapore, and South Africa to develop prototypes of two versions for an international settlement platform that uses different central bank digital currencies (CBDCs).

According to the executive summary of the report, the project’s first phase was successful in developing functioning prototypes and demonstrating practical solutions, meeting its goal of demonstrating that the notion of multi-CBDCs was technically realistic.

Project Dunbar is the name of the collaboration. It focuses on how, as detailed in that paper, a shared platform including numerous CBDCs could aid enable cross-border payments “cheaper, faster, and safer.”

Project Dunbar, led by the Innovation Hub’s Singapore Centre, established that financial institutions may use CBDCs granted by participating central banks to interact directly with each other on a shared platform, according to a press release, on 22 March 2022, from the BIS. The release further articulated,

“This has the potential to reduce reliance on intermediaries and, correspondingly, the costs and time taken to process cross-border transactions.”

The project was divided into three work streams: one for high-level functional requirements and design, and two parallel technical streams for prototyping on various technological platforms (Corda and Partior).

Key challenges emphasized in the BIS report

When it comes to settling transactions using a shared platform, the BIS collaborated research identified three major problems. The first concern is regarding the issues of access to the platform’s CBDCs, like whether banks should be able to utilize CBDCs from nations where they do not have a presence. Another problem was figuring out how to make cross-border payments as simple as possible while yet adhering to each country’s standards. Finally, the third problem was devising a governance framework that would allow countries to share their payment facilities while also taking national security concerns into account.

Enabling entities to directly hold and conduct business in CBDCs from different jurisdictions, according to Michele Bullock, assistant governor at the Reserve Bank of Australia, could reduce the desire for intermediaries in cross-border payments, but it would have to be done in a way that conserves the security and resilience of these payments.

While there is still more work to be done in terms of thinking about the viability and design of multi-CBDC platforms, Bullock believes Project Dunbar’s findings give a sound foundation for future research in this area.

CBDCs Get Green Signal from Bank of International Settlements

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The topic of central bank digital currencies or CBDCs has been in discussion by regulators for a long time with many nations developing their own versions of it. Whatever remaining qualms the rest of the banking industry may have had about CBDCs seems to have changed after the latest approval by the Bank of International Settlements [BIS]. The document was the clearest signal yet from central banks that they are ready to fight any effort to undermine their key role in the global financial system.

Considered the central bank to all other banks, the BIS stated that if CBDC technology was not adopted by the banking world it would be left in the lurch by alternatives. The CBDC mentioned its latest directive in a list of recommendations released on June 23. According to the BIS, if banks remained stoic on their stance on the nascent technology, it would be overtaken by the Big Tech such as Amazon, Facebook, and Alphabet.

The release also included comments from BIS official Benoit Coeure who said:

“The train has left the station. It is not that we are getting carried away, we are just looking around. That [Big Tech overtake] is a place where you don’t want to be, where governments don’t want to be. The new trade wards are technology wars.”

Significance of BIS’s stance on CBDC

Coeure and the BIS’s statement comes at a time when global superpowers like China have CBDCs in the works. Although the digital renminbi had received a lot of traction during the initial announcement, it has since then dipped in terms of developmental progress. This lethargy shown by states is not something that would be seen by the mammoth technology giants swarming for dominance, said Coeure.

Coeure was not the only BIS official as he was also joined by his colleague Hyun Song Shin. Shin added that the onus was now on the authorities to decide whether citizens need digital IDs to use CBDCs. The other alternative would be a token-based cryptocurrency system that would keep transactions private. Both Coeure and Shin agreed that the BIS’s best pick out of the two would be going with the ID system.

Last year, the Bahamas became the first nation to launch a native CBDC, dubbed the Sand Dollar. Aside from China, other European nations such as France and Switzerland were also trying their hands at creating general purpose CBDCs.

Bank of International Settlements to Approach G20 Members to Back New Cryptocurrency Roadmap

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The cryptocurrency market has always been the subject of speculation and the concept of trust has been very difficult to establish. This has forced many institutions within the space to work together and come up with solutions.

According to recent reports, the Bank of International Settlements [ BIS ] is planning to submit a Cryptocurrency Roadmap to the G20 to lower cross-border transaction costs.

During the weekend this decision was announced with the bank saying it was high time institutions took a proper look at the crypto industry. Today, cross-border payment systems are operating in a slow and cumbersome manner and companies like Ripple were planning to change that.

This is the first time that such a large group of world leaders will be subject to developments in the cryptocurrency space and how to deal with them.

The Bank of International Settlements has urged members of the G20 to get behind its plan to reduce growing transaction costs in a faltering economy. High costs, low speeds, and cumbersome processes have been some of the biggest enemies of the current cross-border transaction system.

According to the bank, several regulators, central banks and treasury officials had put their heads together to come up with a solid plan.

Agustin Carstens, the General Manager of BIS had said:

“Central banks have a core role in payment systems. The changes underway require them to step up and play a more significant part in improving the safety and efficiency of these systems. Money and payment systems are founded on trust in the currency – whether cash or digital – and this trust is something that only the central bank can ensure.”

The body recognized that cross border payments were important for growing economies and the issue was of utmost importance. The roadmap will look into current costs, risks involved in crypto and the ways in which the public and private sectors could be involved.

The BIS acts as an umbrella group for a large group of banks and the jump into crypto meant that more and more players were getting interested in the field of digital assets.

For the first time, the BIS dedicated all of its time for a quarterly review to discuss the issuance of Facebook’s Libra. The Basel based organisation pointed out that central banks need to up their game in the financial landscape wit blockchain/crypto acting as the perfect tool. BIS also wants to remove the middle men from the process and establish a cheaper seamless network.

For the first time, the BIS has dedicated all of its time to a quarterly review to discuss Facebook’s Libra issuance. The organization based in Basel found out that central banks need to play their game in the financial environment as the ideal resource is blockchain/crypto. BIS also wants to take the middle men off the chain and set up a cheaper streamlined network.

The umbrella bank has not yet revealed what it plans to do with crypto regulations but that is probably a discussion for another day. Central banks have no hold over cryptocurrencies like Bitcoin and that is the reason why some countries were planning to release state-owned CBDC‘s.

These Central Bank Digital Currencies [CBDC] are expected to possess the best of both worlds: regulatory overwatch as well as all the features of a cryptocurrency.