Crypto’s structural flaws make it an unsuitable basis for a monetary system as recent implosions in the cryptocurrency markets show, according to the Bank for International settlements (BIS).
The BIS, an association of the world’s major central banks, said in its report that recent collapses of the TerraUSD and luna 'stablecoins', coupled market turmoil have demonstrated crypto’s volatility.
Stablecoins attempt to “piggyback on the stability of real money issued by central banks,” the report said.
Crypto’s security risks, high fees and scalability issues, as well as its “unregulated intermediaries that pose financial risks,” are growing concerns in today’s monetary system, BIS said.
“The crypto universe lacks a nominal anchor, which it tries to import, imperfectly, through stablecoins,” the report said.
“These structural shortcomings are unlikely to be amenable to technical fixes alone. This is because they reflect the inherent limitations of a [decentralised] system built on permissionless blockchains.”
Analysts estimate that the overall value of the crypto market has slumped more that $2tn since November.
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“The more serious problem is the fragmentation of the crypto universe,” Hyun Song Shin, BIS’ economic adviser and head of research, said.
“Crypto cannot serve the purpose of money in the sense that it doesn’t recreate this virtuous circle from greater acceptance to greater use.”
BIS said the future of the monetary system lies with Central Bank digital Currencies (CBDCs), where central banks utilise the tech benefits of bitcoin and create digital versions of their own currencies.
Roughly 90% of monetary authorities are now exploring CBDC, with China currently testing its own digital currency, eCNY. Jamaica’s central bank has officially recognised the “Jam-Dex” central bank digital currency as legal tender, becoming the first country to do so.
“This architecture is assumed to have several benefits: less financial risk for the customer, more liquidity, lower costs, increased competition, and wider access,” the Bank of Israel said.
“Our broad conclusion is captured in the motto, ‘Anything that crypto can do, CBDCs can do better,’” said Shin.
However, CBDC projects are still in early stages in most major economies.
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