Risks related to central bank issued cryptocurrencies too unknown: BIS Report

The risks rewards spectrum associated with cryptocurrencies have yet to be mapped out and the resilience of the technology underpinning them have yet to be proven, for consumers as well as for institutions.

As per the Bank for International Settlements, it is too soon to determine whether it is prudent for central banks to issue their own cryptocurrencies since the risks involved are yet to be assessed and the technology underpinning them remains unproven.

Although central banks already use electronic money, their proportion is only a tiny fraction to their overall asset base; moreover these are also backed by gold.

In its latest quarterly review, BIS stated if central banks were to issue a cryptocurrency, rather than just electronic money, it would be a significant change since cryptocurrencies can be exchanged “directly between the payer and the payee without the need for central intermediary”

Blockchain technology allows peer-to-peer payments without requiring a centralized tracking authority. Decentralized cryptocurrencies, including bitcoin, have a shared ledger that verifies, records and settles transactions in a matter of minutes.

“While it seems unlikely that bitcoin or its sisters will displace sovereign currencies, they have demonstrated the ability of the underlying blockchain or distributed ledger technology (DLT),” said BIS.

This report by BIS coincides with a crackdown on the cryptocurrency business in China.

The BIS report explores two possibly forms of central bank-issued cryptocurrency: a consumer-facing currency for use in retail transactions, and a wholesale one that would be used by institutions as a “token” currency for digitally settling transactions.

While peer-to-peer transfer of bitcoins by consumers will provide them with the kind of anonymity that cash currently provides, however, if that isn’t seen as important it is yet to be seen what other benefits do cryptocurrencies provide in this scenario.

“Most of the alleged benefits of retail central bank cryptocurrencies can be achieved by giving the public access to accounts at the central bank, something that has been technically feasible for a long time but which central banks have mostly stayed away from,” reads the BIS report.

Such an issue will demand attention in fairly advanced countries, including Sweden, where the usage of cash has seen a significant decline in the last decade.

Significantly, the BIS report notes, if a retail cryptocurrency were to completely replace cash, i.e. remove the zero-lower-bound constraint on monetary policy, it would no longer be possible for depositors to avoid negative interest rates by hoarding cash.

As for institutions, the utility of central bank-issued cryptocurrency’s will depend on whether it could significantly reduce settlement times and improve efficiency. This depends on the successful resolution of a string of technical issues, and is yet to be a proven technology.

As a result, the BIS report concludes that central banks have to decide, on an individual basis, whether issuing retail or wholesale central bank cryptocurrencies made sense for them.

“In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains – in terms of payments, clearing and settlement – but also the risks it may entail for the financial system and the wider economy, as well as any implications for monetary policy,” said BIS in its report.

Since “some of the risks are currently hard to assess,” as very little is known about the resilience of crypto currencies, including its impact during cyber-attacks.

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