BIS warns of ‘systemic’ risk of digital money

The Bank for International Settlements said recent implosions in the criptocurrency markets indicate that long-warned about dangers of decentralised digital money are now materialising.

The BIS, the global umbrella body for central banks, sounded a warning in an upcoming annual report, in which it urged more effort in developing appealing central bank digital currencies.

Agustin Carstens, the general manager of BIS, pointed out recent collapses of the TerraUSD and luna'stable coin, and a 70 per cent slump inbitcoin, which is the bellwether for the criptocurrency market, as indicators that a structural problem exists.

Any form of money without a government backed authority that can use reserves that are funded by taxes is a waste of credibility. Carstens told Reuters that all of the weaknesses pointed out before have pretty much materialised. Music analysts say that the overall value of the market for criptocurrency has slumped more than $2 trillion since November due to its troubles.

Carstens said that the meltdown was not expected to cause a systemic crisis in the way that bad loans caused the global financial crash. He stressed that losses would be sizeable and that the opaque nature of the universe fed uncertainty.

Carstens said that it should be quite manageable based on what we know. We don't know a lot of things. The BIS has a long-term sceptic of cryptocurrencies and laid its vision for the future monetary system - one where central banks use the tech benefits ofBitcoin to create digital versions of their own currency.

Nearly 90% of the monetary authorities are exploring CBDCs as they are known. Many hope it will equip them for the online world and fight cryptocurrencies. The BIS wants to coordinate key issues, such as making sure they work across borders.

The immediate challenges are mainly technological, similar to how the mobile phone world needed standardised coding in the 1990s. There is also a geopolitical issue as relations between the West and countries such as China and Russia wane.

Interoperability is a topic that has been on the G 20 agenda for a long time. Carstens said there had been a number of real-life trials with different CBDCs over the last year, so I think there is a good chance that this will move forward.

He said that he thinks that the next couple of years will be the time when international standards for CBDC interoperability might be agreed.