Bank for International Settlements (BIS) Warns Against Having Central Bank Digital Currencies

The crypto bug has hit several big players from the traditional financial industry. Over the last year, several reports of central banks testing regulated cryptocurrencies, popularly called as central bank digital currencies (CDBC), have come to the surface.

However, the Bank for International Settlements (BIS) has raised a red flag and cautioned central banks against having their own digital currencies. BIS "fosters international monetary and financial cooperation and serves as a bank for central banks”.

Last Friday, March 22, BIS chief Agustin Carstens gave a speech at the central bank of Ireland stating that central banks are not seeing any value in issuing CBDCs. He says that introducing CBDCs could mean introducing some fundamental changes underpinning the monetary system and financial stability.

He further explains that the existing monetary system is a two-tier system comprising of central bank and the customer-facing banking system wherein both of them work together.  With CBDCs in place, the lending and deposit business will move from commercial banks to only central banks creating a one-tier system.

Carstens continued: “There are historical instances of one-tier systems where the central bank did everything. In the socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But I do not think we can hold up that system as something that will serve customers better.”

He also notes that during the times of financial distress, the flow of money from less secure to more secure banks would become tricky. Having a CBDC in such case would attract a premium over the fiat currency. For example: “where one euro of deposits in the commercial bank buys less than one euro’s worth of central bank digital currency,” Carstens said.

Considering several such risk factors, Carstens wants central banks to trade cautiously in this matter. “Before we open up the patient for major surgery, we need to understand the full consequences of what we’re doing,” Carstens cautioned.

He stated: “So far, experiments have not shown that new technologies would work any better than existing ones. There is no clear demand for CBDCs on the part of society. There are huge operational consequences for central banks in implementing monetary policy and implications for the stability of the financial system.”