TL;DR: On March 1, 2020 the Bank for International Settlements (BIS) released, BIS Quarterly Review March 2020 International banking and financial

market developments, a 151-page report and commentary on the world’s economic health. In it, cryptocurrencies make their presence felt as the central bankers’ central bank grapples with the peer-to-peer electronic cash revolution.

BIS: Peer-to-Peer is Most Transformative for Improving Payments

“The most transformative option for improving payments is a peer-to-peer arrangement that links payers and payees directly and minimises the number of intermediaries,” BIS head Agustín Carstens explained in his chapter, Shaping the future of payments. BIS is the bank for the world’s central banks, doing business only with government central bankers and global international finance organizations. It has been around since 1930 and is based in Switzerland. The recently released report is chart-filled and finance jargon-peppered banker speak to delight a certain audience. That it mentions cryptocurrencies at all is a sign digital money is making an impact.

“Many peer-to-peer arrangements use distributed ledger technology (DLT). Whereas account-based systems record transactions in a central ledger, DLT systems record transactions in multiple places at the same time, resulting in a decentralised, synchronised ledger. Examples that have garnered attention in recent years include Bitcoin and so-called ‘stablecoin’ initiatives like Libra,” Carstens noted.

He further characterized such arrangements as having “the potential to transform wholesale payments,” particularly in the area of “tokenisation – or the digital rendition of assets – could improve the clearing and settlement of securities. They conclude that tokenisation might reduce costs and complexity but does not eliminate the risks associated with one party failing to settle transactions. The success of token-based settlement systems could depend on how well they interact with traditional account-based systems,” he explained.

Market Participants Might Not Want to Move to Shorter Settlement Cycles

Beyond tokens, the report also delves into the increasing popularity of central bank digital currencies (CBDC) and crypto-related remittances, which are viewed through a lens of disruption. The BIS appears to imply the comparatively slow settlement mechanisms of legacy finance are too entrenched, too integral to the system to make faster blockchain-related features desirable. “That said,” the report later concluded, “market participants might not want to move to shorter settlement cycles, as this could increase liquidity requirements and give market-makers less time to source the cash or securities needed for settlement.”

Still, as Carstens freely admits, a question looming over the BIS and its work is namely ‘whether money itself needs to be reinvented for a changing environment, or whether the emphasis should be on improving the way it is provided and used.’

The advent of CBDC, however, was framed by the BIS in relation to how they might be eventually rolled out. Used between banks, as a settlement mechanism, for example, it might work well. But for the average, everyday user, too many risks are associated with its proliferation, the report warns. That cryptocurrencies have proved vulnerable to hackers makes any central bank version an even greater honeypot for malicious actors, the BIS cautioned.

Still, as Carstens freely admits, a question looming over the BIS and its work is namely “whether money itself needs to be reinvented for a changing environment, or whether the emphasis should be on improving the way it is provided and used.” Facebook’s clumsy entrance into the cryptocurrency fracas last year put central bankers on alert, according to the BIS report, and that much is clear. But the need, especially in cross-border, cross-currency payments such as remittances for lowering fees and facilitating greater access to payment systems is real and not going away any time soon.

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