The International Monetary Fund (IMF) recently published an article entitled “The Basis of Trust”. The paper stated that central banks should benefit from the technological innovations offered by cryptocurrencies. Moreover, banks should do so while implementing central bank digital currency to build a rich and diversified monetary system.
The paper also highlighted the shortcomings of cryptocurrencies. the paper is jIt was co-written by three members of the Bank for International Settlements (BIS). These include Agustin Carstens, general manager, Jon Frost, chief financial officer for the Americas, and Hyun Song Shin, financial advisor and head of research.
Not flawless it seems
The newspaper pointed out that cryptocurrencies, with their technological capabilities, have recently gained great popularity. These features are the ability to program payments (programmability) and combine different operations into a single transaction (combinability). Cryptocurrencies can also create a digital representation of money and assets (tokenization).
The monetary system is based on security, stability, accountability, efficiency and inclusion. Although cryptocurrencies are intended to provide an alternative to the traditional financial system, its structural flaws make these matters questionable.
Also, since validators must be incentivized to confirm transactions, users often switch to different crypto platforms due to DeFi congestion. This fragmentation of the DeFi landscape prevents widespread adoption of cryptocurrencies.
In addition, it is highly decentralized and anonymous. The paper adds that this is why there is no liability in cases of fraud or deception.
Central banks hold confidence
Central banks issue government currencies, make mass payments, facilitate smoothly functioning payment systems, and regulate private businesses. Central bank jobs have given them people’s trust. In addition, trust is critical to the functioning of the financial system, according to the paper.
In the digital space, central banks offer digital currencies to central banks that use the above-mentioned features of cryptocurrencies. These include programmability and installation. In addition, they have the confidence backed by central banks.
The paper also advocates the adoption of technological advancements that cryptocurrency offers during CBDC implementation. This would avoid volatility and lead to trust-based transactions.
All on the same page
In June 2022, the Bank for International Settlements (BIS) published a report that aired similar views on cryptocurrencies. The a report It was particularly critical for the digital asset class because the cryptocurrency crash had only begun in May 2022.
This report also highlights what the Bank for International Settlements (BIS) calls the structural flaws of the cryptocurrency. These shortcomings make this asset class unsuitable as a basis for the monetary system.
In the same June 2022, the BIS most dangerous Launch of the cryptocurrency market intelligence platform. The platform has been launched Market values, economic activity, and risks to financial stability in relation to cryptocurrencies.
The most recent article concluded, “Digital technologies promise a bright future for the monetary system.”
Adopting technologies like tokenization and its technical infrastructure in digital central bank currencies can go a long way in building a robust monetary system.