BIS releases contrasting reports on CBDCs and crypto

In anticipation of the meeting of the G20 finance ministers and central bank governors, the Bank for International Settlements Innovation Hub (BISIH) released two significant reports on cryptocurrency and central bank digital currencies (CBDCs) on 11 July. These reports present divergent perspectives on the technologies involved, reports MSN.

The shorter of the two reports, spanning 24 pages, focus on the crypto ecosystem, encompassing cryptocurrencies, stablecoins, and decentralised finance (DeFi). It offers a brief overview of these components but primarily highlights various structural flaws and risks associated with them. The report echoes some commonly discussed issues within the crypto sphere, such as the centralised nature of crypto trading, the instability of stablecoins, and the purported irreversibility of smart contracts.

Additionally, it sheds light on less frequently mentioned points, including the inevitable centralisation of DeFi due to the reliance on oracles. An insightful observation made in the BISIH crypto report pertains to the influence of human nature on crypto investments. It highlights that crypto investors often exhibit tendencies to chase prices, engaging in a pattern of buying high and selling low, similar to what is observed in traditional finance.

However, the BISIH identifies the primary risk associated with crypto as its increasing interconnectedness with the real economy. Despite the challenges faced by the crypto market in the past year, institutional investors and households continue to display interest in cryptocurrencies. The report suggests that the tokenisation of assets could further fuel the growth of the crypto market, potentially leading to the “cryptoisation” of economies, where traditional cash is gradually marginalised.

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