Central bank-owned global financial institution, the Bank for International Settlements (BIS), has released its quarterly report for Q1 2020, which details several conclusions and insights that the institution has made on digital currencies. The research includes Central Bank Digital Currencies (CBDC), peer-to-peer currencies, asset tokenization, and cross border payments.
At a time where CBDCs and general digital currencies are increasing, it revealingly informs how incumbents are approaching the economic future.
The Bank for International Settlements (BIS), a global financial institution that fosters international cooperation and is owned by 60 central banks, has released a 151-page report that examines the future of payments.
Published on March 1, in one of the opening sections titled ‘Shaping the Future of Payments,’ the BIS discusses how new entities that are developing novel payment platforms have come into the picture. These platforms are competing with traditional payment systems provided by banks and incumbents themselves are redeveloping their systems.
The reports glossary section in itself does a good job of revealing how closely the BIS has looked into emerging technologies and decentralized systems, including such terms as ‘atomic settlements, Central Bank Digital Currencies (CBDCs), digital currencies, P2P payments, smart contracts, stablecoins, and tokenization.’
Tokenization Holds Potential
The tokenization of securities is considered to be a major application of emerging fintech solutions and holds special potentials and risks.
Speaking about the potential implications of tokenization, the report says that the highly discussed application of digital currencies can reduce costs and complexities in clearing and settlement. It also notes the legal gray area that are securities, which many digital assets have had issues with in the past.
This risk, it says, is a short term one. Besides, operational doubts remain, as DLTs and smart contracts have yet to prove themselves for clearing and settlements, something that will have to be monitored over time.
Central Bank Digital Currencies Given Much Thought
CBDCs also get some big mentions in the report. Saying that the focus is to lay the foundation for
more systematic discussions, the BIS talks about the technical considerations for a CBDC and consumer needs.
The BIS offers three potential architectures for CBDCs: indirect, direct, and hybrid models. The first involves a tiered structure that relies on various banks, while the central bank handles wholesale payments. The second model involves only the central bank, and the third is a hybrid of the two systems.
The conclusion formed is that banks must share the results of CBDC pilots so that an ideal model can be agreed upon.
CBDCs have been a prominent point of discussion over the past 6 months. Numerous governments have announced their intentions to launch such a payment system, including China, Sweden, France, and Thailand. Most recently, United States Federal Reserve Governor Lair Bernard, said that the United States would be looking into a U.S. dollar digital currency, something that analysts and insiders have suggested the country ought to do.