BIS economists suggest improving TradFi with CBDC to attract users away from crypto
Economists at the Bank of International Settlements (BIS) took a look at the risks inherent in the crypto ecosystem and came up with a seemingly novel solution. “Develop an alternative,” they advised in a bulletin released on Jan. 12. What they had in mind was central bank digital currency (CBDC).
The authors of the bulletin, headed by BIS senior economist Matteo Aquilina, said they sought lessons from the crypto winter that descended in 2022. The recent failures in crypto asset markets underscore the need to address the risks presented by crypto before those markets become “systemic,” they said.
Both centralized and decentralized finance in the crypto world “share many of the vulnerabilities that are familiar from traditional finance (TradFi),” the authors said. However, risks resulting from high leverage, liquidity and maturity mismatches and substantial information asymmetries are greater in crypto.
Crypto is unlikely to go away on its own, despite the issues with it, the authors noted. They placed potential risk mitigation actions into the categories of banning specific activities with crypto, containing crypto in isolation from “the real economy” and regulating crypto “in a manner akin to TradFi.” They provide a separate appendix breaking down national and international crypto regulatory initiatives within that framework.
Related: Central Banks to set standards on banks’ crypto exposure: BIS
Each option has relative pros and cons, they noted. A ban, for example, “could conflict with founding principles of society,” among other things. The three approaches can be pursued simultaneously, however:
Improving the speed and cost efficiency of payments could be a major component of that strategy:
One of the best ways to do
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