The world's top bank weighs in on digital currencies

Established in 1930 by an intergovernmental agreement between many of the world’s most powerful nations of the time, the Bank for International Settlements (BIS) was originally created to facilitate reparations imposed on Germany after WWI. Headquartered in Basel, Switzerland, the organization is often referred to as the banker’s bank, its membership is comprised of 60 central banks, from countries that make up about 95% of world GDP.

Today the BIS released their own in-depth report on digital currencies, including bitcoin. Published by the internal Committee on Payments and Market Infrastructures (CPMI), the 24-page PDF report is simply named “Digital Currencies,” and the majority of its pages are focused on the implications and impact of blockchain-based currencies on our global financial system.

- Benoît Cœuré, Committee on Payments and Market Infrastructures Chairman

The content of the report demonstrates that bitcoin has now caught the attention of the world’s most senior banking institution, and the reaction to it could easily be called positive.

- BIS Report

In a refreshing and welcome break from the normal pattern of banks referring to them as “virtual currencies,” the BIS has elected to call bitcoin and other blockchain-based currency by the proper term “Digital Currencies” within the report, something that few, if any, other banks have done to date. Their reasoning for doing so is surprisingly reasonable.

- BIS Report

The role of regulation over digital currencies was a central theme of the report, including regulatory issues and approaches. Without mentioning any specific regulation, they weighed the banker and consumer risks while using digital currencies without any regulation yet.

Factors influencing the development of digital currencies were heavily explored in the report, including both the supply-side and demand-side factors, covering every issue bitcoin faces from scalability, altcoin fragmentation, volatility, pseudonymity, to security and more. The writer(s) of this well-researched report, who are not named at any point, seem to have a thorough understanding of the technology and economics behind cryptocurrencies, and likely have spent considerable time researching the bitcoin community too.

- BIS Report

However, as bitcoin proponents have come to expect, the narrative of the report downplays the usefulness of the currency and embraces the unique properties of the blockchain. “The genuinely innovative element seems to be the distributed ledger,” it echoed, “especially in combination with digital currencies that are not tied to money denominated in any sovereign currency.”

- BIS Report

The importance of network effects on digital currencies is confirmed and well addressed in the report, comparing their importance to those of retail payment systems and payment instruments. “A range of features and issues that are likely to influence the extent to which these network effects may be realised,” the report stated, chief among them was the advantage “that digital currency has a global reach by design.”

Several other appreciative-sounding comments were made, such as how “there may be gaps in traditional payment services that are or might be addressed by digital currency schemes” and

even perhaps a little jealousy in the department of cost savings: “Distributed ledgers may offer lower costs to end users compared with existing centralised arrangements for at least some types of transactions” the report admitted.

However, it would be inappropriate to call the BIS a ‘fan’ of bitcoin. In case anyone reading the report had any doubts that the BIS could see bitcoin as a de facto competitor to their business model, this report removes all doubt towards the end.

- BIS Report

If there was one single, overall conclusion, it was simply that “distributed ledger technology will continue to emerge and develop,” whether or not digital currencies catch on is still up in the air at the moment.

- BIS Report

The takeaway advice offered to central banks was familiar, yet ominous. Addressing business models as “Financial Market Infrastructures,” (FMIs), the BIS report clearly suggests for its member banks to assimilate digital currencies, not fight them. “Central banks could consider – as a potential policy response to these developments – investigating the potential uses of distributed ledgers in payment systems or other types of FMIs.”

Several central banks have already expressed similar views. The Bank of England was one of the first to show that they grasp the power of the blockchain.

- Andrew Haldane, Bank of England, Chief Economist

Singapore’s central bank said early on that they are watching intensely.

- Ravi Menon, Managing Director of the Monetary Authority of Singapore

Germany’s central bank has shown that they understand the underlying implications of the blockchain pretty well.

- Dr Andreas Dombret, Deutsche Bundesbank, Member of the Executive Board

In South Africa, the central bank is aware that they need to be looking at more than just the currency aspect:

- François Groepe, South African Reserve Bank Deputy Governor

Canada’s top banking authorities agree and are already talking about further uses for blockchain technology that they can be involved with, such as peer to peer lending.

- Carolyn Wilkins, Bank of Canada Senior Deputy Governor

If there is a single day in history that knowledge of bitcoin became propagated to all levels of the banking world, the emergence of today’s report would most likely mark it. So far the response to digital currencies has been more positive than negative, but if bitcoin were to ever grow the rest of the way into mainstream usage, we may find out if the BIS could change its tactics and central banks would be ready to pounce at that time.