Home crypto news CBDCs Could Make Traditional Finance ‘More Attractive’ and Reduce Risk From Crypto, Say Central Bank Economists

CBDCs Could Make Traditional Finance ‘More Attractive’ and Reduce Risk From Crypto, Say Central Bank Economists

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Economists at the Bank for International Settlements (BIS) think central bank digital currencies (CBDCs) could “curb the demand” for crypto.

In a new bulletin, BIS economists Matteo Aquilina, Jon Frost and Andreas Schrimpf argue that addressing risks in the crypto market has become a “pressing policy issue” in the wake of high-profile implosions across the space last year.

“Crypto asset markets have gone through booms and busts before, and so far, the busts have not led to wider contagion threatening financial stability. Yet the scale and prominence of recent failures heighten the urgency of addressing these risks before crypto markets become systemic.

The crypto ecosystem and the ‘shadow financial’ functions it engages in, through centralized financial entities (CeFi) and decentralized finance (DeFi) protocols, share many of the vulnerabilities that are familiar from traditional finance (TradFi). But several factors exacerbate the standard risks. These relate to high leverage, liquidity and maturity mismatches and substantial information asymmetries.”

The economists argue that developing an alternative to crypto could be one way to mitigate the sector’s risks. They say the key to accomplishing that would be developing better quality, lower-cost payment methods.

“One option is to introduce retail fast payment systems, such as the Unified Payment Interface (UPI) in India, Pix in Brazil, the upcoming FedNow system in the United States or initiatives such as the Single Euro Payments Area (SEPA). Another option is to issue central bank digital currencies (CBDCs) that meet real needs. If properly designed and implemented, such initiatives could support sound private sector innovation.”

The economists claim CBDCs could make payments cheaper and increase financial inclusion.

The Switzerland-based BIS is owned by 63 central banks around the world and aims “to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.”

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