BIS analytics has looked into the present state of the financial system and proposed a new one, which comprises of the most viable and efficient features of traditional monetary system and crypto technologies.
The future of monetary system and the role of crypto and CBDCs hold a special place in the recent Annual Economic Report by the Bank for International Settlements (BIS) published at the end of June 2022. The report suggests in no uncertain terms that the only crypto-related thing (apart from some underlying technologies) that could fit into the future monetary system is CBDC. Other forms of crypto, such as decentralized currencies or stablecoins, aren’t going to stick as they fail to fulfil necessary functions of money (we already considered the issue whether cryptocurrency will be able to become a part of monetary system).
Crypto is said to have major drawbacks that prevent it from scalability. One of them is fragmentation of the system: rising number of decentralized blockchains requires bridges for integration, and the bridges for their part are the weak link in terms of security (BIS analytics already published the paper regarding shortcomings of fragmentation; moreover, just a couple of weeks ago there was a huge theft due to security holes in a bridge).
Among other flaws is the lack of trust: even stablecoins tend to peg to sovereign currencies, that in turn are trusted because they are backed by central banks. Moreover, the recent stablecoin collapses revealed dangerous volatility of meant-to-be-stable currencies. CBDCs will have no such problem as they are initially issued by the central banks with hard-earned clear reputation and guarantees for users.
Although the current monetary system is not perfect either, it is much closer to achieving high-level goals that the system should fulfil, according to the BIS analytics. Also, the paper states, it’s high time for crypto technologies to come into play to strengthen the traditional monetary system. Its technological features should become the basis for CBDCs, which will be supported by the well-established central banks’ framework, leaving behind all shortcomings of decentralized blockchains.