BIS: Digital currencies could upend central bank model

Digital currencies could upend central banks’ ability to control money issuance, according to a new report published today by the Bank for International Settlements (BIS).

The BIS, a financial institution formed by the cooperation of central banks around the world, has been looking at digital currency technology since November 2013, and in February this year, its Committee on Payments and Market Infrastructures (CPMI) commissioned a working group to draft the report released today.

The report outlines how digital currencies such as Bitcoin, and the decentralized ledger technology underlying them, blockchain, could affect central banks and the broader global financial system.

At the same time, the report also emphasized that whether digital currency can cause disruptive effects depends on whether it can be widely used. The Bank for International Settlements has portrayed a possible future in which digital currency has the ability to guide monetary policy, assess capital flows, and so on.

As the report states:

“Widespread substitution of digital currencies for banknotes could lead to a decline in the non-interest income of central banks from paying their liabilities. This, in turn, could lead central banks to replace interest payments on their liabilities, reduce their balance sheets, or both. The result could be a reduction in the seigniorage revenue that constitutes the central bank’s income.”

Central banks’ ability to collect data on monetary aggregates, or measure money supply, may similarly be hampered as digital currencies become more widespread.

“The significant expansion of digital currency applications could also raise technical issues regarding the appropriate definition of monetary aggregates, particularly when digital currencies are not denominated in sovereign currencies,” the report states. “Such measurement difficulties could create complications for monetary policy implementation when monetary policy focuses too much on the growth of monetary aggregates.”

Some of the conclusions in the report also come from the report on electronic money schemes released by the Bank for International Settlements in October 1996. Specifically, the new report proposes a guess, assuming that banknotes are replaced by digital forms of currency, what will happen?

“As discussed in the 1990s, the impact of digital currencies on the implementation of monetary policy will depend on changes in the demand for bank reserves,” the report states. “If substitution is widespread and interconnections are weak, monetary policy may lose its effectiveness.”

Government-issued digital currencies

On whether central banks should consider issuing their own currencies based on distributed ledger technology, the BIS acknowledged that some central bank functions could become obsolete.

“The emergence of distributed ledger technology is a hypothetical challenge for central banks, not because it replaces central banks with some other central entity, but because it reduces the institutional functions of central entities and, in extreme cases, may eliminate the need for central entities for certain functions,” the report’s authors said.

Specifically, the BIS argues that if a distributed ledger supports a widely used digital currency, then there would be no need for central banks to issue a currency.

The report states: "In some extreme cases, a sovereign currency issued by a central authority could be undermined by non-sovereign currency protocols issued by no central authority."

The full report can be viewed in the document library: http://8btc.com/doc-view-319.html

Original article: http://www.coindesk.com/bis-digital-currencies-could-disrupt-central-banking-model/
By Stan Higgins
Compiled by: Satuoxi
Editor: Satuoxi
Source (translation): Babbitt Information