Could CBDCs Restore Trust in Crypto Markets?

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Digital currencies could help central banks restore confidence in the digital asset sector after the turmoil of 2022, according to a report by the Bank for International Settlements (BIS).

The report lays out a number of options that central banks can consider as policy responses to the failures of crypto firms such as FTX, including outright bans or stricter regulations.

Authors Matteo Aquilina, Jon Frost and Andreas Schrimpf also pointed out that central banks and regulators could work to make traditional finance more attractive through initiatives such as central bank digital currencies (CBDCs).

By encouraging strong innovation in [traditional finance], they could contribute to a more efficient monetary system, write the authors. Central banks are particularly well placed to do this, as they are at the heart of the monetary and financial system.

A well-designed CBDC could support innovation and reduce the cost of payments, improve financial inclusion, strengthen system integrity, and promote user control over data and privacy, according to the BIS report.

The Federal Reserve began exploring the potential for an effectively digital dollar CBDC in late 2021, but faced opposition from the American Bankers Association and the Independent Community Bankers of America, among others.

Apart from the introduction of CBDCs, the BIS report also suggested reforms to payment systems to improve quality and reduce costs, such as the FedNow system which is expected to be implemented later this year.

Crypto-asset markets have seen a remarkable series of ups and downs, often resulting in significant losses for investors, according to the BIS report. Although these failures have so far not spread to the traditional financial system or the real economy, there is no guarantee that they will not in the future, as decentralized finance and traditional finance become increasingly more intertwined.

Authorities can now consider a variety of policy approaches and, at the same time, work to improve the existing monetary system in the public interest.

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