Digital currencies becoming most urgent for countries where physical currencies disappearing
Global central banks considering own cryptocurrencies but risks to financial system still unclear, BIS says
The rise of cryptocurrencies like Bitcoin has nudged central banks around the world to consider creating their own digital currencies but risks to the financial system are still difficult to gauge, the Bank for International Settlement said.
"All central banks may eventually have to decide whether issuing retail or wholesale CBCCs (central bank cryptocurrencies) makes sense in their own context," the Bank of International Settlement said.
"In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains – in terms of payments, clearing and settlement – but also the risks it may entail for the financial system and the wider economy as well as any implications for monetary policy. Some of the risks are currently hard to assess."
The question of cryptocurrencies is becoming more urgent for countries like Sweden where cash is fast disappearing and many stores no longer accept it and some bank branches no longer take deposits or dispense money. The Swedish central bank, the Riksbank, is has project underway called the eKrona to see whether to supply digital central bank money to the public, BIS said.
"Lately, central banks have entered the fray, with several announcing that they are exploring or announcing that they are exploring or experimenting with distributed ledger technology," BIS said. "But making sense of all this is difficult. There is confusion over what these new currencies are, and discussions often occur without a common understanding of what is actually being proposed."
In the UAE, the country's central bank is close to finishing a review of virtual currencies that may result in new regulations on the use of digital currencies like bitcoin, a person familiar with the situation said last week.
The review, among other things, is looking at ways other governments around the world have responded to the challenge of digital currencies which have been favored by criminals and money launderers due to lack of regulations.
Bitcoin started to gain traction in the UAE, making the need for clearer regulations more urgent. Fam Properties, a Dubai real-estate broker, said last week that a number of landlords will start accepting Bitcoin payments at City Walk in Jumeirah, a new property development, next month.
Bitcoin and other virtual currencies, which have seen massive growth in the past couple of years, are starting to face tighter regulations if not being banned altogether by some countries. It has also faced harsh criticism from bankers, including the chief executive of JP Morgan, Jamie Dimon, who last week denounced the currency as a fraud.
China plans to ban trading of bitcoin and other virtual currencies on domestic exchanges, dealing another blow to the $150 billion cryptocurrency market after the country outlawed initial coin offerings last week.
Chainalysis, a provider of anti-money laundering software, estimates 10 per cent of money intended for initial coin offerings were looted by scams such as phishing so far this year, according to Bloomberg.