CPMI Report on Digital Currencies

The Bank for International Settlements posts this new report on digital currencies on its website. They issued a press release that recaps the report here. Digital currencies are a hotly debated topic and the emergence of Bitcoin has created some interest in the idea. 

This new report confirms what we have reported here on the blog that so far widespread acceptance has not happened. But the report suggests there might be a future for the so called "blockchain" technology that Bitcoin is based on. Below are some quotes from the press release.

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"The Committee on Payments and Market Infrastructures (CPMI)1 today released its report on Digital currencies.

Innovations in the payments domain can have important implications for the safety and efficiency of the financial system and thus are monitored by many central banks. In this regard, Benoît Cœuré, Chairman of the CPMI, said: "Digital currencies and distributed ledgers are innovations that could have an impact on many areas, not only on payment systems and services. Even if today's schemes do not endure in their present form, it is likely that other products, services and business models based on the same underlying technology will continue to emerge and develop. This might lead to changes in the way that FMIs and other market participants operate."

The emergence of digital currencies was noted in previous reports by the CPMI on Innovations in retail payments (2012) and Non-banks in retail payments (2014). There are two key features of digital currencies.

• The first is the assets themselves (such as bitcoins). These assets can have some of the characteristics of a commodity and some of a currency. Currently, their monetary features (such as their use as a means of payment) are often more prominent, yet, these assets are not typically issued in or connected to a sovereign currency, are not a liability of any entity, are not backed by any authority and have no intrinsic value.
• The second feature is the technology used. Particularly noteworthy is the use of distributed ledgers. Most financial transactions are made via a centralised infrastructure, where a trusted entity clears and settles transactions. Distributed ledgers are innovative because they allow transactions in the absence of trust between the parties and without the need for intermediaries.

The development of digital currencies using distributed ledger technology is an innovation with potentially broad applications. In the financial market infrastructures (FMIs) sector, wider use of distributed ledgers by new entrants or incumbents could have implications extending beyond payments, including their possible adoption by some FMIs and more broadly by other networks in the financial system.

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My added comments: This is a common theme you see these days related to this topic. The idea is that while Bitcoin is unlikely to gain widespread adoption, the blockchain technology it is based on might be different.

Maybe so, but before you hop on that bandwagon please read the article we featured here on the blog earlier this year. It is written by one of the top experts in the world on this topic. He makes a convincing argument as to why this technology is unlikely to gain adoption beyond some niche applications for very high end customers. I would not expect to see this technology being used by the average person any time soon, if ever. The limitations built in to the technology are not well known but are pointed out in the article we published here on the blog in two parts.