Every day, people around the world make more than 2 billion digital payments.1
They pay for goods and services, borrow and save and engage in a multitude of
financial transactions. Every time they do so, they rely on the monetary system – the
set of institutions and arrangements that surround and support monetary exchange.
At the heart of the monetary system stands the central bank. As the central bank
issues money and maintains its core functions, trust in the monetary system is ultimately
grounded in trust in the central bank. However, the central bank does not operate in
isolation. Commercial banks and other private payment service providers (PSPs)
execute the vast majority of payments and offer customer-facing services. This division
of roles promotes competition and gives full play to the ingenuity and creativity of
the private sector in serving customers. Indeed, private sector innovation benefits
society precisely because it is built on the strong foundations of the central bank.
The monetary system with the central bank at its centre has served society
well. Yet digital innovation is expanding the frontier of technological possibilities,
placing new demands on the system.
Far-reaching innovations, such as those in the crypto universe, entail a radical
departure. The crypto universe builds on the premise of decentralisation
. Rather
than relying on central bank money and trusted intermediaries, crypto envisages
checks and balances provided by a multitude of anonymous validators so as to
keep the system self-sustaining and free from the influence of powerful entities or
groups. Decentralised finance, or “DeFi”, seeks to replicate conventional financial
services within the crypto universe. These services are enabled by innovations such
as programmability and composability (see glossary) on permissionless blockchains.
Such systems are “always on”, allowing for global transactions 24/7, based on opensource code and knowing no borders.
Key takeaways
• A burst of creative innovation is under way in money and payments, opening up vistas of a future
digital monetary system that adapts continuously to serve the public interest.
• Structural flaws make the crypto universe unsuitable as the basis for a monetary system: it lacks a
stable nominal anchor, while limits to its scalability result in fragmentation. Contrary to the
decentralisation narrative, crypto often relies on unregulated intermediaries that pose financial risks.
• A system grounded in central bank money offers a sounder basis for innovation, ensuring that
services are stable and interoperable, domestically and across borders. Such a system can sustain a
virtuous circle of trust and adaptability through network effects.
• New capabilities such as programmability, composability and tokenisation are not the preserve of
crypto, but can instead be built on top of central bank digital currencies (CBDCs), fast payment
systems and associated data architectures.
76 BIS Annual Economic Report 2022
However, recent events have revealed a vast gulf between the crypto vision
and its reality. The implosion of the TerraUSD stablecoin and the collapse of its twin
coin Luna have underscored the weakness of a system that is sustained by selling
coins for speculation. In addition, it is now becoming clear that crypto and DeFi
have deeper structural limitations that prevent them from achieving the levels of
efficiency, stability or integrity required for an adequate monetary system. In
particular, the crypto universe lacks a nominal anchor, which it tries to import,
imperfectly, through stablecoins. It is also prone to fragmentation, and its
applications cannot scale without compromising security, as shown by their
congestion and exorbitant fees. Activity in this parallel system is, instead, sustained
by the influx of speculative coin holders. Finally, there are serious concerns about
the role of unregulated intermediaries in the system.
As they are deep-seated, these
structural shortcomings are unlikely to be amenable to technical fixes alone. This is
because they reflect the inherent limitations of a decentralised system built on
permissionless blockchains.
This chapter sets out an alternative vision for the future, one that builds on
central bank public goods. This will ensure that innovative private sector services
are securely rooted in the trust provided by central bank money.
Scaling on the back of network effects, central bank digital currencies (CBDCs)
and retail fast payment systems (FPS) are well placed to serve the public interest
through greater convenience and lower costs, while maintaining the system’s
integrity. Decentralisation and permissioned distributed ledger technology (DLT)
can also play a constructive role, eg when central banks work together in multiCBDC arrangements. These innovative payment rails are fully compatible with
programmability, composability and tokenisation to support faster, safer and
cheaper payments and settlement, both within and across borders. In this way, the
future monetary system will be adaptable, allowing private sector innovation to
flourish while avoiding the drawbacks of crypto. Such initiatives could open up a
new chapter in the global monetary system.
This chapter is organised as follows. To set the stage, it first describes today’s
monetary system and the high-level objectives it needs to achieve, and to what
extent changes in technology and the economic environment have opened up
room for improvement. The next section discusses the promise and pitfalls of
crypto and DeFi innovations. The chapter then discusses a vision for the future
monetary system, built on central bank public goods. The final section concludes.
