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Why central banks need to keep an eye on digital currencies

The Committee on Payments and Market Infrastructures (CPMI) has published a report on digital currencies, outlining the impact new payment systems will have on financial and economic policy.

The report, available on the BIS website, looks at how digital currencies can affect various aspects of financial markets and the wider economy. In particular, the report focuses on digital currencies with an embedded decentralised payment mechanism based on the use of a distributed ledger (such as Bitcoin).

Three key aspects relating to the development of digital currencies are identified:

  1. assets (such as bitcoins);
  2. the way in which these digital currencies are transferred, typically via a built-in distributed ledger, which can be viewed as the genuinely innovative element within digital currency schemes; and
  3. the variety of third-party institutions, almost exclusively non-banks, which have been active in developing and operating digital currency and distributed ledger mechanisms.

The report also identifies some of the advantages of digital currencies, such as:

  • their global reach and
  • the lower costs to end users offered by distributed ledgers.

These advantages could potentially bridge gaps in traditional payment services. However, security and trust are issues associated with each of the three key aspects of digital currencies (assets, distributed ledger and third-party intermediaries).

The report considers the possible implications of interest to central banks arising from these innovations. 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.”

It also covers factors influencing the growth of digital currencies (supply, demand and regulation), the implications for central banks including the implications for financial stability and monetary policy as well as for financial markets infrastructure. Perhaps most intriguingly of all, it looks at the potential issuance of digital currency by central banks.

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