Bank for International Settlements or BIS is an international financial institution. It has the stated objective of promoting global monetary and financial stability through international cooperation. The organization has expressed apprehensions about stablecoins and CBDC in a recent report.
Stablecoins: Stablecoins are cryptocurrencies that try to minimize price volatility by pegging it to fiat money, commodity or cryptocurrency. A large proportion of stablecoins existing today are using USD as its benchmark asset. The first stablecoin called Tether was created in 2014. Stablecoin demand is rising rapidly. Stablecoins offer all the benefits of cryptocurrencies while minimizing risks due to price fluctuations.
CBDC: Central Bank Digital Currency or CBDC is an electronic token of a country’s official currency. It is issued and regulated by the central bank of a country. It is expected that CBDC simplifies the implementation of monetary and fiscal policies of a country and it may also lead to greater financial inclusion. CBDC may erode privacy of citizens. There are many countries including China that are exploring the possibility of launching CBDC.
Observations by BIS: In a paper published by BIS, it has stated that the core objectives of financial inclusion and cross-border remittances may not be achieved through stablecoins. The report has expressed doubts that stablecoins may not offer lasting competitive advantage over various digital payment services such as digital ID, e-money or mobile banking. Stablecoins may also create new risks of governance, efficiency in payment processes or consumer rights.
Regarding CBDC, BIS report suggests that in times of systematic stress people may divert to CBDC from bank deposits or other instruments leading to serious operational issues.