Notes 6/27: BIS Future Monetary System, Bitcoin Price

What is the future of the monetary system?

It might be more of the present. For the time being, at least.

A blueprint for the monetary system’s future sketched out by the Bank of International Settlements (BIS) released last week places central and commercial banks at the center of an ecosystem dominated by tokenized deposits. Central Bank Digital Currencies (CBDCs) issued by governments will be the means of settlement for transactions.

The consortium had a released a similar report last year. While the latest version offers a bit more detail, it is not very different from the previous year’s assessment.

The Unified Ledger System

A unified ledger comprising of central and commercial banks and spanning multiple geographies is at the heart of this system. The primary means of payment in this system will be tokenized deposits of CBDCs. As is the case currently, these deposits will be liabilities of commercial banks.

The conceptual underpinnings of the unified ledger are similar to that of Ethereum’s ‘world computer‘ and bitcoin’s blockchain.

Except those systems are built from scratch while the BIS’s proposed unified ledger has to contend with legacy infrastructure that, sometimes, resides in silos and does not talk to each other.

According to Hyun-Song Shin, research director at BIS, the unified ledger will incorporate multiple ledgers, public and private, that are based on the “needs of each jurisdiction.”

A system of Application Programming Interfaces (APIs) will act as a connection between the disparate ledgers. Think the national payment network of one country, such as India’s Unified Payments Interface (UPI), connecting with that of another one.

The Atomic Settlement Problem

There are many regulatory and technological hurdles to implementing such a system. The immediate one relates to atomic settlement. Atomic settlement refers to the simultaneous swap of two tokens and is necessary to ensure instant settlement and finality. problem with this solution, however.

It is difficult to achieve atomic settlement using API systems. “A fundamental rethinking of financial infrastructure is required,” said Shin at a media briefing after the release. He did not discuss or quantify the extent to which central banks around the world have progressed in this rethinking.

Another missing component from the solution is Wholesale CBDCs. Unlike retail CBDCs that are used for daily transactions, wholesale CBDCs are bulk forms of digitized money that are used for trade and between banks for their balance sheets. Again, it is not clear how many banks have committed to such CBDCs.

The Central Bank Primacy

It is still very early days the BIS’s vision of the future monetary system.

Since it replicates the existing structure to a large degree, there is not much that is exciting about it. Tokenized deposits that convert real world assets to tokens can accelerate the move to that future. But existing examples of such tokenization are rare and unconvincing. The report also does not answers related to privacy or the role of stablecoins in the future.

One thing that has become amply clear from the two reports issued in the last one year, however, is the primacy of central banks in that future. The current system of distributing money into an economy relies on a network of commercial banks and, increasingly, institutional firms likes hedge funds.

These dependencies distribute claims between various actors involved in the process. While it simplifies the settlement and claims process to a single entity, the unified ledger also makes central banks the arbiters for finality of a wholesale settlement. This is not a new development. However, technological advances like instant settlement further amplifies their role in the management of economies, a task that they have not excelled at in the past.

Bitcoin Price

As of this writing, bitcoin price is trading at $30,725, roughly unchanged from its price range a day earlier. It made a foray into the $31,000 territory before shedding those gains.

Things are still out of whack at Binance.US, though. The exchange, which has just 1.5% of the total trading volume in the US, has a moving sale on at its venue. As part of that sale, it is offering discounts on bitcoin, Tether, and USDC.

Bitcoin is priced at $29,325. Tether’s peg is at $0.9538 and Circle’s USDC is changing hands for $0.9532. Notably, the last two mentioned stablecoins are being exchanged for dollars, meaning investors are exiting crypto ecosystem instead of staying put.

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