Bitcoin is speculation, not money, and facilitates financial crime, peak central bank warns

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Bitcoin is not money — it is a speculative asset that can be used by organised crime to launder money and launch ransomware attacks, the world’s top organisation of central banks says.

It has urged central banks, such as the Reserve Bank of Australia (RBA), to develop their own digital currencies to satisfy the wants of citizens who are being drawn to cryptocurrencies.

The Bank for International Settlements (BIS) has released a scathing assessment of cryptocurrencies, saying their growing popularity is posing a problem for the world’s financial system.

Report into digital currencies

In a new report on digital currencies, the BIS encouraged the growth of “central bank digital currencies” (CBDCs), saying they offered in digital form the advantages of central bank money — integrity, liquidity, and settlement finality  — while maintaining the public’s trust in the monetary system.

But it warned the landscape was changing quickly, with growing interest in alternative forms of currency.

“By now, it is clear that cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes,” it said.

“Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.”

Stablecoins and big tech

The BIS said other developments were contributing to the changing monetary landscape.

It singled out “stablecoins” and the entry of large technology firms (big techs) into payment services and financial services.

It warned stablecoins — which are supposedly pegged to a national currency, such as the US dollar, to reduce volatility — come with their own problems.

“Stablecoins attempt to import credibility by being backed by real currencies. As such, these are only as good as the governance behind the promise of the backing,” the report said.

“They also have the potential to fragment the liquidity of the monetary system and detract from the role of money as a coordination device.

“In any case, to the extent that the purported backing involves conventional money, stablecoins are ultimately only an appendage to the conventional monetary system and not a game changer.”

It warned the entry of big techs into financial services could pose a huge problem.

It said the amount of data big tech companies had on their customers could be used to further entrench their power as they made inroads into financial services, using data from their existing businesses in e-commerce, messaging, social media or search, to give them a competitive edge.

“The availability of massive amounts of user data gives rise to another important issue — that of data governance,” the report said.

“Beyond the economic consequences, ensuring privacy against unjustified intrusion by both commercial and government actors has the attributes of a basic right.

“For these reasons, the issue of data governance has emerged as a key public policy concern.

“When US consumers were asked in a representative survey whom they trust with safeguarding their personal data, the respondents reported that they trust big techs the least,” it said.

RBA already experimenting

In November, the RBA announced it was partnering with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software (a blockchain technology company) to explore the potential use of a wholesale form of central bank digital currency (CBDC).

It wanted to test how a CBDC could be used by wholesale market participants (i.e. other banks) for the funding, settlement, and repayment of loans between the RBA and each other.

It is expected to release a report on its pilot project within weeks.

However, the BIS said while wholesale CBDCs were worthwhile innovations, if central banks offered digital currencies for retail customers it would be a “more far-reaching innovation”.

It said retail CBDCs modified the conventional two-tier monetary system by making central bank digital money available to the general public, just as cash was available to the general public as a direct claim on the central bank.

“Retail CBDCs come in two variants,” the BIS report said.

“One option makes for a cashlike design, allowing for so-called token-based access and anonymity in payments. This option would give individual users access to the CBDC based on a passwordlike digital signature using private-public key cryptography, without requiring personal identification.

“The other approach is built on verifying users’ identity (“account-based access”) and would be rooted in a digital identity scheme.

“This second approach is more compatible with the monitoring of illicit activity in a payment system, and would not rule out preserving privacy: personal transaction data could be shielded from commercial parties and even from public authorities by appropriately designing the payment authentication process.”

History of the BIS

The Bank for International Settlements was established in 1930 by an intergovernmental agreement between countries including the United States, UK, Switzerland, France, and Germany.

Its original purpose was to facilitate the World War I reparations imposed on Germany by the Treaty of Versailles, but it morphed into a meeting forum for central banks around the world.

Today, it is commonly known as the central banks’ central bank, because it provides banking services to central banks around the world.

By business reporter Gareth Hutchens (Original ABC Article)