"The future monetary system" Bank of International Settlements (BIS)

Question 1

What is the summary of the paper?

Answer 1

● Innovations in money and payments are increasingly faster, providing potential for improving the monetary system to serve the interests of people

● Structural flaws in the crypto universe –> unsuitable as basis for a monetary system: lacks a stable nominal anchor, while limits to scalability result in fragmentation

● Crypto often relies on unregulated intermediaries that pose financial risks (by default should be decentralized tho)

● A system grounded in central bank money offers a sounder basis for innovation, ensuring that services are stable and interoperable, domestically and across borders

● New capabilities such as programmability, composability and tokenisation are not the preserve of crypto; Can instead be built on top of central bank digital currencies (CBDCs)

Question 2

What are the high-level goals of future monetary system?

Answer 2

Future monetary system goals are:
1. Safety & Stability (money needs to be store of value, unit of account, medium of exchange)
2. Accountability (key nodes accountable & transparent to users)
3. Efficiency (low-cost, fast payments, throughput)
4. Inclusion (universal & affordable access to basic services)
5. User control over data (ensure privacy)
6. Integrity (system avoids illicit activity)
7. Adaptability
8. Openness (system allows for seamless cross-border use)

Question 3

How is the standing with those goals now?

Answer 3

Today’s monetary system:
Very Safe and stable;
Else mid

Crypto universe:
Very Adaptable & Open;
Mid at Inclusiveness & User control over data;
Else terrible

Question 4

What is the key development in crypto universe?

Answer 4

The rise of decentralised finance, or “DeFi”.

Question 5

What is the goal of DeFi?

Answer 5

To refashion the monetary system (cuts down the intermediary to lower the costs, increases efficiency by faster transfers)

3 features of DeFi that could improve current financial system:

1. Programmability – Ability of smart contracts to automate certain actions. This can eliminate the middle man in different processes (e.g., lending, borrowing, paying taxes)
2. Composability - The capacity to combine different components in a system, which would allow to create complex multi-layered monetary system processes
3. Tokenization – Assets that are “tokenised” can be transferred and exchanged much quicker and with more efficiency, utilizing the blockchain system

In addition, the borderless nature of crypto allows for faster and safer cross-border transactions

Question 6

What are the issues of crypto?

Answer 6

● Security-decentralization-scalability trilemma, as it is impossible to scale as fast, maintaining the security and decentralization

● Fragmentation (new blockchains not too secure)
● Lack of nominal anchor (have to peg to a real-world currency)
● Tendency to centralization (decisions made through centralized governance tokens, most trading on exchanges (intermediary))
● Flaws would persist even if regulation fixed the financial instability problems and risk of loss implicit in crypto

Question 7

What is the role of the Central Bank?

Answer 7

ROLES:
1. CB provides the core of future monetary system (issue CB money M0)
2. Provides ultimate finality of payments by using its balance sheet
3. Supports the smooth functioning of payments by supplying liquidity
4. Safeguards the integrity of payments through regulation, supervision, oversight

Question 8

What are the components of the future monetary system?

Answer 8

Building on old:
● FMS builds on the division of roles between the central bank (provides money) and private sector entities (customer-facing activities)

New components:
● Application programming interfaces (APIs) to ensure
*Programmability
*Composability
*Tokenisation
● Can use permissioned distributed ledger technology to create central bank digital currencies (CBDCs)

The common theme is that decentralisation can be achieved without the structural flaws of crypto.

Question 9

What are CBDCs? What innovations do they make possible?

Answer 9

CBDC – Central Bank Digital Currencies

Innovations possible with CBDCs:
*Multi-CBDC arrangements
*Wider range of financial intermediaries:
–> Interoperability between customer-facing platforms provided by intermediaries;
–> Instant payments;
–> Inclusive design;
–> Verification through zero-knowledge proofs

Question 10

What is the metaphor for the future monetary system?

Answer 10

Central Bank as tree trunk supporting a diverse ecosystem.

Question 11

What are stablecoins?

Answer 11

Crypto coins that are pegged to a real-world currency, so that they have a stable value over time.