Cryptocurrencies are not the new monetary system that we need

money has already developed from coins to banknotes, entries in balance sheets and bits on computers. With it, the institutions have developed that provide, operate, guarantee and regulate money. So how should it develop in the digital age? The invention of the cryptocurrencies and above all the central banks - the state organs in the administration of public good money - has forced themselves to ask this question. If crypto is not the answer, what then?

The bank for international payment compensation - the club of central banks - has significantly participated in answering this question. The latest result is part of his annual report, which analyzes the resulting ecosystem of cryptocurrencies, stable coins and stock exchanges.

This brave new system is - according to the end - incorrect. The crypto crash (and the previous bladder) shows that cryptocurrencies are more speculative objects than value preservatives. This also makes them unusable as accounting units. As the BIZ determines: "The spread of stablecoins that try to couple their value to the US dollar or other conventional currencies shows the ubiquitous necessity in the crypto sector to use the credibility of the unit of invoice issued by the central bank. In this sense, stage coin are the manifestation of the search for crypto for a nominal anchor."

But their mistakes are lower. There are now around 10,000 cryptocurrencies. It could also be 1 billion. But this tendency towards fragmentation, "many incompatible settlement layers are pushing around a place in the spotlight," argues the biz, the economic logic of the system is inherent, not just its technological ability to multiply unlimited.

In a good money system: the larger the number of users, the lower the transaction costs and the greater the benefit. But the more people use cryptocurrency, the greater the overload and the more expensive the transactions. This is due to the fact that selfish validators are responsible for the recording of transactions on the blockchain. The latter must be motivated by monetary rewards that are high enough to maintain the system of decentralized consensus. The way to reward validators is to limit the capacity of the blockchain and keep the fees high: "Instead of the well -known monetary narrative of 'the more, the better' the quality of 'The more, the more sadter'."

You can't have all three security, decentralization and scalability. In practice, cryptocurrencies sacrifice the last. The cryptosystem bypasses this handicap with "bridges" over blockchain. But these are susceptible to hacks. The conclusion of the biz then reads: “Basically, crypto and stable coins lead to a fragmented and fragile monetary system. It is important that these defects are due to the underlying economy of the incentives, not to technological restrictions. And, no less important, these defects would remain even if regulation and supervision would remain the problems of financial instability and the risk are connected. " A fragmented monetary system is not what we need.

What should be done then? Part of the answer is to insist that Krypto fulfills the standards that are expected from every essential part of the financial system. Among other things, exchanges must "know their customers". Here, too, the assets and liabilities of so -called “stable coins” should be transparent. Connections between banks and crypto players must be particularly transparent.

But we can do it better, argues the biz. What we need from a good monetary system are security, stability, accountability, efficiency, inclusion, privacy, integrity, adaptability and openness. Today's system is inadequate, especially with cross -border payments. The biz provides for a system in its place in which the central banks would continue to state payment validity in their balance sheets. But new branches could grow on the Central Bank trunk. Digital central bank currencies (CBDCs) in particular could enable revolutionary restructuring of the monetary systems.

This could offer CBDCs for major customers a much broader spectrum of intermediaries as domestic commercial banks new functions for payment and processing. A key element, the BIZ suggests, would be the possibility of performing "smart contracts". Such changes would enable new, essentially decentralized payment systems. In the meantime, CBDCs for retail could complement the development of the new fast payment systems that question the rents of the established operators. The biz refers to the success of the new Brazilian Pix system. However, the full benefit would only be achieved if CBDCs revolutionized cross -border payment transactions.

Retail CBDCs would also enable extensive separation of payments and risk transfer. Thus, the money, the company and households for transaction purposes could become the liability of the central banks. Payments would then be managed by companies that concentrate on this function and would take their profits from transactions rather than loans. We then no longer need the state explicit and implicit insurance of private banks. Instead of managing payment transactions, the latter would concentrate on lending. Your liabilities could also become less liquid and obvious riskyer than they are now. That would indeed be revolutionary.

But there are also more modest options. The basic point is that the crypto universe does not offer a desirable alternative monetary system. But technology can and should do this. Central banks have to play a central role in enabling a system that better protects and serves them than today's.

It is time to curtail the crypto thicket. But new branches also have to grow on the tree of money and payment transactions.

martin.wolf@ft.com

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