BIS says crypto is a "flawed system," but tokenization can underpin future financial system

According to the BIS, encryption inherently lacks the trust that money needs, which only central banks can provide.

Cryptocurrencies and DeFi underscore the "promise of tokenization," but ultimately, cryptocurrencies are a "flawed system" that cannot be the "future of money," the Bank for International Settlements (BIS) said.

Global regulators issued a statement in their 2023 annual economic report released on June 20, saying that the global financial system is on the verge of the next "big leap", similar to humanity's transition from gold to paper money.

Cryptocurrency is dead, long live CBDC

According to the BIS, encryption inherently lacks the trust that money needs, which only central banks can provide.

“Cryptocurrencies are not only self-referential, have little connection to the real world, but also lack the anchor of trust in money that central banks provide,” watchdog said.

The watchdog added that stablecoins essentially "mimic central bank money" in an attempt to fill a "vacuum" of industry trust, but they "are not a substitute for the real thing."

The report said that the industry's high-profile scandals that triggered the recent "encrypted world implosion" proved that it cannot become the foundation of the global economic system and that a central bank digital currency (CBDC) is urgently needed.

The regulator said that a financial system built on tokenization would require wholesale and retail CBDCs. A wholesale CBDC would essentially play the same role as a reserve fund in the current financial system, while a retail CBDC would act as a version of digital cash that could be used for everyday transactions.

Tokenization is the future

The BIS said that because of the benefits of tokenization, it could play a key role in building the financial system of the future, as it could eliminate many of the problems that exist in the current financial system, such as transactions being individually reconciled before final settlement.

Tokenization efforts in the private sector have not gone well, as these projects often create “islands” that isolate them from the rest of the financial system. This suggests that the private sector cannot create the infrastructure of the future financial system, the report said.

The Bank for International Settlements stated:

“The collapse of cryptocurrencies and the faltering of other tokenization projects highlight an important lesson. The success of tokenization depends on the foundation of trust that central bank money provides and its ability to hold together key elements of the financial system.”

The regulator urged the public and private sectors to come together and cooperate wholeheartedly to build the financial system of the future.