Bank of International Settlements (BIS) researchers focusing on the payments’ future, reveals their latest quarterly report released on Sunday.
The paper has 138 pages and looks at what’s on the horizon in the financial sector, especially since tokenization, central bank digital currencies (CBDCs) and cross-border payments are starting to be more and more in trend.
Conclusions on Tokenization
According to BIS, the tokenization of securities on distributed ledgers can streamline the settlement cycle and become too efficient for some investors to bear with it, seeing traders are used with slow settlement cycles, liquidity management concerns and intermediaries. The report also says DLT and smart contracts are still to be proven when it comes to settlement and clearing, reading further that:
“The ability of tokenized systems to interoperate with account-based systems will be key to their success.”
What About CBDCs?
Another one of the big stories circulating in the world of banking is that of CBDCs, so BIS didn’t hesitate to address it too. It clarifies that there’s no use to develop digital money if it wouldn’t bring any advantages and while the existing payment systems work, saying retailers wouldn’t want to use a system that’s not in demand, whereas most consumers find cash or credit cards much more convenient.
Trying to answer the question of how decentralized a CBDC system would be, the research says decentralization indeed eliminates the risk of the entire system’s failure, but it brings about new vulnerabilities. Here’s what the report reads exactly:
“The key vulnerability of a conventional architecture is the failure of the top node, for example via a targeted hacking attack. The key vulnerability of DLT is the consensus mechanism, which may be put under pressure, for example, by a denial-of-service type of attack.”
Meanwhile, some banks have publicly stated they don’t see DLT as the salvation that’s rumored to be, whereas others are pushing forward with trials on DLT-based CBDCs.
BIS Report on Payments
Agustin Carstens, the General Manager at BIS, said the impact of a completely different and brand-new backend payment infrastructure needs to be considered. Central banks have been put into working mode by Facebook’s Libra, so it’s not yet clear if stablecoins are going to bring the financial doom foreseen by some or not. BIS deemed the matter as unanswered and enduring, saying there’s a need for an international response. It brought its Innovation Hub into discussion, saying it may provide the looked-for global response.
The Innovation Hub will collaborate with monetary policy makers and bankers at developing frameworks on digital innovations. According to BIS, it has spokes in Hong Kong, Switzerland and Singapore, not to mention a good position for developing policies across different networks.