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Central banks are jostling with private-sector operators of stablecoins to dominate digital money and protect consumers, the global body for policymakers has said.
Private digital assets could coexist with potential digital currencies operated by central banks, the Bank for International Settlements said in a report on Thursday. Central bank versions would rely on banks and other financial institutions to act as intermediaries to create credit and help safeguard financial stability, it added.
The paper reflects growing anxiety among policymakers that the rapid growth of cryptocurrencies and private sector initiatives around payments could lead to central banks losing control of their money.
The study is the second report from the BIS on central bank-backed digital currencies, which are in part an effort from national authorities to combat the threat to their role. The report is an update on the foundational principles of central bank digital currencies set out by a group of seven central banks in October last year. The latest findings come from the same group, which includes the central banks of the US, EU, UK and Japan.
“The central banks contributing to this report have already identified that a CBDC could be an important instrument for ensuring that they can continue delivering their public policy objectives even as the financial system evolves,” the study said.
Stablecoins are crypto tokens native to blockchain technology that typically claim to be backed one-for-one by traditional assets such as dollar debt. They offer a relatively easy way for cryptocurrency traders to hop in and out of coins such as bitcoin and ethereum, and are often touted as a potential crypto-based alternative to traditional currencies such as the dollar as a means of payment.
Fast-growing stablecoins — the biggest of which are Tether and USD Coin — are worth nearly $130bn, according to CoinGecko, a specialist website. In a global context, that is a small part of the financial system.
Nevertheless, rating agency Fitch warned in July that stablecoin operators could trigger contagion in credit markets if they were forced for any reason to unwind their reserves. International regulators are expected to release minimum standards for private stablecoins in the coming weeks.
The BIS report found that significant stablecoin adoption could lead to fragmentation and “excessive market power”.
The paper acknowledged that there were also risks associated with central bank-backed alternatives, but said that private initiatives would have “lower public benefits” because they would not be interchangeable with other forms of money and because they lacked the protections that came with national currencies.
“Central banks have a responsibility to ensure that citizens have access to the safest form of money — central bank money — in the digital age,” said ECB president Christine Lagarde, chair of the group of central bank governors responsible for the reports.
Global central banks’ efforts to create digital currencies are uneven. While China, Sweden and the Bahamas are at an advanced stage, major policymakers in Europe and the US have committed only to exploring the possibility of launching their own. The latest study from the BIS draws together the principles and design ideas that the seven central banks consider to be desirable.
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The study suggests policymakers are hoping their version of digital money will trump private offerings because of their reach and ability to fit into existing systems and financial infrastructures.
The latest recommendations advocate that central bank digital currencies rely on commercial banks to create credit for consumers. Any credit created by a central bank would be recycled into the payments system, the report suggested.
Separately Isda, the trade body for the derivatives industry, said on Thursday it was setting up a working group to develop legal documentation for trading derivatives of digital assets. The body’s master agreements underpin trillions of dollars worth of derivatives contracts around the world.