The Bank of International Settlements (BIS) has cautioned central banks across the globe against issuing central bank digital currency. In a new report, the BIS, a global body comprising of a handful of central banks, warned about associated risks to the world economy due to Central Bank Cryptocurrencies (CBCCs).

The report, published by the Basel-based institution, is titled ‘Central Bank Cryptocurrencies’. It was written by Morten Bech and Rodney Garratt, who studied two types of CBCCs, namely, retail and wholesale. The report is based on four key properties, which are, the issuer of the currency, form of currency, accessibility of currency and finally, the transfer mechanism. The study defines CBCCs as an electronic form of central bank money that can be transferred using peer to peer transfer.

Cryptocurrencies traditionally work on top of a blockchain, which acts as a shared digital ledger of all transactions on the network. Since central banks issue fiat currency, they are traditionally known as ‘centralised’ currencies. On the other hand, there is no governing body or organization responsible for issuing new cryptocurrencies. In a CBCC, all tokens will have to be released by the central bank and not mined by miners or another collective.

Eagle-eyed governments have likely spotted the rise of bitcoin and other cryptocurrencies. While central banks have always maintained their distance from such decentralized assets, most of them are keen believers in the blockchain technology underlining them. It is clear then that such countries are looking to reconcile the notion of blockchains with state-backed currency.

For instance, the idea of ‘fedcoin’ has been thrown around. At its core, it is a federal reserve-backed cryptocurrency at par with the dollar and convertible both ways. The supply of this cryptocurrency would be dependent on market demand.

It was also rumored that Sweden could become the first country in history to have its national digital cryptocurrency, as Riksbank looks to launch Ekrona in less than two years. Speaking to CNBC, Riksbank deputy governor Cecilia Skingsley says:

“We see a rapid decrease in the value of circulation of notes and coins, and as a central bank we are sort of neutral about this. We think that people should be able to use the payment methods that they find safe and efficient, as long as they are safe and efficient.”

The idea of having central bank cryptocurrencies was also discussed amongst the heads of various central and reserve banks at the World Economic Forum held in Davos in January 2018. William Dudley, president of the Federal Reserve Bank of New York, said in November 2017 that the Fed Reserve was exploring the possibility of having a digital cryptocurrency.

The anonymity of identity is an essential feature of transactions that occur on the blockchain. However, there are fears that this may have to be compromised in the case of a CBCC as central banks may want to verify the identity of transacting parties to prevent or spot any economic involvement in illicit activities.

The BIS report also highlights key points such as cybersecurity of the CBCC and underlying reasons behind why central banks are now contemplating to launch their own digital tokens. Central banks issuing cryptocurrencies would boost online payments to mainstream massively since it could counteract issues of fraud and payment processing.  However, it may have to come at a hefty and infeasible cost to implement. The chair of the BIS markets committee, Jacqueline Loh, says, “There are risks we do not fully understand at this point.” ,

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