BIS Advocates Centralized Tokenization as Superior Alternative to Flawed Crypto System

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Decentralized cryptocurrencies have been deemed a "flawed system" by the Bank for International Settlements (BIS), which expressed support for the development of a centralized alternative. The BIS, known as the central bank of central banks, has endorsed "tokenization" as a solution, referring to the conversion of money and other assets into digital tokens tradable on programmable platforms. According to the BIS, this approach holds the potential for a significant advancement in the financial system.

While central banks and regulators have generally maintained skepticism, if not outright hostility, towards cryptocurrencies and their decentralized structure facilitated by blockchain technology, they have recently begun exploring the potential benefits of the underlying technology. The BIS, in particular, has taken a leading role in this regard.

In its quarterly report, which was released in advance, the BIS wholeheartedly embraced the underlying technology but stressed that its success in the financial sphere hinges on the trust derived from being backed by institutions such as central banks. The BIS stated, "Crypto and decentralized finance (DeFi) have showcased the promise of tokenization, but crypto is an imperfect system that cannot assume the role of the future of money." Furthermore, the report highlighted that the cryptocurrency system lacks the trust anchor provided by central banks, and the volatility and scandals within the crypto world demonstrate the absence of a substitute for traditional currencies.

The recent collapse of the FTX exchange platform, resulting in substantial losses for investors, has further shaken confidence in the cryptocurrency space. In response to these incidents, regulators have strengthened their stance to safeguard consumers. US authorities, for instance, have taken action against major exchanges for allegedly evading securities laws. Consequently, a single registry of transactions, as advocated by the BIS, may not be the sole outcome, and instead, an interconnected network of variants could emerge.

The BIS report examines various central bank studies, including the Jura project, a collaborative effort between the Swiss National Bank and the Bank of France, which explores cross-border operations utilizing digitized versions of central bank-issued currencies. The BIS considers tokenization as the logical progression in digital record-keeping and asset transfer. According to the report, tokenization has the potential to significantly enhance the capabilities of the monetary and financial system by revolutionizing the interactions between intermediaries, eliminating the traditional separation of messaging, reconciliation, and settlement processes.

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