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High finance is at home in New York, London or Singapore. But the real center of money is Basel, where all the wires meet. The Bank for International Settlements (BIS) is located in the high-rise building right next to the SBB train station. It is the bank of the central banks that was set up to secure the reparations payments of the Germans. It manages most of the foreign exchange reserves of central banks. And it acts as an exchange forum, research center, and think tank for questions about the monetary system and payment processing.
BIS researchers are not interested in gray theory. Researched and discussed in Basel is what most interests national central banks around the world. This is why the BIS is regularly the focus of bankers and bank critics.
A centralized meta-registration for decentralized applications
Now, a capital letter in the new BIS annual report makes you sit down and draw attention. In it, nothing less than the new financial market architecture is designed. We’re talking about the “unified ledger,” where digital central bank currencies, tokenized funds, and securities are brought to a programmable platform. Smart contracts, where payment terms are written directly into the code, can also be integrated.
A ledger is an electronic ledger or ledger. The term is often used in conjunction with distributed ledger technology, where any number of copies of the ledger are held by different parties in a decentralized manner and a central authority is no longer needed. Bitcoin is the best known application.
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This article was originally published on the paid service of handelszeitung.ch. Blick+ users have exclusive access as part of their subscription. You can find more exciting articles at www.handelszeitung.ch.
Tokenization describes the process of digitally mapping real assets or claims, for example on a blockchain. The BIS sees the tokenization of bank deposits as a central element of the new financial market architecture.
More efficient and programmable
BIS research chief Hyun Song Shin describes the idea of a unified ledger as a “game changer” for “the way we think about money and how transactions are conducted.”
According to Shin, such a platform not only makes the tried-and-tested system faster and cheaper, but also opens the door to entirely new kinds of “regulations” and operations. “By bringing together digital central bank money, digital bank money and various assets on a single platform, completely new possibilities are opening up,” the relevant section says.
For example, instant transactions without intermediaries, also known as “atomic swaps”, in which assets are exchanged simultaneously and on a conditional basis, will be possible. Such seamless transactions will also be possible across national and currency borders.
Central banks provide the necessary confidence
According to Shin, tokenized bank deposits can be programmed to require coordination with other depositors to withdraw larger amounts of money. This will alleviate the problem that, when there is uncertainty, all bank customers want to withdraw the money first, thus causing a bank run. Shin also sees great potential for programmed terms and automatisms in the field of supply chain finance.
The aim of BIS is to bring together all the new technologies related to the digitization of money and assets, as well as private and public initiatives in this field. Central banks and the BIS must guarantee confidence in the currency and its supposed uniqueness. This means that every franc, every dollar, always and everywhere has the same value.
With the unified ledger, central banks and the BIS control an increasingly decentralized and organized financial system. That is why the draft does not arouse much enthusiasm among the advocates of decentralized solutions.
A central database harbors dangers
But the idea of the Unified Ledger did not come as a surprise. “It has been seen for months that international institutions like the BIS would dare to take such a step,” says Fabian Schär, Professor of Blockchain and Fintech at the University of Basel. The Director of the Innovative Finance Center has been following developments for a long time and is also a regular speaker at central banks, regulators and international organisations.
“A wide variety of projects are underway in the central banking environment that try to use new approaches from the decentralized finance world in a centralized context,” explains Schär. This is not bad per se. The great danger, however, is that governance issues are greatly underestimated as we move from decentralization to centralisation. Who decides what to program in smart contracts? And how to decide which coins and coins will come to the platform?
Schär fears that with such a programmable unit notebook, too much power will be concentrated in one place. Even if BIS emphasizes that there will be open interfaces to other databases, the impact from control over the underlying infrastructure form of smart contracts to be mapped should not be underestimated.
Attractive target for cyber attacks
“Open interfaces are important,” says Schär. However, many of the advantages outlined in the document can only be technically realized when the various components are in the same database. Schär suspects that this could have huge network effects, resulting in the majority of related transactions being processed through this unified ledger. But centralization also incurs costs that are often externalized and difficult to measure but should not be underestimated.
For example, a highly centralized system is an attractive target for cyber attacks – this has also been confirmed by the BIS. Therefore, adequate investment in resilience and protection against cybercrime is crucial, according to Shin. He counters concerns about the lack of privacy, saying there are enough technical options to ensure the desired anonymity.
no science fiction
Regarding the timeline for the implementation of the draft, Shin said at the press conference: “This is not science fiction,” most of the components are already there, numerous experiments with digital central bank currencies and special projects with tokenized bank deposits are underway.
So BIS means business. Money should remain a matter of central banks. Facebook’s private currency Libra has been narrowly blocked. BIS is now attacking with its own draft.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
