The report builds on the Sound Practices: implications of fintech developments for banks and bank supervisors published in 2018, and takes stock of recent developments in the digitalisation of finance.

The report reviews the use of key innovative technologies across various aspects of the banking value chain, including application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing. It also considers the role of new technologically enabled suppliers (eg big techs, fintechs and third-party service providers) and business models.

The paper calls for regulatory action to address gaps in the reporting of crypto-trading data and to establish a more level playing field with regard to the regulatory treatment of traditional financial institutions and the cryptocurrency ecosystem. 

The paper also calls for cryptocurrencies and crypto exchanges to be subject to the same types of regulation and oversight as economically equivalent asset classes and institutions, including with regards to financial stability, consumer protection, and AML/CFT standards. Finally, the paper calls for a systematic collection and publication of cryptocurrency data in order to help authorities oversee and regulate cryptocurrencies. 

Global stablecoins may amplify those challenges and could also pose challenges to competition policy, financial stability, monetary policy and, in the extreme, the international monetary system.

The report lays out initial recommendations for both private sector stablecoin developers and public sector authorities to address the challenges and risks. Finally, the report suggests that authorities could develop road maps for improving the efficiency and lowering the cost of payments and financial services. 

The G7 working group on stablecoins is chaired by Benoît Cœuré (Chair of the BIS Committee on Payments and Market Infrastructures) and was set up to examine the challenges, risks and benefits that global stablecoins may pose.

Speaking at Economics of Payments IX conference in Basel, Benoît Cœuré, who is also of a member executive board of the European Central Bank, started by reminding the audience that the creator of bitcoin had embedded its genesis block with a headline from The Times from January 2009 about the bailout of UK banks, adding that "in more ways than one, bitcoin is the evil spawn of the financial crisis".

Cœuré was giving an overview of some of the current policy issues faced by the CPMI, focusing on what the CPMI calls the three Cs, one of which is crypto (the others being central counterparties and cyber resilience).

He said that blockchain presents many opportunities, but that the problems of bitcoin are "plentiful", even though it was also an "extremely clever idea".

Irrespective of the issues around bitcoin, most central banks are conducting work related to central bank digital currencies (CBDCs), as the demand for cash declines in some countries, such as in Sweden, which is considering introducing an e-krona. Cœuré said that a recent CPMI survey of some 80 central banks found that 69% are either conducting or will soon conduct work related to CBDCs.

The remaining central banks are either small, face more pressing challenges or rely on work by regional research programmes or international organisations, such as the BIS or the International Monetary Fund.

In addition, 57% of the banks already conducting work on CBDCs are looking at two broad potential applications: a wholesale payment application for high-value and high-priority transactions, such as interbank transfers, or a more consumer-facing general purpose CBDC for retail transactions.

"Recent successful experiences also show a potential for cross-border remittances-related payment services, which confirms the potential for new technologies to support financial inclusion," he added.

All this being said, most central banks are still "at an early stage" of studying digital currencies.

"There is broad agreement that a CBDC, in whatever form, is unlikely to be issued within the next decade, even among those four central banks that have indicated that they have reached the stage of developing a pilot project," Cœuré said.

A joint report by the Committee on Payments and Market Infrastructure and the Markets Committee of the Basel-based organisation stated that CBDCs - commonly referred to as cryptocurrencies - are worth considering as the underlying technology might hold promise for wholesale payments, clearing and settlements.

In an accompanying op-ed published in the Financial Times, Benoît Cœuré and Jacqueline Loh, Chairs of the two committees behind the report, also said that "a consumer-oriented CBDC could have far-reaching ramifications for the role of money, the financial system and the economy".

The BIS report analysed two main CBDC variants, a wholesale currency limited to select financial institutions and a general purpose one that would be widely accessible to the public, as well as the implications of both types on payments, monetary policy implementation and financial stability.

On wholesale CBDCs, the report states that, in combination with blockchain, wholesale CBDCs "may enhance settlement efficiency for transactions involving securities and derivatives".

CBDCs could also bring benefits and be a "safe, central bank instrument" in jurisdictions where paper money is on the decline, such as in some of the Nordic countries.

However, the report tempered this by saying that banks considering this course of action should first establish whether this could be achieved by other means, as "currently proposed implementations for wholesale payments… look broadly similar to, and [are] not clearly superior to, existing infrastructures".

On general CBDCs, the report said that one potential risk is that "in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations".

Such a turn of events could result in "a greater role for central banks in allocating economic resources, which could entail overall economic losses should such entities be less efficient than the private sector in allocating resources".

This, in turn, could move central banks into uncharted territory and could also lead to greater political interference. In spite of some of the more positive notes, both the report and the op-ed called for further research and urged caution.

"Central banks should continue to monitor developments in digital innovations, as well as analyse the possible implications of central bank digital currencies for areas that are core to the central banking mandate," Loh said.

The op-ed even said that "the jury is still out" as to whether CBDCs for consumers and businesses are even necessary or desirable.

The report was released ahead of the meeting of the G20 central bank governors and finance ministers in Argentina later in March.

Mark Carney, Chair of the BIS Global Economy Meeting and Chair of the Financial Stability Board, said the report will contribute to the G20 discussions.

"Technological developments have raised questions about the feasibility and desirability of combining distributed ledger technology with the trust inherent in fiat currencies to create a central bank digital currency available to all. As set out in this report, the policy issues that this would raise, for central banks and society more generally, need careful consideration. A more immediate priority is how to use these new technologies to meet the current demand for fully reliable, real-time payments," Carney said.