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Innovations in the payments domain can have important implications for the safety and efficiency of the financial system and thus are monitored by many central banks. In this regard, Benoît Cœuré, Chairman of the CPMI, said: "Digital currencies and distributed ledgers are innovations that could have an impact on many areas, not only on payment systems and services. Even if today's schemes do not endure in their present form, it is likely that other products, services and business models based on the same underlying technology will continue to emerge and develop. This might lead to changes in the way that FMIs and other market participants operate."
The emergence of digital currencies was noted in previous reports by the CPMI on Innovations in retail payments (2012) and Non-banks in retail payments (2014). There are two key features of digital currencies.
The first is the assets themselves (such as bitcoins). These assets can have some of the characteristics of a commodity and some of a currency. Currently, their monetary features (such as their use as a means of payment) are often more prominent, yet, these assets are not typically issued in or connected to a sovereign currency, are not a liability of any entity, are not backed by any authority and have no intrinsic value.
The second feature is the technology used. Particularly noteworthy is the use of distributed ledgers. Most financial transactions are made via a centralised infrastructure, where a trusted entity clears and settles transactions. Distributed ledgers are innovative because they allow transactions in the absence of trust between the parties and without the need for intermediaries.
The development of digital currencies using distributed ledger technology is an innovation with potentially broad applications. In the financial market infrastructures (FMIs) sector, wider use of distributed ledgers by new entrants or incumbents could have implications extending beyond payments, including their possible adoption by some FMIs and more broadly by other networks in the financial system.
Digital currencies, and especially those which have an embedded decentralised transfer mechanism based on the use of a distributed ledger, are an innovation that could have a range of impacts on various aspects of financial markets and the wider economy. These could include potential disruption to business models and systems, as well as facilitating new economic interactions and linkages.
Currently, such schemes are not widely used or accepted, and they face a series of challenges that could limit their future growth. However, some digital currency schemes have demonstrated that their underlying technology could feasibly be used for peer-to-peer transactions in the absence of a trusted third party. Such technology may have potential to improve some aspects of the efficiency of payment services and financial market infrastructures (FMIs) in general. In particular, these improvements might arise in circumstances where intermediation through a central party is not currently cost-effective.