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The BIS sets out its vision of an interconnected sovereign monetary system, in the event of a transition to which DeFi services will not be necessary.
As a result of the recent crashes of stablecoins, the blocking of customer assets and the general insolvency in the crypto space, the Bank for International Settlements (BIS) publishes 3 unique but inherently interrelated critical documents regarding the cryptocurrency market, DeFi (decentralized finance), CeFi (centralized finance) and Web3.
The BIS presents its arguments in favor of the fact that blockchain technology is better used exclusively as a utility for the global payment infrastructure of sovereign states or “GovFi”.
In its first paper, published on June 14, 2022: “DeFi Lending: Mediation Without Information,” the BIS makes a reasonable case that DeFi lending does not serve those who do not have or do not have enough banking services, which should have been the main reason to justify the wider adoption of DeFi products.
The BIS points out that a form of unsecured lending in DeFi is not available. Both assets and over-collateral are needed to serve a wide range of pseudo-anonymous borrowers, neither can be provided to those who do not have access to banking services.
The BIS says That DeFi remains an illusion, as only a know-your-customer (KYC) policy can provide a reliable credit score and provide unsecured lending, a key component of serving the underbanked.
As such, DeFi lending is still mostly used for institutional speculation with crypto assets and is therefore useless for lending to the real economy.
The BIS argues that tokenizing real assets is an opportunity for DeFi technology that can unlock blocked capital and should be used to secure loans.
Miners as intermediaries
In its second paper, published on June 16, 2022: “Miners as Intermediaries: Recoverable Value and Market Manipulation in Cryptocurrency and DeFi,” the BIS argues that economic incentives for miners under the Proof of Work (PoW) algorithm of decentralized consensus verification encourage manipulation of the cryptocurrency market; immoral, unethical and largely illegal behavior.
Miners are economically interested in prioritizing certain transactions based on the amount of reward each transaction adds to a block. This is known as a “miner extraction value” (MEV).
MEVs can lead to market manipulation strategies, as miners have a good understanding of how each of their priority transactions can change the markets before they are published in a block. Such manipulation strategies include “vanguard,” “backrunning,” “sandwich deals,” and more.
The BIS, like many others, highlights the clear and urgent need for regulation to harmonize cryptocurrency markets with securities and other regulated markets.
This timely document coincides with the SEC’s recent overhaul of “pay-per-order” — a method of obtaining a flow of orders by market makers who pay (reward) brokers for orders and the execution of securities transactions.
Monetary system of the future
In a recent article published on June 21, 2022, “III. The Monetary System of the Future,” the BIS uses its previous arguments to lay out its ultimate vision: the globalization of money through the interconnected network of different central bank digital currencies (CBDCs).
This is where the BIS states that the concept of a decentralized autonomous architecture for payments is essentially dead. The BIS argues that only elements of digital ledger technology (DLT) should be preserved – used as a utility for sovereign state payment infrastructure (CBDC).
The document goes on to say that the BIS rejects the idea that stablecoins represent any viable payment function. Using the collapse of TerraUSD as a backdrop, bis refutes the notion that even fiat-backed regulated stablecoins can support a payment network.
The BIS argues that stablecoins import confidence in funds issued by a central bank, but do not have any protection or regulatory restrictions provided by a central bank.
The BIS also argues that stablecoins in general are not currently used for payments, but are mainly used to facilitate cryptocurrency arbitrage, which actually binds liquidity and fragments the monetary system.
The BIS notes that some are wondering whether stablecoins should be banned.
The BIS then reiterates previous claims that DLT in its current state has structural limitations that make it highly fragmented, non-scalable, and vulnerable to mass hacking and fraud.
To better protect consumers from cryptocurrency fraud, eliminate regulatory arbitrage, reduce systemic risks, and strengthen financial stability as a result of the crypto economy, BIS offers a brighter visualization of the future monetary system.”
The BIS concludes that sovereign payment systems based on proven digital ledger technology that support CBDC (API network-based) will better provide greater control, stability, and security to money markets while facilitating the global interaction of money.
As part of the proposed CBDC payment infrastructure, transaction verification can be achieved based on the consensus of the participants in the transaction together with a third party (notary) who confirms the uniqueness of the transaction in order to prevent double spending. The BIS assumes that the natural candidate for the position of notary is the central bank.
The BIS emphasizes that the world has moved away from the small bunkers of monetary excellence that the BIS calls island economies, and that the world is ready for a globally interconnected payment solution called the multi-CBDC platform (mCBDC), which some believe has the makings of the beginning of the globalization of the single currency.
As part of the global mCBDC framework, simplified KYC due diligence (e.g., verified credentials) can identify consumers, protect privacy, and remove barriers to access to financial services that the DeFi community has apparently not figured out.
The BIS concludes that a global network of CBDCs is in the public interest, and they will encourage the community of central banks to encourage cooperation in this initiative.
Conclusion: From DeFi to GovFi
BIS offers an academically idealistic and functionally elegant solution to the problems of a global payment infrastructure that will be managed exclusively by sovereign states.
While the BIS offers lines of demarcation between wholesale CBDCs and retail payments, the BIS insists that central banks are at the center of the verification process.
The proposal for global payment systems CBDC implies much more than the transition to a more technological version of SWIFT. Sovereigns can probably also act as “notaries” to verify transactions under the consensus mechanism. This will raise the alarm.
While the BIS’s utopian view of the global interconnected mCBDC framework provides a clearer vision of the future monetary system, the BIS proposal also conjures up a dystopian scenario whereby sovereign states could easily use their power to monitor and control consumer payments. .
In the wrong mCBDC scenario, sovereign states could expand their notarization capabilities to more easily demonstrate control over consumer payments. Establishing citizens’ social scores, vice indices, and other scenarios can play a role in restricting or even denying consumers the free will to use currency for payments.
Unfortunately, the same blockchain technology developed by the DeFi community, which was supposed to reduce reliance on increasingly centralized government control over payments, could eventually become the same technology that further centralizes and globalizes the future of money.
Author: Elvir, Analyst Freedman Club Crypto News