In its inaugural report on central bank digital currencies, the BIS's Committee on Payments and Market Infrastructures (CPMI) and Markets Committee analyse the potential impact of CBDCs on various sectors of the financial system.
Digital currencies issued by central banks could improve the transmission of monetary policy, according to a report published by the Bank for International Settlements.
The report warns that a cryptocurrency backed by ultra-safe central banks would be too tempting for investors if other assets were losing value in a financial crash.
At the same time, it warned that digital coins might destabilise traditional lenders if offered widely to the general public.
"But more work and experimentation would be needed to explore these benefits", he added.
More than 1,200 years after the first paper banknotes appeared in China, the use of physical cash is in demise in various countries as digital transactions surge.
A new joint European banking report has poured cold water on the effectiveness of so-called central bank digital currencies (CBDCs).
"Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank can not become insolvent".
Jacqueline Loh, chair of the markets committee at the BIS, said: "A general goal central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications for financial stability".
The report said that blockchain - the distributed ledger technology (DLT) that underpins cryptocurrencies - could make settling trades of securities and foreign exchange more efficient.
Governor Mark Carney of Bank of English stated that CBDC needs careful consideration, a new method to use the new technologies to fill the current demand for reliable, real-time payments.
A report written by Klaus Löber, who is a Senior Advisor at the European Central Bank (ECB) and Aerdt Houben, who is the Director of the Financial Stability Division at De Nederlandsche Bank (DNB), details the negative impact it could have on the economy.
The appeal of a such a currency would be more pronounced if it were interest-bearing.
The BIS urged central banks to continue their studies of digital innovations and also consider the implications of not issuing CBDCs.
In an opinion piece on Tuesday titled "Bitcoin is not the answer to a cashless society", ECB executive board member Benoît Coeuré and Bank of International Settlements Markets Committee chair Jacqueline Loh write that, while digital money may be the way of the future, existing public cryptocurrencies like bitcoin are not that future.
Central banks differ over the virtues of issuing their own virtual tokens.
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