– By: Mr. Rajagopal Menon, Vice President, WazirX
The Bank of International Settlements defines itself as a developer of public technological solutions to support central banks and improve the functioning of the financial system. It has played a prominent role in shaping the worldview of Crypto, often aiding in policy decisions of global financial watchdogs, identifying loopholes in adoption of digital assets, and subsequently presenting a more positive stance in recent times.
The BIS’s CBDC philia
In BIS’s view, private financial players are moving the needle on the sentiment towards digital assets for transactions. Furthermore, their ability to act at short notice with only domestic legislations to abide by, is putting them at an advantage over central banks across the world. However, they feel that they have a foot in the door in terms of CBDCs being a digital iteration of existing currencies that is a legal tender. It is not backed by assets as in the case of private Crypto tokens or stablecoins. In the opinion of BIS, this could be a game changer for the global payments system as they incorporate payments on distributed ledger for settlements in wholesale as well as retail transactions.
BIS has always been a proponent of settling payments using digital assets backed by the Central banks. In 2021, project Jura, launched by BIS, tested the transfer of digital currencies (euros and Swiss francs) between French and Swiss banks on a secure platform. The platform was created to settle trades involving tokenized assets and foreign exchange in a safe and efficient manner. The project was aligned with global efforts to improve cross-border payments and handling international financial transactions, such as those involving foreign exchange, securities, and more. The project concluded with the report that Jura could provide commercial banks access to CBDCs and also improve their efficiency in recording settlement transactions in a secure way. In addition to this, Project Dumbarton was designed to facilitate cross-border transactions between financial institutions in a swift and low cost manner, and could also enable international settlements using digital currencies issued by multiple central banks. Project mBridge was another successful attempt at creating a sandbox for central banks to serve as a specialized platform for implementation of multi-currency cross-border payments in CBDCs..
The scale and potential of project Atlas
Project Atlas’s announcement doesn’t seem quite like another of BIS’s collaborative projects between a few central banks to see how technological prowess can enhance the payment systems’ potential. This is a far more ambitious move which doesn’t simply want to tap into cross border payments but also ensure a fair information access for Bitcoin transactions worldwide, and assets, more commonly USDs being converted to BTC in circulation. A product of recent inconsistencies in the crypto ecosystem with respect to project collapses, illicit transactions and several rug pulls due to unverified or insufficient research, this could be a starting point of data consolidation for all stakeholders in the ecosystem.
How does it work?
According to the official website of the BIS, project Atlas combines on- and off-chain information, creating a layered approach to data vetting and tailored statistics for central banks. The first proof of concept of Atlas successfully showcases how to collect, clean and analyse data relevant to central banks’ mandates. This also extends to any data discrepancy or misinformation. Not just that, apparently, at any point, the implications of the Crypto ecosystem border on the verge of spilling on the mainstream financial system or show signs of affecting any macroeconomic aspects, the radar goes off and all regulators in the TradFi system have an idea.
What could be the outcome?
In recent years, the crypto asset market and its related products and services have experienced rapid growth. Additionally, these assets have become increasingly interconnected with the traditional financial system. This poses a challenge for policymakers who are tasked with monitoring the risks associated with this dynamic sector, particularly because many activities within it remain unregulated. There is a growing concern that these risks could soon reach a systemic level in certain countries, potentially leading to financial instability. The absence of coordinated regulatory measures may inadvertently facilitate disruptive movements of capital, which can have destabilizing effects.
The steps taken by the BIS (Bank for International Settlements) in collaboration with its partners, De Nederlandsche Bank, and the Deutsche Bundesbank, to create Project Atlas seem quite promising for a transparent data monitoring system in digital asset generation, management and transactions.
Regulations and country specific policies could become more nuanced based on real time data from this platform. This will lead to better engagement between public and private stakeholders due to enhanced information sharing and better understanding of any implications for the existing monetary system. Going by the information provided by the BIS, stakeholders can look forward to state of the art on chain and off chain data which could improve market integrity and accountability of all players. This in turn can greatly benefit Central Banks. Project Atlas could enable more customized policy responses based on tailored statistics. Central banks may be better equipped to address specific challenges and opportunities posed by crypto assets and DeFi if any, in their respective jurisdictions.
There is also an urgent demand for efficient cross-border transactions and more streamlined global value networks. Policymakers are actively seeking ways to enhance efficiency while maintaining security and stability. As a result, the focus is on digitalization and cutting-edge technologies, which are recognized as key catalysts for creating opportunities for a global information system that benefits one and all. Collaboration between central banks within the Eurosystem and international financial institutions like the BIS signifies a coordinated effort to address the global implications of crypto assets. This may lead to increased international cooperation in regulating and monitoring these markets, which has been the greatest takeaway from this year’s G20 summit, headed by India.
As central banks gain more insights into the trillion dollar crypto asset markets, they will also be better prepared to respond to market volatility and potential disruptions, which could boost financial stability and investor sentiment. In fact, monitoring the platform on a real time basis can provide insights into what can go into the betterment of the technology which could prevent impending risks, and also make transactions in the digital asset space smoother. Any new technological integration can be supervised and scourged for drawbacks or success, thus having the potential to be deployed at a larger scale.
The creation of Project Atlas and its focus on crypto asset markets and DeFi bolsters the growing recognition of the importance of blockchain based digital assets in the broader financial landscape. The implications of this initiative are likely to extend to regulatory and policy responses, risk assessment, and international cooperation in the evolving world of crypto assets and DeFi, finally culminating into an effective instrument for global Crypto adoption and facilitation.
