What is the BIS?
The Bank for International Settlements (BIS) is effectively a bank for central banks. Their mission statement is
“promoting global monetary and financial stability through international cooperation.”
The BIS began operating in 1930 as a way to promote cooperation for WWI war reparations imposed on Germany. It is owned by 63 other central banks that make up over 95% of global GDP, and serves as an intermediary for those central banks. In a way, they provide services to the Federal Reserve and the European Central Bank like JP Morgan provides services to their clients.
They promote monetary policy discussion, analysis, research, facilitate transactions between central banks and are a for-profit institution. They charge fees for their services and they collect commissions for their services. They provide research and insight on innovation and find ways to earn the best return, risk adjusted, on investment opportunities.
Background of the BIS
The BIS operates out of Basel, Switzerland (The Tower of Basel) and because of the WWI war reparations it was originally created out of the Treaty of Versailles of 1919. The BIS was formed out of the treaty and war reparations. It was created by the governors of the Bank of England and Reichsbank, The German Central Bank 1876 – 1945. Amazingly they’re still protected by that international treaty. Giving them protection and power beyond national and international laws.
The way the BIS operates is very interesting. The BIS has complete legal immunity in Switzerland when it comes to their operations. Everything they do is extremely secretive. Every employee (650 total) who works there is protected by these “laws”. None of them fall under any sort of legal jurisdiction whatsoever. Every employee is protected and none of them can have any of their assets seized. They’re also free of having to pay any sort of taxes on any profits they make.
These officials are immune under these “laws” for life. Not even the Swiss have the authority to set foot on the premises of the BIS. Nobody aside from other central bankers and those with “clearance” can set foot in or around the BIS. All because of the Treaty of Versailles.
Currently the BIS is managed under Agustin Carstens, the General Manager. He is responsible for the Board of Directors and all operations at the BIS. Some notable members of the Board are of course big names like Christine Lagarde and Jerome Powell. Carstens is the head of this Board at the BIS and is assisted by his Deputy Manager. The board is responsible for forming strategy and policy, and they meet 6 times a year.
Leading Up to the BIS Summit
The BIS Innovation Summit is where the BIS brings in panelists from central banks and large financial institutions to speak on technological innovation and global financial changes moving forward. They cover their ongoing objectives, research, and improving the global financial system.
Their objectives for 2022 are:
- Launching new projects into CBDC developments
- Expanding to support G20 efforts to improve cross-boarder payments
- Next generation payment systems
- Launch new projects into “green finance”, regulatory and supervisory technology
- Cyber security
- Opening more centers across Europe and advancing the strategic partnership with the FED
Notable Statements from the BIS Innovation Summit Panelists
Federal Reserve Chairman Jerome Powell speech included remarks on the Russia/Ukraine geopolitical concerns, regulations, and the direction the pandemic caused policy leaders to move toward. He emphasized the dual mandate of the FED for stabilizing prices and promoting maximum employment.
Some of the more notable statements of his are as follows:
“In 5 – 10 years it is highly likely that digital financial activities outside of regulation will come under it”
“Digital innovation in the finance sector is here to stay, we are just at the beginning”
“We are examining CBDC issuance, have not made any decisions yet.”
Christine Lagarde, the head of the European Central Bank, also spoke at the Innovation Summit. Back in Nov 2020, the ECB was in the beginning stages of their “experimentation” phase of a CBDC. Now they’re phasing into further developments, rapidly. Her statements continued to echo previous statements being dismissive of crypto and DeFi, and her focus was on distorting the “evading sanctions” and “illicit finance” narrative.
Some of the more notable statements this week are as follows:
“the amount of Russian rubles going into crypto and stablecoins have been on the rise”
“Crypto service providers may be an “accomplice to” circumventing sanctions against Russia, and crypto assets have been and remain a threat”
“We have taken steps to clearly signal to all those who are exchanging transacting offering services in relation to crypto assets… they are ‘accomplices’ to those trying to circumvent sanctions.”
CBDCs and the BIS
A primary topic of discussion subject was CBDCs. The legacy financial system’s products are not open source and transparent like they are in crypto. Nor are they as productive and advanced. The Central Banks know this and are trying to adapt and bring new ways to work more efficiently in the traditional system, which brings us to the reasons and the “why” behind developing CBDCs.
“CBDCs and improvements in payments systems continue to be an area of exploratory focus, accounting for 13 out of 17 projects that were active in 2021 or will be launched in 2022. This reflects the interests and priorities of BIS member central banks”Raphael Auer
The BIS is currently working with 4 smaller central banks on developing their CBDCs. Under the name Project Dunbar, their focus is on developing retail CBDCs to develop a shared platform that will provide efficient and effective cross-border payments. Enabling “faster, cheaper, and safer” transactions.
The project is a collaboration between the Bank for International Settlements (BIS) Innovation Hub Singapore Centre, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank.BIS
The project here is to test out a multi-CBDC platform with several geographies and test the efficacy of CBDCs. The biggest takeaways are of the benefits of “reduced reliance of intermediaries” and the “simplification of the settlement process”, and “process automation with smart contracts”.
The problems they are currently faced with are:
- Jurisdictional Boundaries
One major characteristic of CBDCs are the multi-platform potential and the simplicity. The ability for banks to hold and transact in multiple CBDCs will enhance ease of use. They’re being faced with a hybrid model and will need technology developed that is able to process multiple CBDCs simultaneously. Thus, the test with Project Dunbar.
Then infrastructure needed for this is being assisted by AWS and Azure (Amazon and Microsoft). Below is an image of the Dunbar Network in Corda. The Corda Network is where all of this takes place. It is made up of four separated networks that work in accordance with one another via the distributed nodes.
Again, it’s easy to see how large of an implication crypto has on the traditional financial system. Project Dunbar is a massive step forward in the development of CBDCs. Although still nascent, the direction is there and all major central banks are actively working on this. It won’t be long until we see larger pilots take place in the US and EU.