As the US debates key cryptocurrency legislation in what has been dubbed “crypto week” by lawmakers there, Disruption Banking shines a light on the Bank for International Settlements (BIS) and its own forays into digital money.
The BIS is a venerable institution pre-dating the Second World War – now it faces the task of modernizing. Asia is a main focus region for its research into digital currency, with two BIS Innovation Hubs based in Hong Kong and Singapore. To put that in perspective, there are just seven in total, with the rest being based in Europe and North America.
In the BIS’s own words, its Digital Innovation Hub project is intended to map and exploit “critical trends in technology affecting central banking” and use those to improve the “functioning of the global financial system.”
In October, Hong Kong SAR’s central bank HKMA co-hosted an international financial conference with the BIS to discuss “how artificial intelligence, tokenisation, and other technologies are transforming the financial landscape and how the industry can better prepare for these changes.”
As the attention garnered by the Genius Act in the US strongly suggests, a stablecoin that can be used by central banks ranks highly in that suite of innovations.
CBDC Trial a Success
Two years previously, the BIS Innovation Hub and HKMA declared their trial run at a central bank digital currency (CBDC) a success. Also assisted by the Hong Kong Applied Science and Technology Research Institute, Project Aurum set up wholesale interbank and retail e-wallet systems with two different types of tokens: an intermediated CBDC, and stablecoins backed by CBDC in the interbank system.
“The latter is unique in the study of CBDC to date,” says the BIS. “While intermediated CBDC is a direct liability of the central bank, CBDC-backed stablecoins are liabilities of the issuing bank, with its backing assets held by the central bank.”
BIS Wants a Slice
Basel is right to get in on the ground floor when it comes to central-bank stablecoins in Asia. European Central Bank head Christine Lagarde has made no secret of her wish to see a digital euro, while HKMA is already in partnership with EU member France’s central bank on another prototype interoperable CBDC for use by both parties.
Meanwhile, Hong Kong has quietly but confidently passed what could be viewed as its own version of the Genius Act. The Communist Party-owned China Daily reports that the SAR’s Stablecoins Ordinance “establishes a mandatory licensing regime for anyone who issues or offers fiat-referenced stablecoins in Hong Kong, or whose activities touch the Hong Kong dollar.” Approved in May, the law is due to come into force in August.
Hong Kong’s pioneering role in CBDCs was perhaps presaged in 2021, when Disruption Banking interviewed Invest Hong Kong’s Andrew Davis.
“China is the only country in the world with two currencies. It has the Yuan and the Hong Kong Dollar,” he told Disruption Banking back then. “Until the Yuan is fully convertible and internationally traded, the Hong Kong Dollar provides that ‘sandbox’ where you can try things out.”
Aurum 2.0 Going Strong
In the meantime, the BIS’s prototype CBDC project has continued apace. In March 2024, Basel declared the rollout of Project Aurum 2.0. Building on the successes of the first, the project takes as a core aim tackling user privacy concerns around digital currencies.
In the BIS’s own words “the next phase aims to leverage expertise from multiple disciplines, by collaborating with universities and privacy experts.”
BIS adds: “The project seeks to advance the practical understanding of central banks around privacy when designing their CBDC systems and demonstrate to public sector how technology can protect personal data in the CBDC space.”
‘Privacy by Design’
Aurum 2.0 takes the concept of “privacy by design” as its guiding principle and will explore technologies such as pseudonymization and zero-knowledge proof – a cryptographic method that allows one to prove knowledge of, say, a password without revealing the password itself.
Just as important, the BIS will run tests to see if enhanced privacy measures detract from the CBDC’s overall efficacy.
Innovation-Friendly Leadership
In the foreword to its 2025 report, then BIS general manager Agustín Carstens heralded the Innovation Hub as “a collective endeavour, made successful by the strong commitment of our people.”
“The strategy’s focus on innovation and the development of new capabilities has energised the Bank and strengthened its sense of purpose. The BIS is well positioned to adapt to future challenges and help our members to navigate an increasingly complex economic and financial landscape.”
As at time of writing, Carstens has left the BIS after completing his allotted five-year tenure in June. He now sits on the International Advisory Board of the Global Finance & Technology Network (GFTN). He has been praised for driving through modernization in central banking. His successor, Pablo Hernández de Cos, will have some big shoes to fill.
Erasing a Dark Past?
The Basel-based bank might have more than one reason for being so determinedly future-focused. Some 21st-century commentators have pointed to what they see as the BIS’s shady origins. Adam LeBor’s 2013 book Tower of Basel claims that the bank’s true purpose was to foster a clandestine alliance between central banks “free from the interference of politicians and the public eye,” as one summary puts it.
LeBor’s book also calls out the Swiss bank, founded in 1930, for its former ties to Nazi Germany. It accuses the BIS of accepting looted gold during the Second World War and before – when Czechoslovakia was dismantled by Hitler’s forces in 1938.
“The transfer of Czechoslovak gold held at the Bank of England [BoE] in a BIS account to the Reichsbank’s BIS account, despite clear signs of duress, highlighted the bank’s rigid formalism and [BoE governor and BIS member] Montagu Norman’s priority of protecting the BIS’s independence over national interests,” says SoBrief in its summary of LeBor’s book.
It adds: “This decision, and the subsequent acceptance of gold melted down and re-stamped at the Prussian Mint, turned the BIS into a de facto arm of the Reichsbank, facilitating Nazi plunder.”
And yet, contends the summary of LeBor’s controversial book, the BIS was (almost) able to erase this dark chapter in its history, even becoming a key player in the postwar Marshall Plan for Europe’s economic reconstruction.
A Brighter Future?
But the harsh truth is, Asian central bank players in the HKMA are unlikely to concern themselves with that. Benefits of a working CBDC include but are not limited to streamlined cross-border payments with lower transaction costs, and increased financial inclusion in a region where small businesses find it difficult to access banking services.
Put simply: there is just too much at stake for Hong Kong to turn aside from the Basel project for reasons past or present. Having said that, only time will tell whether the BIS can use its innovation hubs in Asia and elsewhere to write a brighter chapter in its future.
#HKMA #CBDC #BIS #CentralBanks #stablecoins
Author: Damien Black
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
See Also:
Two Currencies One Nation with Invest Hong Kong | Disruption Banking
Wholesale CBDCs and Stablecoins: A Dual Future for Digital Finance | Disruption Banking
Christine Lagarde Pushes for Digital Global Euro | Disruption Banking