Central banks want to look under crypto’s hood — Is this a positive sign?

The Bank for International Settlements’ (BIS) Project Atlas report offers yet another indication that the worlds of crypto and traditional finance may be converging.

On the surface, this proof-of-concept project backed by some of Europe’s biggest central banks — like German central bank Deutsche Bundesbank and Dutch central bank De Nederlandsche Bank — seems modest enough: securing more crypto-related data, like cross-border Bitcoin (BTC) flows.

But the mere fact that these giants of the incumbent financial order now want such information suggests that crypto assets and decentralized finance (DeFi) applications are becoming, in the report’s words, “part of an emerging financial ecosystem that spans the globe.”

BIS, a bank for central banks, and its partners still have some serious concerns about this new ecosystem, including its “lack of transparency.” For instance, it’s still hard to find seemingly simple things, like the countries where crypto exchanges are domiciled.

And then, there are the abiding potential risks to financial stability presented by these new financial assets. Indeed, in the introduction of the 40-page report, published in early October, BIS references how recent crypto failures — such as the recent theft of $61 million from Curve Finance’s pools — “exposed vulnerabilities across DeFi projects.” Moreover:

“The crash of the Terra (Luna) protocol’s algorithmic stablecoin in a downward spiral and the bankruptcy of centralised crypto exchange FTX also highlight the pitfalls of unregulated markets.” 

Overall, this seemingly innocuous report raises some knotty questions. Does crypto have a macro data problem? Why are cross-border flows so difficult to discern? Is there an easy solution to this opaqueness? 

Finally, assuming there is a problem, wouldn’t it behoove the industry to meet the central banks at least halfway in supplying some answers?

Is crypto data really lacking?

“It’s a valid concern,” Clemens Graf von Luckner, a former World Bank economist now conducting foreign portfolio investment research for the International Monetary Fund, told Cointelegraph. 

Central banks generally want to know what assets their residents hold in other parts of the world. Large amounts of overseas assets can be a buffer in times of financial stress.

So, central banks want to know how much crypto is going out of their country and for what purpose. “Foreign assets can be handy,” said von Luckner. A large stock of crypto savings abroad could be seen as a positive by central banks worried about systemic safety and soundness. In times of crisis, a country may get by financially — at least for a period — if its citizens have high overseas holdings, von Luckner suggested.

Yet the decentralized nature of cryptocurrencies, the pseudonymity of its users, and the global distribution of transactions make it more difficult for central banks — or anyone else — to gather data, Stephan Meyer, co-founder and chief legal officer at Obligate, told Cointelegraph, adding:

“The tricky thing with crypto is that the market structure is significantly flatter — and sometimes fully peer-to-peer. The usual pyramid structure where information flows up from banks to central banks to BIS does not exist.”

But why now? Bitcoin has been around since 2009, after all. Why are European bankers suddenly interested in cross-border BTC flows at this moment in time?

The short answer is that crypto volumes weren’t large enough earlier to merit a central banker’s attention, said von Luckner. Today, crypto is a $1 trillion industry.

Moreover, the banks recognize the “tangible influence these [new assets] can exert on the monetary aspects of fiat currencies,” Jacob Joseph, research analyst at crypto analytics firm CCData, told Cointelegraph.

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Meyer, on the other hand, assumed “rather that the emergence of stablecoins led to an increased demand for gathering payment data.”

Still, it’s complicated. Many transactions take place outside of regulated gateways, said Meyer. When regulated gateways do exist, they usually aren’t banks but “less-regulated exchanges, payment service providers, or other Anti-Money Laundering-regulated financial intermediaries.” He added:

“The usual central actors existing in the fiat world — e.g., the operators of the SWIFT network as well as the interbank settlement systems — do not exist in crypto.”

What is to be done?

Central banks are currently getting their crypto data from private analytic firms like Chainalysis, but even this isn’t entirely satisfactory, noted von Luckner. An analytics firm can follow Bitcoin flows from Vietnam to Australia, for example; but if the Australian-based exchange that receives a BTC transaction also has a New Zealand node, how does the central bank know if this BTC is ultimately staying in Australia or moving on to New Zealand? 

There seems to be no…