A global central bank test lab has developed a prototype bitcoin monitoring system with the aim of providing authorities with a clearer understanding of how, when, and where cryptocurrency is used.
The Bank for International Settlements (BIS) initiated the project, codenamed Atlas, at the Dutch central bank over five years ago. Its significance has been highlighted in the last 18 months due to tumultuous events in the cryptocurrency industry.
The Atlas project has created a “proof of concept” platform that gathers data from both publicly available “on-chain” crypto ledgers and more challenging-to-obtain “off-chain” data reported by select exchanges and users. While this information offers a broad view of cryptocurrency activity, it’s important to note that crypto wallets can be established anonymously, without specifying the owner’s location, making it less precise.
According to the BIS, an initial analysis of the platform’s data indicates substantial cross-border cryptocurrency flows, though these are unevenly distributed across different geographical regions. However, the BIS acknowledges some level of uncertainty in the data.
Regulators have become increasingly concerned about the risks associated with cryptocurrencies due to their decentralized nature, particularly following the collapse of widely-used stablecoin pair Luna and TerraUSD, as well as the FTX platform last year.
The BIS’s ‘innovation hub’ prototype generates “dashboards” displaying information such as the conversion of bitcoin into US dollars in specific regions at specific times. These dashboards also offer insights into the adoption and relative importance of crypto markets as they experience fluctuations in popularity.
Cross-border cryptocurrency flows are particularly relevant for central banks, serving purposes such as cross-border payments, economic analysis, and balance of payments statistics. These flows can represent a significant part of cross-border transfers for some countries, though it is challenging to quantify due to data gaps.
The BIS emphasizes the need for central banks to gain firsthand knowledge of cryptocurrencies and decentralized finance (DeFi) to better understand the risks and opportunities they present to the financial system. The dashboards will now be shared with a group of “test” central banks for feedback and further development.