In its latest warning about the burgeoning cryptocurrency sector, the Bank of International Settlements (BIS) stated on June 17, 2018, that cryptocurrencies are not scalable and “are likely to face a breakdown in trust” as the number of people using digital currencies increases. Other concerns revolve around their inherently self-limiting design flaws, and the fact that they can neither handle the current payment system load nor offer a realistic alternative.
BIS’ Plays down Cryptocurrencies
According to Reuters, the BIS placed trust in the stability of any form of money as a principal feature for it to be accepted economically and scale efficiently. However, the authority pointed out the ease of losing trust in cryptographic forms of money, due to the “fragility of their decentralized networks,” effectively playing down the rising sentiment of the asset class replacing fiat money.
The Swiss bank, which has worked for 88 years with a consortium of more than 60 central banks from around the world to shape thought leadership on international finance and policy made this assessment in a 24-page extract from its annual report released on June 17, 2018.
The BIS singled out network congestion in cryptocurrencies “as they become bigger,” while noting bitcoin’s infamously high transaction fee and the limited number of transactions it can process per second. The Switzerland-based authority stated in their annual report:
“Trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded. Not only does this call into question the finality of individual payments, but it also means that a cryptocurrency can stop functioning, resulting in a complete loss of value.”
The problem of blockchain scalability has received a considerable amount of coverage recently. BTCManager reported in January 2018 that Ethereum co-founder Vitalik Buterin launched a financial subsidy for developers who could come up with ways to solutions to the Ethereum blockchain’s scalability problem.
In April 2018, Buterin also announced that a solution must be implemented or else Ethereum developers are “screwed.”
Absent Use-Case Omits Value Addition
Hyun Song Shin, head of research at BIS, believes sovereign money generates value for the state due to the sheer number of users, while cryptocurrency users purchase the asset solely for speculation.
However, Shin acknowledged that without users, fiat money could be akin to a “worthless token,” calling it piece of paper “with a face on it.”
Furthermore, the BIS called out the network’s dependencies on “so-called miners” to confirm transactions and maintain cryptocurrency networks, apart from their notoriously high energy usage. The report called the electricity consumption – not only wasteful and unsustainable but also a severe environmental issue – “an environmental disaster.”
BTCManager earlier reported that mining activity now consumes more electricity than the country of Iceland, a situation which has led some to research the environmental impact of bitcoin mining while others insist that it as a non-issue.
Both Sides of the Coin
The phenomenal rise of cryptocurrencies in 2017 attracted several believers and naysayers of the volatile asset, with a majority of banks and financial authorities in the latter category. Nonetheless, BIS’ report did also acknowledge the positive aspects of this rising innovation.
The report mentioned that the core logic of distributed ledger data processing provides some promising benefits for the global financial system such as quicker and more efficient processing of cross-border payments and the migration of the overwhelmingly paper-based system of international commerce onto digital platforms.
Ultimately though, the report damned bitcoin and its many descendants with faint praise. In the professional view of the BIS, the sheer amount of risk presented by basing global finance on a network with no center, substantially outweigh any potential benefits or opportunities it offers.
Agustin Carstens, general manager of the BIS, described the pioneer cryptocurrency bitcoin as “a combination of a bubble” and “a Ponzi scheme.” Besides its apprehensions, the BIS asked central banks “to think hard” before issuing their tokens or aligning with related businesses.
While no central bank has issued its token yet, Sweden’s Riksbank is reportedly developing the e-krona for enabling micro-payments. However, this may be attributed to the country’s pullback of cash usage, instead of the state’s optimism about cryptocurrencies.
To conclude, the BIS pointed out the need for a globally-accepted regulation of digital assets, applicable to both cryptocurrency businesses and regulated financial institutions.
The above article was co-authored by Shaurya Malwa of BTCManager.