The Bank of International Settlements (BIS) has leased a chapter from its forthcoming annual report that delivers a critical appraisal of bitcoin and cryptocurrency. The report attacks virtual currencies from several main standpoints: claiming that cryptocurrencies do not effectively perform monetary functions due to price volatility, that the retail adoption of blockchain-based payment mechanisms would “bring the internet to a halt,” mass cryptocurrency adoption would reap a drastic environmental toll, and that the trust engendered by a decentralized network is too “fragile” to compete with that of centralized institutions.
The chapter addressing cryptocurrencies in BIS’ upcoming report opens by stating that “Less than 10 years after their inception, cryptocurrencies have emerged from obscurity to attract intense interest on the part of businesses and consumers, as well as central banks and other authorities. They garner attention because they promise to replace trust in long-standing institutions, such as commercial and central banks, with trust in a new, fully decentralized system founded on the blockchain and related distributed ledger technology (DLT).”
Despite acknowledging that “Cryptocurrencies such as bitcoin promise to deliver not only a convenient payment means based on digital technology, but also a novel mode of trust,” the BIS report seeks to highlight a number of “economic limitations” arising from “permissionless cryptocurrencies.”
BIS first attacks the notion of cryptocurrencies comprising an effective form of money, arguing that stability in value is a requisite quality for the facilitation of exchange. Cryptocurrencies, the report claims, are unstable in value due to “the absence of a central issuer with a mandate to guarantee the currency’s stability.”
By contrast, BIS claims that central banks emerged as the product of a “quest for solid institutional underpinning trust in money” that arose “in direct response to poor experiences with decentralized money.”
“The independent central bank,” the report claims, is the “tried, trusted and resilient way to provide confidence in money in modern times.”
BIS asserts that Scalability comprises another significant issue confronting cryptocurrencies.
The report poses “A thought experiment” as evidence of “the inadequacy of cryptocurrencies as an everyday means of payment,” claiming that “To process the number of digital retail transactions currently handled by selected national retail payment systems, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks,” and “beyond that of servers in a matter of months” – adding that “only supercomputers could keep up with verification of the incoming transactions.”
“The associated communication volumes,” the article posits, “could bring the internet to a halt, as millions of users exchanges files on the order of magnitude of a terabyte.”
According to BIS, the rigid protocols, which are described as underpinning the confidence in a cryptocurrency, have the adverse side effect of manifesting limitations in the ‘efficiency’ of virtual currencies.
Firstly, BIS emphasizes the ecological strain caused by the mining process. The report claims that “the total electricity use of bitcoin mining” equates to that of “mid-sized economies such as Switzerland,” adding that “the quest for decentralized trust has quickly become an environmental disaster.”
The report also posits that cryptocurrencies are inefficient as a form of money, arguing that the rigidity of their underlying protocols prevent them from “being supplied elastically.”
BIS claims that there is a “fragile foundation [to] the trust in cryptocurrency” stemming from “uncertainty about the finality of individual payments, as well as trust in the value of individual cryptocurrencies.” Said “uncertainty,” the report claims, arises from concerns pertaining to forks and 51% attacks.
“Trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded,” the report concludes.