BIS Report – Cryptocurrency is an elusive promise

The Annual Economic Report of the Bank of International Settlements [BIS] is titled “Cryptocurrencies: Looking beyond the hype”. The report is an analysis of the problems that cryptocurrencies promise to solve but actually fall short on. It states that cryptocurrencies simply can not be used as a national or global currency in its current version.

The report starts off by going briefly into the history of money. Currency –  the printed note, by itself, has no value, unlike gold. But the common belief, by the public and being backed up by the government, means that this piece of paper may be used as legal tender. Currency is nothing but a trust system, and history is littered with failed currency tokens, ranging from seashells to countless coins. A stable currency is an exception, not a norm. A contemporary example is Venezuela, according to the report.

Cryptocurrency promises to be trustless,  decentralized, and stable in value by virtue of its technology. No oversight needed, no accountability required.

The money flower | Source: BIS Report

Yet, it can be argued that cryptocurrencies fall far short of their promises. The cost of this decentralized trust in the cryptocurrency is equivalent to the electricity consumed by an entire nation like Switzerland or Denmark, and this is Bitcoin alone. Other currencies also have considerable consumption, like Ethereum. The cost will soon prove too great a burden to bear in an age of warming climates and dying species.

Energy, TPS and scalability issues | Source: BIS Report

The report talks about the issues of scalability, stability of value, and trust in finality of payments. Scalability refers to scaling up. There is no central authority to enforce the value of the currency, nobody to ‘trade against a market and absorb a loss’, and because the volume of trade determines the value of the cryptocurrency, unbelievable volatility is the result.

The report details that the issue of finality of payments is the fact that the version of the ledger a user’s transaction is stored in is not guaranteed to be the ‘final’ version of the ledger. This is because the blockchain follows the ‘longest chain’ rule for validating transactions – meaning that the finality of payment is ‘probabilistic’.

The value of the cryptocurrency may also be manipulated by miners who control a significant portion of the computing power that verifies transactions, also known as 51% attacks. Shutting down of illegal marketplaces has a strong effect on the value of the cryptocurrency. says the report.

Furthermore, while the idea of cryptocurrency may not work as money, the underlying technology of blockchain is certainly promising in multiple avenues, like low volume cross-border transactions. The report concludes with some suggestions. First, the redrawing of regulatory boundaries to specifically address the rise of cryptocurrencies and cryptoassets. Second, the interoperability of cryptocurrencies with regulated financial entities and lastly the regulation of institutions that offer services specific to cryptocurrencies.

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