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Bank for International Settlements Explains Why Cryptos Are Not Globally Adopted

The Bank for International Settlements published yesterday a report entitled “Cryptocurrencies: looking beyond the hype.” In it, they provide an overview of the cryptocurrencies world enumerating the pros and cons of their adoption.

As shown in the title, the analysis seeks to go beyond the excitement that many might expect; however, it also highlights some advantages of cryptocurrency over traditional FIAT money.

Bank For International Settlements LogoBank For International Settlements Logo

The Bank for International Settlements is an institution that provides financial services to Central Banks. Currently, 60 Central Banks are members of this institution, attesting to the prestige and importance of the BIS in the world’s financial and macroeconomic sphere.

The Report shows an overview that serves as an answer to the question of why cryptocurrencies the world does not use cryptos as a mainstream means of payments.

According to the Bank for International Settlements, even though cryptocurrencies have a lot of potentials, they do not yet have the maturity level required to disrupt the international monetary system:

Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value. Overall, the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.
That said, the underlying technology could have promise in other applications, such as the simplification of administrative processes in the settlement of financial transactions. Still, this remains to be tested.

According to the study, the use of FIAT money is still a much more convenient system for ordinary users and still represents the’final boss’ cryptocurrencies need to beat

Thanks to the active involvement of central banks, today’s diverse payment systems have achieved safety, cost-effectiveness, scalability and trust that a payment, once made, is final.

They mentioned three key factors why cryptocurrencies have not yet become mainstream, and why they represent a less viable use option than FIAT money:

“First, cryptocurrencies simply do not scale like sovereign moneys. … The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte …
The second key issue with cryptocurrencies is their unstable value. This arises from the absence of a central issuer with a mandate to guarantee the currency’s stability …
The third issue concerns the fragile foundation of the trust in cryptocurrencies.”

The Bank for International Settlements Explained the BTC/BCH  Debate?

Another aspect that worries the institution is the excessive control users give to the miners over the fate and stability of a blockchain:

The lack of payment finality is exacerbated by the fact that cryptocurrencies can be manipulated by miners controlling substantial computing power, a real possibility given the concentration of mining for many cryptocurrencies.

This point is precisely the main reason for the break-up between the Bitcoin and Bch communities. A more substantial and heavier block would give a high level of control to the most powerful pools, allowing them to have certain privileges over a given network.

In the same vein, it seems BIS believes forks are also an anomaly and a sign of the fragility of blockchain:

An even more worrying aspect underlying such episodes is that forking may only be symptomatic of a fundamental shortcoming: the fragility of the decentralised consensus involved in updating the ledger and, with it, of the underlying trust in the cryptocurrency

Should Central Baks Issue Digital Currencies?

On the initiative of some Central Banks to study the use of Blockchain technologies, the Bank for International Settlements mentioned that although there are currently many intentions, if implemented, the most likely is that the CBDC (Central Bank Digital Currencies) do not have the same characteristics as the traditional cryptocurrencies:

At the moment, central banks are closely monitoring the technologies while taking a cautious approach to implementation. Some are evaluating the pros and cons of issuing narrowly targeted CBDCs, restricted to wholesale transactions among financial institutions. These would not challenge the current two-tier system, but would instead be intended to enhance the operational efficiency of existing arrangements. So far, however, experiments with such wholesale CBDCs have not produced a strong case for immediate issuance.

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Swiss Bank Lambastes Crypto; Slow, Costly, and will Break the Internet

In a recent report the Bank for International Settlements (BIS) condemned cryptocurrencies with some scathing comments about the collapse of the internet among other things.

It is not unusual for a bank to be critical of crypto. It is not surprising either since decentralized money competes with and goes against a bank’s business model which is to make money from its customer’s money. They will often fuel FUD harping on about terrorism funding and criminal activity but breaking the internet really is going a bit far.

In its Annual Economic Report, the Swiss-based central banker’s bank argued that the decentralized technology underpinning cryptocurrencies is no substitute for trusted fiat money. The report stated that the bank was prompted to look ‘beyond the hype’ following ‘intense interest’ in Bitcoin and virtual currencies. Predictably the authors were overtly critical;

“looking beyond the hype, it is hard to identify a specific economic problem which they currently solve. Transactions are slow and costly, prone to congestion, and cannot scale with demand. The decentralised consensus behind the technology is also fragile and consumes vast amounts of energy.”

For a bank to say crypto transactions are slow and costly is absurd, anyone that has tried a cross-border transaction between two different banks in two different countries will know the meaning of ‘slow and costly’.

The report went on to attempt a calculation on what it would take the current Bitcoin blockchain to process the current level of retail transactions taking place at the moment;

“To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, 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. The associated communication volumes could bring the Internet to a halt.”

What it doesn’t consider is that the industry is embryonic and gradual adoption will lead to evolution in the technology. There are already several blockchains and digital currencies that are far more efficient than Bitcoin and more will follow. Would networks in 1994 been able to handle the current level of information flowing around the internet? No, they have evolved along with the technology and adoption.

In addition to breaking the internet the report went on to call the energy consumption in mining operations an ‘environmental disaster’. Did it compare this to the energy used to power the tower blocks that banks own or fuel for the planes that their executives fly around the planet in? No.

Banks are threatened by crypto in the same way that corrupt governments are threatened by free speech and flow of information. Taking the profits and power back from the banks by fostering crypto adoption will bring about a financial revolution that this world profoundly needs – it just may take a few years, and the bankers will not like it.

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BIS Chief Slams Bitcoin As Ponzi Scheme and Threat to Central Banks

The head of the Bank for International Settlements (BIS) has blasted bitcoin as “a combination of a bubble, a Ponzi scheme” and, due to the energy consumption required for mining it, an “environmental disaster”

Calling for more regulation in a speech today, Agustin Carstens, general manager of the BIS, warned that cryptocurrencies could become “parasites” on the financial system and argued that they must be held to the same standards as other banking and payment services, Reuters states.

Forbes further cites Carstens as saying that cryptocurrencies should not be allowed to undermine trust in central banks. He argued that the consequences of debasing this trust have historically been detrimental, citing the 19th century production of currencies by private banks as a cause of financial turmoil that subsequently brought about the creation of the Federal Reserve System.

“The tried, trusted and resilient modern way to provide confidence in public money is the independent central bank,” Carstens stated, while lauding the protections banks afford consumers and investors.

He also claimed that cryptocurrencies are “not sustainable as money,” adding that they fail to meet the “basic textbook definition” of a currency. The volatility of cryptocurrencies, the BIS chief went on, is tolerated mostly by those “who massively evade taxes or launder money.”

Carstens’ remarks put him in the company of a growing list of heads of state and influential finance figures condemning bitcoin and other cryptocurrencies, which have recently suffered substantial losses in value.

Billionaire George Soros made similar assertions last month, saying that the term “cryptocurrency” is a misnomer, because a lack of stable value precludes it from being a currency at all.

Agustin Carstens image via Sari Huella/Wikimedia Commons

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