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Muh Monopoly! How a Banker's Talk Sparked All Kinds of Crypto Mockery

Last week, Agustin Carstens, the head of the Bank of International Settlements (BIS), widely considered the central bank of central banks – told cryptocurrency makers to “stop trying to create money.”

And the crypto community promptly had a field day with those remarks.

The BIS head has, to date, adopted a largely hostile tone toward cryptocurrencies. Back in February, he called bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster” during a lecture.

Carstens isn’t alone in his view, to be sure. Billionaire Warren Buffett, for example, said earlier this year that bitcoin is “rat poisoned squared,” while JPMorgan Chase CEO Jamie Dimon famously declared in 2017 that bitcoin is “a fraud” (though he later said he regretted issuing those remarks).

And while Carstens has long held this position, it was his remarks last week – essentially calling for a moratorium on te creation of new cryptos – that drew the ire of many in the community on social media. He also argued that “it’s a fallacy to think money can be created from nothing” – a contention that drew more than a few derisive comments.

It was developer Jameson Lopp who perhaps best summed up that collective sentiment:

Indeed, many drew issue with the fact that an institution tied to central banks – which manage the money systems of economies and serve as lenders of that money – would call out anyone over the creation of money from nothing.

The trust issue

It’s worth noting that, at the time of the bitcoin network’s official launch in January 2009, the world’s financial sector was, to quote Satoshi Nakamoto, “on the brink of collapse.” That line – “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” – was immortalized in bitcoin’s genesis block.

As Coinbase chief technology officer Balaji Srinivasan quipped, bitcoin’s creation was steeped in the context of mistrust in banks.

Commentator Matt Odell argued that Carstens got at least one thing “almost right”: that trust is a valuable thing.

But in this case, however, it’s not central banks that are earning the trust of everyday folk.

Currency competition?

While Carstens never came out and declared that cryptocurrencies pose a competitive threat to central bank-backed monies, his organization has touched on the subject in the past.

Last month, the BIS published a report that examined them, concluding that “the decentralized technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.”

Harsh stance aside, the BIS noted that “the underlying technology may have promise in other fields” – something other central banks have highlighted before.

Whether Carstens intended to or not, his comments came across as a bit of a competitive challenge to some in the crypto space.

Indeed, Carstens’ contention was ultimately positioned as an argument for fiat currencies in favor of cryptocurrencies.

And – perhaps unsurprising – some observers saw Carstens’ commentary as a sign that they should, in fact, buy more cryptocurrency.

Ultimately, Carstens’ call to stop creating new kinds of money may have actually inspired people to do the opposite.

Carstens image via Shutterstock

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Halt the Internet? BIS Report Critiques Blockchain and DLT Claims

A financial institution operated by the world’s central banks is taking aim at cryptocurrencies, questioning their ability to deliver on their promise in a new report published Sunday morning.

The document, titled “Cryptocurrencies: looking beyond the hype” and released by the Bank of International Settlements (BIS), explains the history behind the technology and analyzes whether it can truly creating a trustless form of money. As previously reported, the release precedes the organization’s full annual economic report, which will be published next week.

Citing hard forks, mining concentration, the proliferation of new cryptocurrencies, volatile markets and scalability as issues with cryptocurrencies at present, the bank’s report concludes that ” the decentralized technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.”

In addition, the bank claims that using a blockchain to process the volume of retail payments made daily “could bring the internet to a halt.”

The report explains:

“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.”

Beyond storage capacity, the report claims that “only supercomputers” possess the processing power needed to conduct every retail transaction on a blockchain, and even if there were sufficient supercomputers to create a decentralized network, “millions of users [would] exchange files on the order of a magnitude of a terabyte.”

This massive communication volume is what would impact the internet, according to the report.

The report also takes shots at miners, noting that “delivering … hinges on a set of assumptions: that honest miners control the vast network of computing power, that users verify the history of all transactions and that the supply of the currency is predetermined by a protocol.”

While the BIS was harsh on cryptocurrencies, it saw distributed ledgers more positively, writing that “the underlying technology may have promise in other fields.”

Distributed ledger technology can facilitate cross-border payments, as well as help niche fields “where the benefits of decentralized access exceed the higher operating cost of maintaining multiple copies of the ledger.”

However, the report ultimately noted that research in other technologies to accomplish the same goals as a distributed ledger is ongoing, “and it is not clear which will emerge as the most efficient one.”

Match on fire image via Shutterstock

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Bank of International Settlements to Publish New Crypto Research

The Bank of International Settlements (BIS) is dedicating two chapters of its forthcoming annual economic report to cryptocurrencies.

BIS – considered to be the central bank’s central bank – will publish those two chapters this weekend on June 17, the institution announced this week. The full report will be published on June 24.

The upcoming report will follow the bank’s most recent quarterly review, which warned that “many cryptocurrencies are ultimately get-rich-quick schemes.”

The review stated:

“What makes currencies credible is trust in the issuing institution, and successful central banks have a proven record of earning this public trust. The short experience of cryptocurrencies shows that technology, however sophisticated, is a poor substitute for hard-earned trust in sound institutions. “

Similarly, BIS touched on the topic in an opinion piece written in part by Markets Committee chair Jackqueline Loh in March. The piece claimed that public cryptocurrencies are not feasible options for a cashless society, as previously reported by CoinDesk.

By the same token, the bank has claimed that digital currencies issued by central banks could carry unwelcome side-effects, such as making periods of financial instability worse by helping banks’ clients funnel their money from their accounts more quickly.

“A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large-scale, challenging commercial banks and the central bank to manage such situations,” BIS stated at the time.

Image via Shutterstock

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Central Bank Digital Currencies Could Fuel Bank Runs, BIS Says

A central bank-issued digital currency (CBDC) could fuel faster bank runs during periods of financial stability, the Bank of International Settlements (BIS) said Monday.

The institution – considered by some to be the “central banks’ central bank” – argued those looking to develop and launch a wholly digital currency should “carefully weigh” the implications of doing so, especially as they relate to monetary policy and overall stability. In sum, the BIS noted that a currency of that nature “might be useful for payments but more work is needed to assess the full potential.”

“A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations,” the BIS stated at the outset.

Later on, the report’s authors revisited the subject, outlining a hypothetical situation in which banks – even stronger ones – could face issues during a bank run in an environment in which a central bank’s digital currency offers a path for deposit flight.

The report explains:

“Depending on the context, the shift in deposits could be large in times of stress. A crucial element in such system-wide shifts is the stronger sensitivity of depositors to the actions of others. The more other depositors run from weaker banks, the greater the incentive to run oneself. If CBDC were available, the incentives to run could be sharper and more pervasive than today, as the CBDC would be the favoured destination, especially if deposits were not insured in the first place or deposit insurance was (made more) limited. Whereas weaker banks could experience a run, even stronger banks could face withdrawals in the presence of CBDC.”

“It would be difficult to stem runs under such conditions, even when providing large lender of last resort facilities,” the report adds.

The BIS has taken a somewhat middle-of-the-road view toward distributed ledger applications, expressing a belief through past reports that the technology is promising yet is unlikely to be used widely by banking institutions in the near-term. By contrast, its senior leaders have sharply criticized cryptocurrencies in the past.

Whether such concerns forestall any central bank-issued currency of this kind remains to be seen. As it stands, a number of institutions have looked at the idea of using some cryptocurrency elements as part of their digital money projects. Last week, Yao Qian, who heads up the People’s Bank of China’s research in this area, argued that some characteristics should be incorporated.

Piggy bank image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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'End of Life Cycle': BIS Report Positions DLT as Needed Banking Update

The Bank of International Settlements (BIS) has published a report arguing that distributed ledger technology (DLT) could help central banks replace their ageing payment systems. 

BIS, which is effectively a bank for central banks, commissioned the report to look at both DLT and cryptocurrencies with the aim of clarifying their applicability in a central banking context.

While central bank-issued cryptocurrencies are still largely speculative, it concludes, DLT has shown their potential utility in the industry. Such a digital currency would be of particular utility in countries such as Sweden which are seeing a reduction in the use of cash, the paper states.

Most notable in the paper’s findings, though, is that DLT is of particular interest to central banks due to a need to upgrade existing payment systems.

The paper states:

“One of the reasons for the interest in DLT is that many central bank-operated wholesale payment systems are at the end of their technological life cycles. The systems are programmed in obsolete languages or use database designs that are no longer fit for purpose and are costly to maintain.”

The paper comes amid growing interest in DLT and cryptocurrencies worldwide, with various central banks experimenting with applications of the tech. Bank of Canada, the Monetary Authority of Singapore, the Bank of England and the Central Bank of Brazil are all attempting to implement real-time gross settlement (RTGS) systems onto DLT platforms, while others have expressed interest.

Further, several central banking authorities have already moved to experiment with cryptocurrencies. Last week, The Reserve Bank of India hinted that it was researching what it called a “fiat cryptocurrency” as a digital alternative to the rupee. Officials in Russia have also expressed support for a national cryptocurrency

The BIS paper states, however, that while interest exists in central bank-issued cryptocurrencies, there is confusion in institutions surrounding what they actually are. As such, its authors provide a taxonomy of terms to clarify the potential of cryptocurrencies.

BIS headquarters image via Shutterstock

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