The Bank for International Settlements (BIS, which assists the central banks in their move to endorse monetary and financial stability, belittles cryptocurrencies stating cryptos are not suitable enough to act as a monetary system, even though the bank recognizes that there are suitable areas where cryptos can offer improved efficiencies.
The bank also revealed that there are chances for the central bank to launch digital currencies, which several central banks are contemplating.
In its annual economic report, the bank disclosed its take on cryptocurrencies and distributed ledger technology.
Based on the report, for a monetary system to efficiently make transactions, it needs to be flexible to handle demand and must be able to scale with the economy, a task central banks have been able to provide. According to the central banks, the payment system operates successfully and guarantee the supply of reserves responds appropriately to changing demand.
On the other hand, cryptocurrencies’ decentralized technology, is unable to provide sufficient alternative for the traditional, institutional backing of money.
The bank argues that a decentralized agreement via which transactions are verified can weaken trust in the system. A collapse in trust can raise doubts on the finality of individual payments, which implies that the system will no longer be functional, resulting in a loss of the currency’s value.
Putting aside trust issues, cryptocurrencies are liable to insufficiencies and extensive energy usage. These kinds of currencies are not able to scale with increasing transactions, leaving them liable to congestion and value changes.
A central authority such as a central bank needs to match the supply of the means of payment with transaction demand to be able to increase or decrease the supply. The authority needs to be able to trade in such market conditions, even if it comes to accepting a loss. However, in a decentralized network, there is no central authority with the power to stabilize the currency’s value.
The bank went on to add that the rapid rate at which cryptocurrencies are developed adds to inconsistent valuations.
In mainstream payment systems, once a payment goes through the central bank’s books, it becomes final and cannot be canceled.
The BIS reports claim that permissionless cryptocurrencies are unable to guarantee such finality given that there can be competing forms of the ledger. This can result in transaction rollbacks, which occurs when two miners update the distributed ledger at the same time. Only, one of the two can make it, ensuring payment finality in each ledger possible.
Cryptocurrencies can also be operated by miners who control large amounts of computing power.
The bank also stated that forking can also weaken trust in the system.