“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),” was the opening statement of the chapter addressing cryptocurrencies in the Bank of International Settlements (BIS)’ upcoming report.
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.”
The notion of cryptocurrencies comprising an effective form of money, arguing that stability in value is a requisite quality for the facilitation of exchange, was the first thing attacked by BIS. The report claims that cryptocurrencies are unstable in value due to “the absence of a central issuer with a mandate to guarantee the currency’s stability.”
According to BIS, 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 says that Scalability includes another important 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 exchange files on the order of magnitude of a terabyte.”
On the notion of Efficiency, BIS believes that the rigid protocols described as underpinning the confidence in a cryptocurrency, instead portray the adverse side effect by manifesting limitations in the ‘efficiency’ of virtual currencies.
BIS says there is an ecological strain emanating from the mining process. The report says 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.”
Concerning Trust, BIS says 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,” which according to the report, arises from concerns pertaining to forks and 51% attacks.
The report concludes thus: “Trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded.”