“When the crypto gold rush ends, in which most people buy and sell cryptocurrencies solely to strive for profit, then fluctuations are likely to abate and the actual use case for cryptocurrencies as money may gain momentum”
A report, demanded by the European Parliament’s Committee on Economic and Monetary Affairs, evaluated cryptocurrencies, regulations, ICO’s and the likely impact of launching central bank digital currencies (CBDC) on the financial system. The survey was authored by several members of the Kiel Institute of the World Economy who offer in-house counsel to the European Parliament committees.
The report termed cryptocurrencies as a “special case of virtual or digital currencies” with “absence of a central counter-party, non-discriminatory public access, and security against fraudulent spending,” as their primary features.
Bitcoin and other cryptocurrencies have been termed as problematic to use as a medium of exchanges due to their instability. Yet the report stated that this may change in the future once the speculative phase goes away.
“High volatility is explained by the lack of trading pairs, low trading volumes, and strong volatility of demand, and is currently an inherent aspect of almost every single cryptocurrency,” the report mentioned. “Volatility of individual cryptocurrencies could decrease in the future as Bitcoin dominance declines, but this is uncertain due to the speculative nature of cryptocurrency demand.”
The report speaks about the design and functionality of bitcoin and its consensus algorithm. It showed concerns regarding the significant resource consumption and limited scalability. Proof of Stake is cited as a likely way to overcome the restrictions faced by the Proof of Work algorithm.
“As of yet, it is unclear whether such a system could rise to prominence and whether it would introduce its own pathologies.” the report stated on PoS.
Monero, Dash, and Zcash are also cited for their capability to permit private transactions compared to bitcoin where all the transactions are publicly seen on the shared ledger. It goes on to state that “These technological improvements over Bitcoin are therefore necessary to replicate one of the main features of common cash: the ability to conduct uncensored, private transactions.”
Lightning Network is noted to be a likely solution to deal with the problem of low transaction speeds. However, the report also stated, “Since technological innovations such as these are still very young and the development process is ongoing, a final assessment cannot yet be made.”
Cryptocurrencies have been considered to have a cost advantage over transitional currencies when used for global money transfers and they have also been classified to be effective for citizens in countries with rigid capital controls and cash shortages.
“Cryptocurrencies could serve as a vehicle to protect assets against theft or repressive confiscation, increase systemic competition, and eventually financial stability, but current technology is a limiting factor.”