Bank for International Settlements Attacks Cryptocurrencies: One Side of the Coin

In their latest Annual Economic Report, The Bank for International Settlements (BIS) has spoken out against cryptocurrencies, arguing that, ‘...beyond the hype, it is hard to identify a specific economic problem which they currently solve’.

In a new chapter entitled “Cryptocurrencies: looking beyond the hype” released by the BIS yesterday, the self-proclaimed ‘oldest international financial institution’ has biasedly targeted cryptocurrencies, DLT and blockchain technology with a purposefully limited view to discredit the use of this disruptive alternative currency system, in favour of the centralized global banking system.

“The tried, trusted and resilient way to provide confidence in money in modern times is the independent central bank.”

In chapter V of the Annual Economic Report, the BIS outlines their belief that the existing centralized financial infrastructure is the only way to guarantee global financial security and trust, employing a sweeping generalisation to argue that all cryptocurrencies suffer from the same shortcomings: poor scalability, energy inefficient consensus protocols, slow congested networks and costly transactions.

“...cryptocurrency technology comes with poor efficiency and vast energy use. 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.”

Poor Efficiency And Vast Energy Use...

While this is true in particular areas of digital assets, the statement omits to offer the full picture of what cryptocurrencies are now capable of. Bitcoin’s 1st generation Proof-of-Work (PoW) consensus protocol, while highly secure, is widely accepted across the crypto-space as being highly inefficient.

Because of this, in the past year alone we have seen a huge surge in the number of more proficient, scalable and cost effective consensus protocols as the technology evolves. Proof-of-Stake (PoS), Delegated PoS, Direct Acyclic Graphs (DAG), ZDAG, Proof-of-Authority (PoA), Proof-of-Weight and ‘Gossip Protocols’ using byzantine fault tolerance (BFT) are all case-examples that exhibit the exponential growth of this industry and how much has been improved upon since Bitcoin’s creation.

Cannot Scale With Demand…

“First, cryptocurrencies simply do not scale like sovereign moneys.”

Scalability is fundamental problem for cryptocurrencies and represents a core issue that is currently inhibiting the technology’s progress towards mass market adoption. As each network of nodes grows, the network is stretched to perform the same job over a continually growing audience of users, increasing network throughput. In the past, this exponentially growing user base has caused congested networks and high fees in PoW systems, as they struggle to keep up with the mounting demand.

Now however, we are seeing immensely innovative systems being created to tackle this Achilles heel, which include sharding, Segwit, masternodes, PoS and ‘Plasma’ to name a few.

Cryptocurrencies greatly fluctuate in value…

“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.”

“a cryptocurrency can simply stop functioning, resulting in a complete loss of value.”

Digital assets are volatile due to a host of global sentiment, socio-political and media factors. Because cryptocurrencies are traded assets and not typically pegged to a store of value, their intrinsic value is solely dependant on supply and demand which changes frequently moment to moment.

Fiat however, is supposed to be pegged value currency where 1 unit of fiat currency was originally purposed to serve as 1 unit measurement of gold - since carrying gold was labour intensive and difficult to travel with safely in large quantities.

US national debt has grown by $1trillion in the last 6 months alone and is rising astronomically, meaning that the de facto global currency, US dollar ($), is being massively quantitatively eased to allow the United State’s to continue spending. This means that the dollar’s value is sliding at an increased pace as more money is being printed without the equivalent gold backing.

According to Resourceinvestor 

“The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month”

Though it is unlikely that a total collapse would ever occur, a sliding dollar value is likely to attract more investors to find ways to store their assets in an incorruptible, fixed-supply currency that can be accessed from anywhere in the world and held personally away from centralized institutions. This is why cryptocurrencies are so important.

In Summary

The latest chapter of the BIS Annual Economic report serves to highlight the lack of any deep understanding of digital assets and the constantly evolving blockchain technology that drives it. As antiquated financial institutions fight desperately to suppress the growing popularity of digital assets that threaten to supercede them, we are seeing more of this fear manifest itself in bias media designed to scare new investors away from this innovative and pioneering space.