BIS says crypto is ‘inadequate’ as currency
It’s still incredibly difficult to walk down the street and purchase a cup of coffee using only cryptocurrency.
The Bank of International Settlements (BIS) has released a report this week which identifies underlying economic problems and barriers preventing cryptocurrencies from becoming everyday means of payment.
The report, Cryptocurrencies: Looking Beyond The Hype, details three main shortcomings of cryptocurrencies:
- Stability of value
- Trust in the finality of payments
In terms of scalability, the report highlights that in order to process the number of digital transactions currently managed by select national retail payment systems, the size of the blockchain or digital ledger would balloon beyond reasonable storage capabilities and you would need a supercomputer to handle processing capacity.
First, cryptocurrencies simply do not scale like sovereign moneys. At the most basic level, to live up to their promise of decentralized trust cryptocurrencies require each and every user to download and verify the history of all transactions ever made, including amount paid, payer, payee and other details. With every transaction adding a few hundred bytes, the ledger grows substantially over time.
Bank of International Settlements: Cryptocurrencies: Looking Beyond The Hype
“This limits cryptocurrencies’ usefulness for day-to-day transactions such as paying for a coffee or a conference fee, not to mention for wholesale payments,” according to the report. “Thus, the more people use a cryptocurrency, the more cumbersome payments become. This negates an essential property of present-day money: the more people use it, the stronger the incentive to use it.”
Stability of value
Given that cryptocurrencies aim to be decentralized, the absence of a primary issuer – such as a central bank for fiat currencies – means that digital currencies’ valuations remain extremely volatile.
Authorities such as central banks at times must trade against the market, even if this means taking on risk and absorbing losses. In a decentralized network of cryptocurrency users there is no obligation to stabilize the currency’s value. Therefore, whenever demand for a particular cryptocurrency decreases, so does its price.
Trust in the finality of payments
The report states that cryptocurrencies cannot guarantee payments given that the blockchain may be compromised by transaction rollbacks, simultaneous ledger updates and hard and soft forks.
Forking is a process whereby a subset of cryptocurrency holders coordinate on using a new version of the ledger and protocol, while others stick to the original. This splits the chain into two sub-networks.
While the BIS discredits digital currencies as a legitimate means of everyday payment, the organization does make the case that the underlying platform, blockchain technology, “may have promise in other fields”.
This can be proven by the many examples of low-volume cross-border payment services.
In summary, the report concludes that cryptocurrencies suffer because their goal is to be decentralized.
“Some of these issues might be addressed by novel protocols and other advances. But others seem inherently linked to the fragility and limited scalability of such decentralized systems. Ultimately, this points to the lack of an adequate institutional arrangement at the national level as the fundamental shortcoming,” the report said.
You can learn all about different exchanges, understand exactly how to buy and sell cryptocurrencies, calculate your taxes, discover digital wallets to hold assets and explore a list of all the alternative coins on the market.
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