The Bank of International Settlements just told the cryptocurrency world it’s not ready for prime time — and as far as mainstream financial services go, may never be.
In a withering, 24-page article released on Sunday as part of its annual economic report, the BIS said bitcoin and its ilk suffered from “a range of shortcomings” that would prevent cryptocurrencies from ever fulfilling the lofty expectations that prompted an explosion of interest — and investment — in the would-be asset class.
The BIS, an 88-year-old institution in Basel, Switzerland, which serves as a central bank for other central banks, said cryptocurrencies are too unstable, consume too much electricity, and are subject to too much manipulation and fraud to ever serve as bona fide mediums of exchange in the global economy. It cited the decentralised nature of cryptocurrencies — bitcoin and its imitators are created, transacted and accounted for on a distributed network of computers — as a fundamental flaw rather than a key strength.
In one of its most poignant findings, the BIS analysed what it would take for the blockchain software underpinning bitcoin to process the digital retail transactions currently handled by national payment systems. As the size of so many ledgers swell, the researchers found, it would eventually overwhelm everything from individual smartphones to servers.
“The associated communication volumes could bring the Internet to a halt,” the report said.
Researchers also said that the race by so-called bitcoin miners to be the first to process transactions eats about the same amount of electricity as Switzerland. “Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster,” they said.
The BIS is weighing in at pivotal moment in the cryptocurrency story. Even as Goldman Sachs Group, the New York Stock Exchange and other institutions take steps to offer clients access to the new marketplace, the US Securities and Exchange Commission is cracking down on the offerings of new digital tokens, which it has found are rife with rip-offs. At the same time, cyber attackers are hitting crypto exchanges regularly — just last week, bitcoin nosedived after a South Korean exchange reported it was hacked. The value of the cryptocurrency market has plunged 53% this year to US$280-billion, according to CoinMarketCap.
Achilles heel
The BIS did say that blockchain and its so-called distributed ledger technology did provide some benefits for the global financial system. The software can make sending cross-border payments more efficient, for example. And trade finance, the business of exports and imports that still relies on faxes and letters of credit, was indeed ripe for the improvements offered by blockchain-related programs.
Still, the institution concluded that bitcoin’s great breakthrough, the ability of one person to send something of value to someone else with the ease of an e-mail, is also its Achilles heel. It’s simply too risky on a number of levels to try and run the global economy on a network with no centre.
“Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded,” the report concluded. “Not only does this call into question the finality of individual payments, it also means that a cryptocurrency can simply stop functioning, resulting in a complete loss of value.” — Reported by Edward Robinson, (c) 2018 Bloomberg LP
