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The Bank of International Settlements says that crypto cannot become a medium of exchange, and lacks âscalability, stability of value and trust in the finality of payments.â
The Bank of International Settlements (BIS) has said that cryptocurrencies cannot scale to function as money, in a 24-page article published yesterday, June 17, as part of its annual economic report.
According to the BIS â an organization based in Switzerland made up of 60 of the worldâs central banks â cryptocurrencies will not be able to scale to become a medium of exchange in a global economy. The BIS report outlines three key âshortcomingsâ that will prevent crypto from replacing money â these being âscalability, stability of value and trust in the finality of payments.â
BIS criticizes the decentralization of cryptocurrencies as a flaw rather than a strength, alleging that âtrust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded.â
BIS makes the case most blockchains can at best only offer âprobabilisticâ transaction finality by privileging the longest chain on the ledger to negotiate conflicting transaction validations.
In this vein the report raises alarms over the âforkingâ of blockchains that can cause cryptocurrencies to split entails the risk of âthe complete loss of value.â The report cites an erroneous Bitcoin (BTC) software update in March 2013 that caused the blockchain to temporarily split and the price of BTC to drop âalmost a third,â â though BIS fails to mention that the coin regained most of its losses within a few hours.
The BIS also raises concerns that as the shared ledger grows, processing transactions demands electricity and computing resources that exceed even the most powerful facilities.
The âcommunication volumesâ and storage demands associated with mass crypto adoption, the bank argues, could âbring the Internet to a halt.â Less drastically, congestion of the blockchain simply risks that âthe more people use a cryptocurrency, the more cumbersome payments become.â
The bank also raises concern over the concentration of power across âallâ cryptocurrencies, citing the problem of âmanipulation,â with mineable cryptocurrencies being controlled by a small pool of miners who have high-powered processing resources able to keep up competition.
The report is notably focused only on cryptocurrencies that use proof-of-work, permissionless blockchains, although it acknowledges the existence of alternative consensus mechanisms such as proof-of-stake, as well as scaling solutions such as the Lightning Network, maintaining that they âhave yet to be proved in practice.â
A March report released by the BIS refuted the effectiveness of so-called central bank digital currencies (CBDCs), warning of their potentially âadverseâ consequences, and calling for further research into their possible effects on global financial stability.
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