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Bank of International Settlements Warns That Cryptocurrencies Aren’t Scalable

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The Swiss-based Bank of International Settlements has issued another warning about cryptocurrencies. This time, the statement reads that cryptos perform gradually worse as they increase in size. The BIS also believe that crypto is “no substitute” for centralized fiat currency, especially given the risk that a crypto could lose its entire value overnight.

Trust Is Key

The BIS feel that the key to a crypto performing well or badly is trust – and this is something that can quickly disappear. In the instance of Bitcoin, for example, the trust in the coin was eroded as more users clogged up the network, driving up transaction times and costs.

Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded. 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.

– From the BIS report on cryptocurrencies

The BIS also feel that the lack of centralized backing isn’t something that is sustainable, and that crypto coins are essentially only given worth by the users themselves. The BIS’ head of research, Hyun Song Shin,said:

Without users, it would simply be a worthless token. That’s true whether it’s a piece of paper with a face on it, or a digital token.

Inefficient

The report also claims that crypto is inefficient compared with traditional fiat currencies, as it consumes energy, power and time through the mining process. Not only that, but the consensus mechanisms that crypto transactions are built on are fragile, and the networks are not as fallible and irreversible as people claim. The BIS believes that rollbacks or competing ledgers could lead to issues with the finality of payments, or a fork could devalue payments that have gone before.

The parting shot was that upcoming regulation would need to be global in order to work, rather than national, as it currently happening in a number of countries. The report will make for worrying reading for many, as the BIS are an umbrella for central banks, and are therefore likely to have these sentiments echoed to an extent.

Are cryptocurrencies inherently flawed? Let us know your thoughts.

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