The Bank of International Settlements (BIS) is out with a report on cryptocurrencies that hammers the new technology.
Created in 1930, a time of profound economic uncertainty, BIS serves central banks by promoting financial stability and cooperation. The BIS is actually owned by 60 central banks, with its head office is in Basel, Switzerland (a country known for its crypto innovation).
The report does a good job of providing a high level overview of digital currencies and the concept of blockchain. But following these explanatory highlights, the authors dive right in and eviscerate the concept of cryptocurrency.
Regarding limitations and intrinsic shortcomings of crypto, the BIS report bashes mining. Citing Bitcoin, the document states;
“At the time of writing, the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland, and other cryptocurrencies also use ample electricity. Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster.” [emphasis added]
But the authors don’t stop there, they question cryptocurrencies stability, fragility, and the ephemeral panacea of permissionless decentralization.
“The lack of payment finality is exacerbated by the fact that cryptocurrencies can be manipulated by miners controlling substantial computing power, a real possibility given the concentration of mining for many cryptocurrencies. One cannot tell if a strategic attack is under way because an attacker would reveal the (forged) ledger only once they were sure of success. This implies that finality will always remain uncertain. For cryptocurrencies, each update of the ledger comes with an additional proof-of-work that an attacker would have to reproduce. Yet while the probability that a payment is final increases with the number of subsequent ledger updates, it never reaches 100%.”
BIS says trust – fragile due to forking – may be “symptomatic of a fundamental shortcoming: the decentralised consensus involved in updating the ledger… coordination on how the ledger is updated could break down at any time…”
There is the addedproblem of illicit usage of crypto such as money laundering and terrorist financing, something central banks don’t like.
Of course, the solution is already in existence: fiat currency controlled by the global central banking system.
The authors admit that distributed ledger technology has “promise” in other fields, such as small value cross border transfers.
Should central banks issue digital currencies or CDBCs? Perhaps, if the banks control who acts as a trusted node.
This is a must read report, embedded below.