The head of research at the bank coordinating the world’s top 60 central banks, the Bank for International Settlements (BIS), told delegates at its Annual General Meeting Sunday that he does not believe cryptocurrency blockchains in general can scale and transact enough to threaten the global banking establishment.
Hyun Song Shin spoke from a special chapter on cryptocurrencies included in this year’s BIS Annual Economic Report, which he said was included to, “dig deeper…to understand whether cryptocurrencies can perform the role of money and whether they could replace the conventional monetary system.”
There is no threat, said Shin. “Our assessment is that cryptocurrencies fall a long way short of being able to oust the conventional monetary system, even taking account of possible technical advances.”
The comments come as something of a blow to “crypto-maximalism,” which dreams of supplanting corrupt global banking and traditional finance with a series of peer-owned, censorship-resistant global blockchains that automate “trust” (fair financial settlement).
But Shin’s points may also encourage a more realistic understanding of networks like Bitcoin, for example, which currently functions as a gold-like, digital “store of value” rather than as a payment system.
“Two limitations loom large,” said Shin. “One is the lack of scalability,” a problem exaggerated by the presence of self-interested miners moderating the networks, he said. “In order to maintain incentives for self-interested bookkeepers to keep the system running, the capacity needs to be small enough to generate (optimal) user fees. But limits on capacity choke the system through congestion, especially at peak times.”
Bitcoin and Ethereum networks regularly slow down in times of high traffic, and the miners that process transactions have the right to prioritize transactions sent with a high fee. Small transactions and those transmitted at low fees are relegated to the back of the line, creating, at times, a non-optimal user experience.
High fees also deter small payments on the network. When Bitcoin was at its all- time-high price in December 2017, said Shin, it cost $57 to send a transaction, meaning no-one in their right mind would buy a coffee with Bitcoin at that time.
“Finding the right capacity (in a monetary system) is like balancing on a knife-edge,” he said. Systems like Bitcoin have their monetary policies written in mathematical stone, which some see as a feature, but which Shin regards as an impediment in that system’s ability to outperform national currencies. “The capacity chosen at the outset is unlikely to get it exactly right,” said Shin.
Shin also argues that blockchain-based crypto ledgers may also not be as “immutable” as users would hope.
“The second problem is the lack of finality of payments,” said Shin. “A payment being recorded in the ledger does not guarantee that it is final and irrevocable. For cryptocurrencies, what counts as the truth is a matter of agreement among the bookkeepers. If a pack of them collude and rewrite history, the payment could be erased. Payment histories interwoven through the system will then be subject to unravelling, giving rise to a new twist in the systemic risk of payments, where voided payments cascade through the system… “
Shin said that anthropologists argue that physical money came about because it was a portable “record-keeping device”:
“Rather than everyone carrying around copies of a cumbersome ledger that records the whole history of transfers, money converts the tangle of IOUs into a simple token. In laboratory experiments with undergraduates as guinea pigs, researchers find that the exchange of intrinsically worthless tokens does better at generating cooperative behaviour than when the students are left to their own devices to keep a tally of who owes what to whom.”
Shin told the audience that “money as an institution…in the terminology of game theory… (is) a coordination game,” that relies on attracting and retaining participants in order to exist. Floating transaction fees can frustrate users on the network,
In addition, a current proliferation of umpteen competing crytocurrencies compromises their use as stable money, said Shin. “This is not how we expect money to work. Network externalities should weed out currencies that have no users. But new ones mushroom into being. This is one way that cryptocurrencies fail the economic test for money.”
An automated monetary system with fixed supplies and moderated by fee-seeking miners, one that is constantly under threat of losing frustrated users to new and shinier coins, said Shin, “imposes too many constraints and cuts too many corners for it to replace the monetary system…”:
“(H)owever sophisticated and useful for many other purposes, (a cryptocurrency blockchain) is a poor substitute for the solid institutional backing of money through independent and accountable central banks.”
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