Cryptocurrency Cannot Replace Fiat Money, Bank for International Settlement Says
The Bank for International Settlements (BIS), a financial institution under central banks’ possession, has issued part of its annual economic report suggesting that cryptocurrencies cannot replace the current payment system.
In the 24-page article released Sunday, the BIS said Bitcoin and other cryptocurrencies suffered from “a range of shortcomings” that would prevent them from ever fulfilling the lofty expectations of developers and investors alike.
The BIS noted that the high volatility of cryptocurrencies and them being subject to too much manipulation and fraud makes the assets unfit to serve as bona fide mediums of exchange in the global economy. According to the institution, the decentralized nature of cryptocurrencies serves as a fundamental flaw rather than a key strength.
Researchers also noted that mining activities involving cryptocurrencies consumes about the same amount of electricity as Switzerland does. “Put in the simplest terms, the quest for decentralized trust has quickly become an environmental disaster,” they said.
The report also cites the tendency of networks becoming congested as a particular cryptocurrency grows in value. This results in things like the high transactions fees of Bitcoin, along with the low transaction-per-second rate that it can handle. The BIS concluded that the technology cannot handle the transaction volume of the global financial system and pushing the issue could even have the potential to result in the collapse of the internet
“The associated communication volumes could bring the Internet to a halt,” the report said.
The BIS, however,admitted that blockchain did provide some benefits for the global financial system as it can process cross-border payments more efficiently. Still, it noted that it would be too much of a risk to try and run the global economy on a network with no center.
“Trust can evaporate at any time because of the fragility of the decentralized 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.”