On June 17, the BIS made available a 24-page chapter from its upcoming annual economic report. The report, which is negative against cryptocurrencies as a whole, repeats the same criticisms against cryptocurrencies that have been around for years, namely that of scalability, volatility and trust.
The report begins with a definition of money and the basic structure of cryptocurrencies. It then goes on to compare the current state of cryptocurrencies against said definition and concludes that because cryptocurrencies cannot scale efficiently and are too volatile, they will never succeed as a widespread payment system.
Other issues that the report brings up against cryptocurrencies include the high electricity cost of cryptocurrency mining, the efficiency of a distributed ledger as the ledger grows in size and the large number of cryptocurrencies currently in existence. It even questions whether cryptocurrencies are genuinely trustless, noting that it is “costly — though not impossible — for any individual to forge a cryptocurrency.” The report also references the existence of hard forks to question the trustless nature of blockchain.
After thoroughly criticizing the viability of cryptocurrencies as ever being an accepted currency, the report then moves on to talk about some regulatory challenges, ICOs and the potential of distributed ledger technology. The last part is also to be expected. Even as traditional financial institutions continue to heap criticisms upon cryptocurrencies, they are actively exploring the potential of the underlying blockchain technology for use in their own payment ecosystems. This growing divergence is now almost an expected norm when such institutions discuss cryptocurrencies.
The Report Steadfastly Ignores the Solutions Currently Being Developed to Address These Problems
While the problems that the BIS highlights in its report are undoubtedly true, the crypto community has been aware of these since the very beginning. What is striking is how glaringly the report omits the current work being done to address the aforementioned problems. For instance, there is zero mention of solutions such as the Lightning Network, which was launched in March 2018.
Another scaling solution that the report neglects to mention is the upcoming Ethereum upgrades such as sharding, which is specifically designed to solve the scaling problem. In fact, the report barely mentions Ethereum at all except to talk about how the underlying smart contract capability of Ethereum could be used to help transactions within the current financial status quo.
The BIS Report Is Firmly on the Side of Centralized Institutions
It should be of little surprise that the BIS report sides with central banks, after all the BIS is owned by 60 central banks around the world. A few statements from the report clearly highlight this bias:
“Formal central banks, as we know them today, also often emerged in direct response to poor experiences with decentralised money… Independent central banks have largely achieved the goal of safeguarding society’s economic and political interest in a stable currency.”
Hence, the negative tone of the report toward cryptocurrencies is something that should have been expected. After all, the original intentions of cryptocurrencies were explicitly against the centralized role that central banks play in our monetary system. And while the criticisms raised against cryptocurrencies are valid, they only highlight the problems and not the solutions.