BIS Puts Down Cryptos

| Publish date: 06/19/2018
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The Bank of International Settlements published its annual economic report on Sunday June 17. As part of the report, the BIS conducted an analysis of cryptocurrencies, wherein the organization concluded that cryptocurrencies were not scalable enough to function as money.

The Bank of International Settlements (BIS) is based in Basel, Switzerland and is the central bank of central banks, made up of 60 central banks, making it one of the most power financial institutions in the world.

Flaws in Cryptocurrencies

In its report, the BIS stated that there were three main flaws with cryptocurrencies in general – scalability, the stability of its value and the trust engendered in the finality of payments.

According to the report, mining for cryptocurrencies is an expensive affair. Taking the example of Bitcoin, the organization stated that the amount of electricity used at this stage to mine the digital asset was equal to the consumption of electricity by the entire nation of Switzerland. Additionally, if cryptocurrencies were to conduct as many transactions as fiat currencies did every day, the amount of communications data that would be required for this would shut down the internet.

Thus, just the sheer amount of power and computing facility that would be required by cryptocurrencies to scale up is what makes cryptos not a viable option as money.

Next, the BIS also criticized the decentralized nature of cryptocurrencies as a weakness, rather than its core strength. The organization stated that users’ trust could evaporate at any time thanks to the fragile nature of the decentralized consensus mechanism via which transactions are recorded. The challenge is that this new technology can at best offer probable transaction finality by giving preference to the longest chain on the Blockchain ledger when it has to negotiate conflicting validations.

Additionally, the forking of a Blockchain carries the risk of that cryptocurrency losing complete value. The example given to prove this point was the incorrect Bitcoin update in 2013, which led to the Blockchain splitting temporarily and cause the value of the digital currency to drop by almost one-third.

This high risk of hard forks as well as the extreme volatility of the cryptocurrency market proves that cryptocurrencies cannot make the transition to being used like fiat currencies.

Upside of Blockchain Technology

The report was not completely negative. The BIS admitted that the new Blockchain technology has made some positive impact in the financial world too. For example, cross-border transactions are much faster and cheaper when using Blockchain technology.

Additionally, the supply chain industry stands to benefit a great deal from this new technology. The import/export business, which still uses antiquated faxes as well as letters of credit. With the implementation of Blockchain tech, there are significant improvemen

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