Cryptocurrencies, doomed to fail?
If you were to ask Dr. Agustin Carstens, General Manager for Bank of International Settlement, he would argue a “Yes”. He would tell you thatcryptocurrencies cannot yet replace sovereign money.Note: The Bank of International Settlements is the Central banks’ bank.
CNBC quotes him as “savaging bitcoin as a combination of a bubble, a Ponzi scheme and an environmental disaster”. He pretty much made the same case at the LKY School of Public Administration last Nov 15, 2018. Dr Carstengave 10 reasonsand of these, I sharetwo.
Imagine that all non-cash transactions in three countries were done using cryptocurrency instead of money. And further assume that each of these digital transaction use up just250 bytes. The graph below shows the rapid growth in the hypothetical size of the digital ledgers.
Imagine cryptocurrencies replaced money for all non-cash transactions in just three countries. And further assume that each of these digital transaction used up 250 bytes. The graph below shows the rapid growth in the size of the digital ledgers. China in Red, US in Blue and the Euro in Yellow.
As the ledger sizes grows, it becomes more costly to maintain. To slow down the rate of growth, Cryptocurrencies limit the number of transactions at any given time. These transaction limits unfortunately also cause congestions - as shown in the graph below. It was experienced in late 2017.
Congestionsin turn, show that cryptocurrencies do not scale like sovereign money. Cryptocurrency in its present state is thus not yet ready for prime time.
Faced with these graphs, the audience raised two cases. These cases seem to show that cryptocurrencies are better than sovereign cash.
One is in international payments. While it takes SWIFT system as long as 3 days to affect a transfer, bitcoin and its ilk can do this much faster. The other case has to do with hyperinflation. In countries like Zimbabwe and Venezuela bitcoin proves much better than ‘sovereign money’.
Dr. Carsten’s anchors his analysis on “proof of work” to update digital ledgers. Cryptocurrencies rely on an ecosystem of ‘miners’ to maintain these ledgers. The cost of updating these digital ledgers come at a high computational cost. Read the complete article by
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