Cryptocurrencies assessed as too risky for mainstream
Instability, environmental toll among concerns listed by central bank overseer
LONDON— The Bank for International Settlements just told the cryptocurrency world it’s not ready for prime time — and, as far as mainstream financial services go, may never be.
In a withering 24-page article released Sunday as part of its annual economic report, the BIS said Bitcoin and its ilk suffered from “a range of shortcomings” that would prevent cryptocurrencies from ever fulfilling the lofty expectations that prompted an explosion of interest — and investment — in the wouldbe asset class.
The BIS, an 88-year-old institution in Basel, Switzerland, that serves as a central bank for other central banks, said cryptocurrencies are too unstable, consume too much electricity, and are subject to too much manipulation and fraud to ever serve as bona fide media of exchange in the global economy.
It cited the decentralized nature of cryptocurrencies — Bitcoin and its imitators are created, transacted and accounted for on a distributed network of computers — as a fundamental flaw rather than a key strength.
In one of its most poignant findings, the BIS analyzed what it would take for the blockchain software underpinning Bitcoin to process the digital retail transactions currently handled by national payment systems. As the size of so many ledgers swell, the researchers found, it would eventually overwhelm everything from individual smartphones to servers.
“The associated communication volumes could bring the internet to a halt,” the report said.
“Put in the simplest terms, the quest for decentralized trust has quickly become an environmental disaster.” BANK FOR INTERNATIONAL SETTLEMENTS REPORT
Researchers also said the race by so-called Bitcoin miners to be the first to process transactions eats 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 BIS is weighing in at a pivotal moment in the cryptocurrency story. Even as Goldman Sachs Group Inc., the New York Stock Exchange, and other institutions take steps to offer clients access to the new marketplace, the U.S. Securities and Exchange Commission is cracking down on the offerings of new digital tokens, which it has found are rife with rip-offs. At the same time, cyber-attackers are hitting crypto exchanges regularly — just last week, Bitcoin nosedived after a South Korean exchange reported it was hacked.
The report could also revive concerns that, for all its ingenu- ity, blockchain transactions will get harder and harder to protect as it scales up. When this decentralized anonymous system was introduced in 2009, it quickly proved it could secure purchases by computer enthusiasts, networks of friends as well as criminals in the digital black market, says a working paper published by the National Bureau of Economic Research, a non-profit organization in Cambridge, Mass.
Yet with supporters pushing to make it a mass market plat- form utilized by companies and governments, it could become too expensive to secure, concludes Eric Budish, the paper’s author and an economics professor at the University of Chicago Booth School of Business.
The BIS did say that blockchain and its so-called distributed ledger technology did provide some benefits for the global financial system. The software can make sending cross-border payments more efficient, for example. And trade finance, the business of exports and imports that still relies on faxes and letters of credit, was indeed ripe for the improvements offered by Blockchain-related programs.
Still, the institution concluded that Bitcoin’s great breakthrough, the ability of one person to send something of value to someone else with the ease of an email, is also its Achilles heel. It’s simply too risky on a number of levels to try to run the global economy on a network with no centre.