Earlier this week, the Bank of International Settlements (BIS) in Switzerland issued a new document as part of its annual economic report that warns citizens of the dangers of digital currencies.
Since the report’s publication, many leaders in the crypto community have argued that the BIS is incorrect in much of what it seems to state as fact.
CEO and co-founder of Circle Jeremy Allaire commented that the report was “very shallow,” and added, “They haven’t done much research at all. They’re looking back at stuff that’s years old. They’re not looking at what’s going on in terms of the real R&D in this space. It’s just really poor research.”
This research appears to treat each coin as interchangeable with the next, and the findings claim that they “all [tend] to be very closely substitutable with one another.” Throughout the report, the author tacitly references the operations of Bitcoin’s blockchain and assumes that all cryptocurrencies function in a similar vein. These assumptions are fallacious in their logic and are hallmarks of the same “shallow,” narrow-scoped research that Allaire criticizes.
The document does acknowledge some benefits to blockchain technology. For example, sections point out that the blockchain can make cross-border payments easier and more efficient, along with the business of both importing and exporting goods.
However, the authors also claim that the blockchain will be too expensive to secure, and that it could “bring the internet to a halt,” as implementing it into digital retail transactions handled by national payment systems will overwhelm “everything from individual smartphones to servers.”
According to the text, cryptocurrencies are “not scalable” and are more likely to “suffer a breakdown in trust and efficiency” the more people use them. Most cryptocurrencies operate via decentralized platforms, which BIS says is a huge problem as they can deter users’ confidence.
“For any form of money to work across large scale networks, it requires trust in the stability of its value and in its ability to scale efficiently,” the report says. “But trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded. Not only does this call into question the finality of individual payments, but it also means that cryptocurrency can simply stop functioning, resulting in a complete loss of value.”
“The report is correct about price stability and potential scaling issues,” Jeremy Gardner, CEO of Ausum Ventures, told Bitcoin Magazine. “The rest is garbage. Bitcoin's decentralized consensus is backed by the most powerful computer network to ever exist and has never been broken. The entire point of blockchain technology is the immutability of the ledger of transactions. There's no record of a major cryptocurrency like bitcoin or ether ‘simply stop functioning.’ These are arbitrary statements with no grounding in reality.”
Head of research at BIS Hyun Song Shin also believes that money has value strictly because it’s used, whereas, people are only holding crypto for speculative purposes rather than actually using it.
“Without users, it would simply be a worthless token,” he proclaims. “That’s true whether it’s a piece of paper with a face on it or a digital token.”
The Mining Trope
In addition to this perceived lack of value, researchers claim cryptocurrency mining operations are flawed due to the high amounts of energy they consume.
“Put in the simplest terms, the quest for decentralized trust has quickly become an environmental disaster,” the report states.
This is a criticism that has been refuted in the past on numerous occasions. CIO of Bitfury Alex Petrov, for example, has pointed out that traditional finance processes currently exceed the amount of energy required for bitcoin mining.
“There are 3.6 million ATMs deployed in the U.S.,” he said at a mining conference in May. “Each of them are using seven to 800 watts just in standby mode. This alone generates huge numbers of electricity usage, slightly higher than the Bitcoin network. If you add internal banking systems, CTVs, communicating with other banks and additional protection, you get higher costs than those of bitcoin.”
Scott Howard, CEO and co-founder of the Toronto-based venture ePIC Blockchain Technologies, stated at that same conference that many bitcoin mining operations will set up camp in abandoned industrial sites, thereby recycling the building’s resources and contributing less to toxic waste pollution. In addition, he pointed to large projects, like hydro dams, that produce energy regardless of whether it’s used or not, and that crypto mining simply capitalizes on this energy by consuming it when no one else will.
“Prices are low because the energy can’t find more productive use, often taking over abandoned industrial sites far away from urban centers,” he concluded.
Stability and Security
The BIS report also states that virtual currencies are too vulnerable to manipulation, fraud and outside influence to ever work as stable mediums of exchange. Again, the report fails to consider the different mechanisms that different protocols employ, painting only in broad strokes.
Furthermore, the report ignores altogether applications like the Lightning Network that have made their way into the cryptocurrency scene as a means of solving the energy and scalability issues potentially facing the Bitcoin blockchain.
As the Lightning Network is built on top of present-day digital assets, it allows for greater volumes of cryptocurrency to be processed at faster speeds without consuming mass amounts of energy, potentially allowing for millions of transactions to occur per second.
The application gets its name from its “lightning fast” payments, which are powered by blockchain smart contracts, and users don’t have to worry about block confirmation times as payments will usually occur in either seconds or milliseconds.