The Bank for International Settlements published yesterday a report entitled “Cryptocurrencies: looking beyond the hype.” In it, they provide an overview of the cryptocurrencies world enumerating the pros and cons of their adoption.
As shown in the title, the analysis seeks to go beyond the excitement that many might expect; however, it also highlights some advantages of cryptocurrency over traditional FIAT money.
The Bank for International Settlements is an institution that provides financial services to Central Banks. Currently, 60 Central Banks are members of this institution, attesting to the prestige and importance of the BIS in the world’s financial and macroeconomic sphere.
The Report shows an overview that serves as an answer to the question of why cryptocurrencies the world does not use cryptos as a mainstream means of payments.
According to the Bank for International Settlements, even though cryptocurrencies have a lot of potentials, they do not yet have the maturity level required to disrupt the international monetary system:
Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value. Overall, the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.
That said, the underlying technology could have promise in other applications, such as the simplification of administrative processes in the settlement of financial transactions. Still, this remains to be tested.
According to the study, the use of FIAT money is still a much more convenient system for ordinary users and still represents the’final boss’ cryptocurrencies need to beat
Thanks to the active involvement of central banks, today’s diverse payment systems have achieved safety, cost-effectiveness, scalability and trust that a payment, once made, is final.
They mentioned three key factors why cryptocurrencies have not yet become mainstream, and why they represent a less viable use option than FIAT money:
“First, cryptocurrencies simply do not scale like sovereign moneys. … The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte …
The second key issue with cryptocurrencies is their unstable value. This arises from the absence of a central issuer with a mandate to guarantee the currency’s stability …
The third issue concerns the fragile foundation of the trust in cryptocurrencies.”
The Bank for International Settlements Explained the BTC/BCH Debate?
Another aspect that worries the institution is the excessive control users give to the miners over the fate and stability of a blockchain:
The lack of payment finality is exacerbated by the fact that cryptocurrencies can be manipulated by miners controlling substantial computing power, a real possibility given the concentration of mining for many cryptocurrencies.
This point is precisely the main reason for the break-up between the Bitcoin and Bch communities. A more substantial and heavier block would give a high level of control to the most powerful pools, allowing them to have certain privileges over a given network.
In the same vein, it seems BIS believes forks are also an anomaly and a sign of the fragility of blockchain:
An even more worrying aspect underlying such episodes is that forking may only be symptomatic of a fundamental shortcoming: the fragility of the decentralised consensus involved in updating the ledger and, with it, of the underlying trust in the cryptocurrency
Should Central Baks Issue Digital Currencies?
On the initiative of some Central Banks to study the use of Blockchain technologies, the Bank for International Settlements mentioned that although there are currently many intentions, if implemented, the most likely is that the CBDC (Central Bank Digital Currencies) do not have the same characteristics as the traditional cryptocurrencies:
At the moment, central banks are closely monitoring the technologies while taking a cautious approach to implementation. Some are evaluating the pros and cons of issuing narrowly targeted CBDCs, restricted to wholesale transactions among financial institutions. These would not challenge the current two-tier system, but would instead be intended to enhance the operational efficiency of existing arrangements. So far, however, experiments with such wholesale CBDCs have not produced a strong case for immediate issuance.