Bank of International Settlements (BIS) Throws Major Shade at Crypto
The Bank for International Settlements (BIS), which specializes in servicing the world’s central banks, hammered crypto in a scathing new report. The international financial institution pointed out drawbacks such as scalability, energy use, and volatility. However, the BIS assertions seem unsurprisingly biased toward traditional banking, with many of their claims already having well-developed responses in the cryptoverse.
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Centralized Power Dings Rising Decentralization
In a new document, the Basel-based BIS has called attention to a collection of limitations that it alleges would restrict bitcoin and its crypto peers from achieving mainstream status.
Per the BIS report, the major shortcoming of cryptocurrencies is their decentralized natures, insofar as their pre-scaled data is typically shared among all participants on a distributed network of computers. Therefore, if all transactions that are at presently handled by existing systems were to be performed on distributed ledger like Bitcoin’s, then the accumulated data weight could load up servers and bring the “internet to a halt.”
The argument is disingenuous with a bit of nuance, though, as cryptocurrencies won’t remain with current scaling conditions forever. Developers have come up with second-layer protocols such as the Lightning Network that may facilitate millions of transactions-per-second in throughput. The second-layer payment protocols work on top of blockchains, allowing off-chain transactions that don’t overburden main chains.
According to BIS, the value of cryptocurrencies could become nil if their decentralized consensuses are breached. Though the space literally just saw EOS’s consensus broken (temporarily), and their project didn’t crash and burn.
The BIS wrote:
“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, it also means that a cryptocurrency can simply stop functioning, resulting in a complete loss of value.”
The chance of a breach of trust seems higher in the banking ecosystem, where abuses are seemingly systemic, rather than in cryptocurrencies.
Myth of Energy Consumption Broken
The BIS also emphasized the energy consumption used by miners to verify transactions on the blockchain, saying it could lead to an “environmental disaster.”
The report said:
“Individual facilities operated by miners can host computing power equivalent to that of millions of personal computers. At the time of writing, the total electricity use of bitcoin mining equaled that of mid-sized economies such as Switzerland, and other cryptocurrencies also use ample electricity. Put in the simplest terms, the quest for decentralized trust has quickly become an environmental disaster.”
Certainly, verifying transactions on the blockchain tech is an energy-intensive task, but it’s supposed to be, and there are ways to mitigate the ecological impact of such mining. The common myth is that the banking system is less energy demanding, as well. Most analyses only compare the power and cost used to verify transactions in the existing banking system, but the majority miss out on the operational costs, the costs of physical infrastructure, employees commuting to and from from the bank, and many other factors.
Adding the global operational costs and power usage of the banking ecosystem makes cryptocurrencies’ power consumption look minuscule. Adopting cryptocurrencies could eventually remove the need of intermediaries such as banks, altogether removing all associated costs and uses of resources.
BIS Positives on the Blockchain
The BIS did have some positive points on blockchain, stating that the efficient use of blockchain could be where transaction volumes are low such as sending cross-border payments. It also highlighted the benefit distributed ledger technology could bring to the trade finance industry. With the present system, there are multiple checkpoints to facilitate trades, but with blockchain smart contracts, the task could be cost-effective and hassle-free.
All that being said, blockchain and cryptocurrencies are still in their nascent stage and there is more advancement to come. Many traditional financial institutions are radically shifting their focuses to digital technologies as part of expanding their services.
Is blockchain technology more efficient than the current banking system? Share your views in the comments section.
Images via Financial Tribune