Cryptocurrencies may suffer breakdowns as they scale, warns central banks' group

20 June, 2018, 18:01 | Author: Patty Hardy
  • Sydney Pub To Accept Bitcoin Virtual Currency

The Bank for International Settlements (BIS) said that the lack of a central institution backing cryptocurrencies means they risk breaking and proving worthless for holders, along with a host of environmental and operational issues.

As a financial institution that acts as a bank to central banks, BIS serves as a voice of authority in this case.

Swiss bankers say that large-scale use of bitcoin may overload servers worldwide.

Unstable pricing, the potential for manipulation and their growing drain on the speed of the internet are casting major shadows over the future of digital currencies such as bitcoin, a major new survey by the Bank of International Settlements (BIS) has concluded.

BIS authors also raised long-standing concerns echoed in Washington that cryptocurrencies are a hotbed of money-laundering activity and illegal financing used by terrorists, drug kingpins, white-collar criminals and Russian cybercriminals. This can result in transaction rollbacks, which occurs when two miners update the distributed ledger at the same time. "Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster".

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 now handled by national payment systems.

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Beyond storage capacity, the report claims that "only supercomputers" possess the processing power needed to conduct every retail transaction on a blockchain, and even if there were sufficient supercomputers to create a decentralized network, "millions of users [would] exchange files on the order of a magnitude of a terabyte".

BIS suggests that distributed ledgers will find uses in simplifying administrative processes related to complex financial transactions. What's more, they can even issue their own "central bank digital currency" (CBDC). In the instance of Bitcoin, for example, the trust in the coin was eroded as more users clogged up the network, driving up transaction times and costs. Cryptocurrencies can not scale with transaction demand, are prone to congestion and greatly fluctuate in value.

Shin says that the potentially wild price volatility of cryptocurrencies "arises from the absence of a central issuer with a mandate to guarantee the currency's stability".

The findings of the BIS come at a time when the "currency" of digital coins has not fallen.

In mainstream payment systems, once a payment goes through the central bank's books, it becomes final and can not be canceled. "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", BIS researchers said in the report.

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