This is the first in a series of articles on some of the main topics to be discussed during our November 2018 Beyond Borders: International Tax Into 2020 conference in Limassol, Cyprus. Book your early bird ticket HERE before it’s too late!
A new report by Switzerland’s Bank of International Settlements (BIS) refers to the digital currency as “a poor substitute for the solid institutional backing of money,” arguing that its wishy-washy regulation and volatile price could potentially lead to trouble.
As reported by Entrepreneur’s Lydia Belanger, BIS looked into “the sheer computing power it takes not only to mine cryptocurrencies, but also to process transactions with them.”
According to Belanger, BIS suggests that, “because records of all cryptocurrency transactions are stored on a decentralized ledger rather than by central bank, that ledger could become unsustainably large very quickly.”
More specifically, BIS writes, “To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months.”
Furthermore, BIS’s research predicts the Internet to crash at some point taking into account the amount of power required to both mine the digital currency and process transactions registered on the ledger.
BIS writes: “Only supercomputers could keep up with verification of the incoming transactions…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.”
This need for energy might also have dire environmental concerns.
The BIS report says, “At the time of writing, the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland, and other cryptocurrencies also use ample electricity.”
“Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster,” it concluded.
Finally, the system can readily become congested, which in turn may lead to a hike in transaction fees.
In the video below, BIS Head of Research Hyun Song Shin explains how these transaction fees may grow and make it too expensive to use Bitcoin for certain purposes.
The BIS, however, does believe the blockchain itself and its many applications can be of great use in the banking and financial world.
As reported by Bloomberg, BIS’s report highlights blockchain’s ability to “make sending cross-border payments more efficient” and improve “trade finance, the business of exports and imports that still relies on faxes and letters of credit.”
Bitcoin Backers Respond to BIS
Obviously, this report did not resonate with individuals who have faith in Bitcoin and the future role of digital currencies in the global economy.
Saifedean Ammous, author of The Bitcoin Standard, tweeted, “Are you looking for a comprehensive summary of the most idiotic nocoiner propaganda against Bitcoin? The Bank Of International Settlement’s Concern Troll Division has published a compendium just for you.”
Alistair Milne, a Bitcoin investor and entrepreneur, agreed with Ammous and said via Twitter: “I don't know about you, but I find this reassuring ... i.e. it either demonstrates a complete lack of understanding/knowledge ... or they're scared enough to write this nonsense in an effort to misinform!”
Additionally, Jeremy Allaire, the CEO of crypto company Circle, which is backed by Goldman Sachs, spoke to Business Insider and called the BIS report “really shallow.”
“They haven't done much research at all clearly. They're looking back at stuff that's year's old, they're not looking at what's actually going on in terms of the real R&D in this space. It's just really poor research," Allaire added.
"There's a lot of infrastructure work going on and I think it's really, really key because I think the consensus within the industry is that if we can solve some of those issues in the next year to two years, then we can have products that are actually used by a billion people. That's when this gets to be a lot more interesting," he concluded.
Furthermore, Paddy Baker, writing for Crypto Briefing, criticizes the BIS report for omitting any mention of the more energy-efficient Proof-of-Stake (PoS) models when putting together its analysis.
Baker says, “The report completely omits the Proof-of-Stake (PoS) model from its evaluation, instead focusing exclusively on Proof-of-Work (PoW) as the basis for an assessment for the entire cryptocurrency sector.”
“Whilst PoW networks are still in the majority – at least by market cap – there has been a recent surge in PoS protocols, and the developers behind Ethereum have already begun the transition to a hybrid consensus network with the ultimate aim to becoming a fully PoS blockchain in the next few years,” he adds.
As explained by Eli Afram for CoinGeek, PoS “attempts to bypass the computation intensive mining process with a system that chooses the block creator through various combinations of random selection and wealth and/or age,” which then “translates to an astoundingly energy efficient method for attaining a form of distributed consensus.”
More Regulation & Cross-Border Collaboration Required for Bitcoin
Of course, the BIS assessment should be taken with a grain of salt considering the source: a global bank that aims “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”
Bloomberg Opinion columnist Lionel Laurent does believe, though, that the BIS report raises an important point.
Laurent writes, “The best way of looking at the BIS report is as a cry for help on what to do about Bitcoin. It needs to be heard, and not just for the slightly overblown talk of an internet meltdown. That’s far less urgent than supervision of a market that has reinvigorated scammers. Better monitoring would be a start, of course. But without cross-border help, serious action on fraud and adequate resources, this central banker lament will go unanswered.”
You can download the full BIS report HERE.