On "Cryptocurrencies: looking beyond the hype"

diego-ph-249471-unsplash.jpg
  • Last week,  "Cryptocurrencies: looking beyond the hype" was released by the Bank of International Settlements (BIS).  BIS members are 60 central banks from around the world. The paper's comments included:
  • Cryptocurrencies promise to replace trusted institutions with distributed ledger technology ... Transactions are slow and costly, prone to congestion, and cannot scale with demand. The decentralized consensus behind the technology is also fragile andconsumes vast amounts of energy. Still, distributed ledger technology could have promise in other applications.
  • the distinguishing feature of cryptocurrencies is digital peer-to-peer exchange. Digital bank accounts have been around for decades. And privately issued “virtual currencies” – e.g. as used in massive multiplayer online games like World of Warcraft – predate cryptocurrencies by a decade.
  • decentralized cryptocurrencies suffer from a range of shortcomings. The main inefficiencies arise from the extreme degree of decentralization: creating the required trust in such a setting wastes huge amounts of computing power, decentralized storage of a transaction ledger is inefficient and the decentralized consensus is vulnerable 
  • “While cryptocurrencies do not work as money, the underlying technology may have promise in other fields. A notable example is in low-volume cross-border payment services … A recent non-profit example is the case of the World Food Programme’s blockchain-based Building Blocks system, which handles payments for food aid serving Syrian refugees in Jordan.
  • Cryptocurrencies live in their own digital, nationless realm and can largely function in isolation from existing institutional environments or other infrastructure. Their legal domicile – to the extent they have one – might be offshore, or impossible to establish clearly. As a result, they can be regulated only indirectly.
  • the efficacy of these products is limited by the low liquidity and intrinsic inefficiencies of permissionless cryptocurrencies ... The added value of the technology will probably derive from the simplification of administrative processes related to complex financial transactions, such as trade finance. Crucially, however, none of the applications require the use or creation of a cryptocurrency."


MY TAKE

  • While some crypto-players may view the article as self-serving (given its members are central banks), most seasoned practitioners will concede that the distributed ledger architectures are still at an early stage of development. - and will debate the trade-offs between centralized and distributed approaches.
  • At the same time, the growth of the internet and digital assets will continue to change the role of financial institutions (central banks, investment firms, advisors, etc.) and sovereign states (their policy makers, regulators, etc.)
  • Bottom line: The growth of digital assets and digital trade is driving many new opportunities and will result in new ways to create, exchange and store value.

More resources here.

FPM Team