Cryptocurrencies' model of generating trust limits their potential to replace conventional money, the Bank for International Settlements (BIS) writes in its Annual Economic Report (AER), a new title launched this year.
The Bank of International Settlements (BIS), a transnational institution owned by and comprised of central banks that seeks to "fosters international monetary and financial cooperation and serves as a bank for central banks", recently published its quarterly review of "International banking and financial market developments" for June 2018.
That's one of the messages from a new report by an organization that represents dozens of the world's central banks.
The reason for this claim is based on how Bitcoin and other cryptocurrencies track transactions, which is that all transactions are added to a ledger.
The paper calculated what it would take for the blockchain software underpinning bitcoin to process the trillions of retail transaction now swirling through national payment systems.
When bitcoin peaked at $20,000 in December, a single operation with the digital currency cost additional $57.
The central bank further stated that due to its high electrical power consumption, "the quest for decentralized trust has quickly become an environmental disaster" due to its high electrical power consumption.
Shin has a good point here, although we do have cryptocurrencies that use more energy-efficient algorithms, such as NEO, which use a "Proof-of-Stake" (PoS) algorithm and EOS, which uses a "Delegated Proof-of-Work" (DPoS) algorithm.
The need for the decentralised blockchain ledger which records transactions to be updated eventually by every user has caused congestion as cryptocurrencies have become increasing popular.
"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 BIS extrapolates that if Bitcoin was to process all global payments in its current state, the decentralized network would overload everything from mobile devices to servers around the globe and effectively break the internet.
It also noted the unstable value of cryptocurrencies, which has arisen from the lack of a central issuer guaranteeing its stability. The software can make sending cross-border payments more efficient, for example.
Should central banks issue digital currencies or CDBCs? With mainstream payment systems, he says that once an individual payment reaches the central bank's books, it can't be revoked, whereas permissionless cryptocurrencies cannot make such guarantees. "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", it reads.