Switzerland’s Bank of International Settlements (BIS) says that although cryptocurrencies promise to replace real money with digital money, there is hardly any specific economic problem it would solve except causing an environmental disaster. This is mentioned in the BIS Annual Economic Report named “Cryptocurrencies: looking beyond the hype.”
Hyun Song Shin, a South Korean economic theorist and financial economist who is the Economic Adviser and Head of Research of the Bank for International Settlements, mentions that the principle behind traditional money is that when more people accept it, it becomes accepted by the society going with the motto “more the merrier” while modern cryptocurrencies do not follow that. Instead, it is the miner and those who pay the miner that decide which currency to generate, and it also spends a huge amount of money among those who are involved in mining the cryptocurrencies thus making it “more the sorrier.” Another problem is that if the capacity is increased then there will be less fees for the miners and they might be dissuaded. Therefore, too narrow or too wide are the two extremes that would render cryptocurrencies problematic to the economy.
The report says that even currencies like Bitcoin, well known and widely accepted, should give the world the assurance that it is mined genuinely and there is no deception whatsoever:
“Yet delivering on this promise hinges on a set of assumptions: that honest miners control the vast majority of computing power, that users verify the history of all transactions and that the supply of the currency is predetermined by a protocol.”
Another major problem the report focuses on is the effect of crypto mining on the environment:
“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 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.”
Another point of inadequacy of cryptocurrencies is that they do not scale like sovereign moneys. If a cryptocurrency to be a decentralized currency, each and every user should download and verify every transaction made in the history of the currency. Taking Bitcoin as an example, standing roughly at 170 gigabytes, it has practical limitations to verify it in the said manner.
Congestion and the resulting queuing to enter records of blockchain-based cryptocurrencies is yet another scalability issue according to the BIS Annual Economic Report named “Cryptocurrencies: looking beyond the hype.”
“The second key issue with cryptocurrencies is their unstable value. This arises from the absence of a central issuer with a mandate to guarantee the currency’s stability,” according to the report. Since cryptocurrencies are generated by a predetermined protocol their value cannot be adjusted by a central bank or an issuer by controlling the flow of currency.
Mr. Shin says that although cryptocurrencies like Bitcoin cannot be still used as traditional money, distributed ledger technology may have other uses and applications, and until it is fully usable authorities should keep an eye on them in order to prevent abuses during the experimentation stage.
