Cryptocurrency earns another potent critic
Ben D. Kritz
AS far as the Bank of International Settlements (BIS) is concerned, cryptocurrencies like Bitcoin are at best a waste of time and energy that would be better spent on developing applications for blockchain technology that are actually useful. The imaginary fairy coin ecosystem probably won’t be discouraged by yet another downbeat assessment by the evil global centralized banking cabal, but the critical BIS report released this week might just help to kill further efforts to mainstream the alternative to real money.
The BIS, which is based in Switzerland, has a considerable amount of influence over financial policymakers because it’s essentially the bank for central banks. Thus, if the BIS decides it doesn’t want to do business in cryptocurrency, central banks’ ability to do business with each other in cryptocurrency will be handicapped to some extent, perhaps enough to discourage official sanction by some late-comers like the Philippines.
Although the BIS has not yet made an official pronouncement to that effect, the report, which is actually a 24-page chapter in the BIS Annual Economic Report 2018, makes it clear the bank wants nothing to do with cryptocurrency.
The fundamental reason why the BIS has concluded that cryptocurrency is essentially useless as a mainstream medium of exchange is what advocates of the technology tout as its key strength, the distributed network that creates, transacts, and maintains the accounting of cryptocurrencies.
“Overall, decentralized cryptocurrencies suffer from a range of shortcomings,” the report summarizes. “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.”
One of the biggest problems is scalability. The BIS analyzed what would happen if the world’s current volume of digital retail transactions was managed with blockchain technology, and concluded that it would overwhelm the internet. So many distributed ledgers would be created that the required data capacity would exceed the world’s communication capabilities. In other words, every internet-connected device in the world, every computer, tablet, and smartphone would be doing nothing but processing cryptocurrency transactions and the total computing power would still be insufficient.
Cryptocurrency advocates might argue that this hypothetical case is an extreme example, but that would be as much as admitting the BIS is correct. Cryptocurrency has never been marketed as a merely additional form of money, but rather as a conceptually superior alternative intended to replace existing forms.
Security is another fatal flaw in cryptocurrency, as the BIS sees it. The bank noted that there had been a number of costly security breaches involving cryptocurrency exchanges, and that it also helped to facilitate cybercrime activity such as last year’s high profile ransomware attacks. But the real problem is even more basic. As cryptocurrencies expand, the consensus required of the distributed networks to confirm transactions becomes increasingly vulnerable to disagreements, which are manifested as “forks” – changes in the computing rules governing a blockchain that inevitably result in a certain number of transactions becoming stranded.
Forks also often, although not necessarily always, result in the creation of new cryptocurrencies, which simply magnifies the risks. For example, in January of this year alone, forks in the Bitcoin blockchain have resulted in the creation of Bitcoin ALL, Bitcoin Cash Plus, Bitcoin Smart, Bitcoin Interest, Quantum Bitcoin, BitcoinLite, Bitcoin Ore, Bitcoin Private, Bitcoin Atom and Bitcoin Pizza. None of these may be permanent or even last beyond a brief period of time, but if the distributed ledger concept was working as it should, they shouldn’t even exist.
The BIS report also touches on the enormous energy cost of cryptocurrency. At its current scale, which is miniscule compared with the global volume of transactions involving ordinary money, the activity of Bitcoin “miners” who process blocks of data (and thereby “mine” new bitcoins as compensation for maintaining the distributed ledger) uses about as much energy as the entire nation of Switzerland.
There have been some solutions to ease the energy burden – for example, some Bitcoin “mines” in Australia are powered by disused small hydro plants – but none are scalable enough to significantly lower the overall energy costs or keep up with expansion of the distributed ledger.
“While cryptocurrencies don’t work as money, the underlying technology may have promise in other fields,” the BIS concludes. It cites the example of the application of blockchain in trade transactions – one area where the technology has so far demonstrated its efficacy, and is being adopted rapidly – and in other “niche settings where the benefits of decentralized access exceed the higher operating cost of maintaining multiple copies of the ledger.”
For example, the World Food Program uses a program called Building Blocks to manage payments for food aid to Syrian refugees in Jordan since the blockchain can facilitate cross-border money transfers. But only to a point, apparently. When the program used the decentralized distributed ledger (based on Ethereum, a Bitcoin alternative), the WFP found that transactions were slow and costly. Switching to a “permissioned” version of Ethereum, which centralizes management of the ledger with a single party (WFP headquarters in this case), transactions were speeded up, and their cost reduced by about 98 percent relative to bank-based alternatives.
“Crucially, however, none of the applications require the use or creation of a cryptocurrency,” the BIS noted in summing up its review of potential practical uses for the technology. With the global acceptance of cryptocurrency for its originally envisioned purpose now appearing more remote than ever, that statement might just be a fitting epitaph to one of recent history’s odder technological obsessions.
ben.kritz@manilatimes.net
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