BIS: Crypto’s ‘Structural Flaws’ Make It Unsuitable as Basis for Monetary System


A new report from The Bank for International Settlements (BIS) concludes that the “structural defects” of the cryptocurrency make it “inadequate as a basis for a monetary system.”

O 2022 Annual Economic Report of the BIS, a global organization of 63 leading central banks, continues they suggest that the role of the blockchain in a future monetary system is likely to take the form of central bank digital currencies (CBDCs), because “a central bank’s money-based system provides a stronger foundation for innovation.”

The report points out The historical collapse of Earth last month and the current bear market as the catalyst for what analysts have called the start of a “cryptographic winter,” but says focusing only on price action “diverts attention from the deepest structural flaws” of cryptocurrencies that make it unsuitable for its purpose as a monetary system.

Fragmentation failures

The report says the cryptographic space has two main flaws: the need for a “nominal anchor” and “fragmentation.”

It refers to the need for a “nominal anchor”. stable currencies, which link their value to fiat currencies, such as the US dollar (with varying degrees of success). The report says the existence of stablecoins “indicates the widespread need in the cryptocurrency sector to bet on the credibility provided by the unit of account issued by the central bank.”

The report argues that cryptocurrencies have done little to challenge central bank hegemony by providing a unit of account for the economy: “The fact that stable currencies must matter the credibility of central bank money is very revealing of the structural weaknesses of cryptocurrencies The fact that stable currencies tend to be less stable than their issuers claim shows that they are, at best, an imperfect substitute for a solid sovereign currency.

The report also notes the “fragmentation” of the sector, which is defined as the abundance of different cryptocurrencies competing for supremacy, as “perhaps the biggest failure of crypto as a basis for a monetary system.”

In its analysis, the report states that this flaw is the most crippling to the public interest. He argues that fiat money has a “network effect,” meaning that the more users go to a fiat currency, the more users it attracts.

However, with cryptography, the report states that the more users go to a blockchain system, the worse the congestion and the higher the transaction rates, “opening the door to the entry of younger rivals who can cut security in favor of greater capacity. ”

It should be noted that here the report looks more like a directed critique Ethereum in its current form than crypto in general. The world’s second-favorite cryptocurrency has well-known scalability issues, such as high rates and low transaction performance that have led to countless “Ethereum Assassins“, how Solana, Cardanoe Polkadot to offer their own alternatives.

Ethereum developers have promised to address network scalability the next network reviewcalled “fusion.”

The answer: central bank crypto, of course!

As expected, the report says the blockchain has a place in a future monetary system: in the hands of central banks. He says any future system “must combine new technological capabilities with a higher representation of central bank money at its core.”

BIS signal smart contract technology – self-executing financial contracts in the blockchain – as one of the advantages that “will allow transactions between financial intermediaries that go beyond the traditional medium of central bank reserves.”

It also says that tokenization of deposits in the blockchain distributed registration system will allow for new forms of exchange, “including the fractional ownership of securities and real assets,” which could open up a number of new financial services.

Yesterday’s report is not the first time the BIS has issued loud warnings about cryptocurrency risks and argued that digital currencies should be the sole domain of central banks. In early 2021 he warned Bitcoin could “completely break” with BIS Director-General Agustín Carstens, stating that “if digital currencies are needed, central banks should be the ones to issue them”.

Later that year, the BIS warned that decentralized finance (DeFi) creates financial vulnerabilities that “exceed those of traditional finance,” highlighting stablecoins as “subject to classical executions.”

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