The “Central Bank of Central Banks” recently released a 24-page report taking a hard stance against the cryptocurrency movement and the mainstream application of the technology. The Bank for International Settlements (BIS) “fosters international monetary and financial cooperation and serves as a bank for central banks,” and presumably the recent crypto-doomsday report was carried out by well-informed experts in the banking sector. Despite the promising adoptive measures we’ve seen throughout the crypto-ecosystem in recent months, the report suggests that permissionless cryptocurrencies simply have no use case as a monetary instrument. We’ve covered the report in this article which summarizes the findings of the report nicely. What I’d like to discuss is the bank’s motive. Is it skeptical to believe that the BIS is pushing their agenda above the facts with this report? Is it naive to believe that cryptocurrency can really threaten banks to the point where they’d try something like that?
The Case for Central BanksCentral banks are vital for the use of fiat currency, there’s no doubt about it. These organizations control the supply of fiat currencies in order to control inflation – failure to do so can result in currency runs as seen in Egypt, Venezuela, and Argentina where the cost of living has skyrocketed due to plummeting currency values. Without central banks the world economy would have no way of regulating unbacked, uncollateralized fiat currency, resulting in widespread economic chaos and disaster. Even the firmest advocates of cryptocurrency as the only form of currency will probably agree that these institutions can’t simply be replaced overnight if they’re ever to be replaced at all.
“The tried, trusted and resilient way to provide confidence in money in modern times is the independent central bank. This means agreed goals: clear monetary policy and financial stability objectives; operational, instrument and administrative independence; and democratic accountability, so as to ensure broad-based political support and legitimacy.”
The Case Against CryptocurrencyLet’s get into what the report had to say about permissionless cryptocurrencies. Lack of accountability Because permissionless cryptocurrencies are often decentralized, BIS points out that there’s nobody to be held accountable if something goes wrong, and considers decentralization to be a flawed system.
“Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded.”High energy consumption, inefficiency Proof of Work cryptocurrencies do indeed consume a lot of energy, with Bitcoin alone currently consuming more power than the nation of Ireland. The inefficiency refers to the scaling issues that are faced by current-generation blockchains. Blockchain forks create transaction uncertainty The report refers to an incident in 2013 when Bitcoin split in two for 6 hours (24 blocks), resulting in transactions being voided after users thought they had been completed. If blockchains can simply split into two, how can they be trusted with user funds? It’s a fair point to raise. That essentially wraps up the report, but there’s one thing that the BIS didn’t bring up that I’d like to get into in the spirit of fairness.
The Case Against Central BanksDid they forget this part? I could easily write my own 24-page report on this, but I’ll spare you. Let’s take a look at the main points the BIS raised against permissionless cryptocurrencies. Lack of accountability Cryptocurrency was arguably invented precisely to combat the corruption and lack of accountability in the banking system and among central banks around the world. Recently the governor of the Latvian central bank stood down amid a corruption scandal, to refer to one of many examples. In Ireland, my home country, the economy collapsed in 2008 following the American housing bubble. A risk manager called Jonathan Sugarman approached the Irish central bank in 2007 to blow the whistle on the fraudulent liquidity breaches that led the country to disaster – he was ignored by the central bank and then blacklisted from ever working in the banking sector again. Here’s a recording of Irish bankers describing how they conned the government into an initial $8 billion bailout that would eventually lead to $34 billion. Direct quote:
“If they saw the enormity of it up front, they might decide they have a choice. You know what I mean? They might say the cost to the taxpayer is too high…if it doesn’t look too big at the outset…if it doesn’t look big, big enough to be important, but not too big that it kind of spoils everything, then, then I think you can have a chance.”Out of hundreds of complicit risk managers and executives, only four were ever held legally accountable for their crimes. High energy consumption, inefficiency Bitcoin’s energy consumption is set to account for 0.5% of the world’s electricity by the world’s end. However, this is far outweighed by the negative impact fiat currency has on the environment, which is much higher. The data centers, vaults, trucks, banks, and armed guards required to handle fiat currency consume a huge amount of energy and resources, not to mention the forests cut down for paper currency and the areas of land strip-mined for the ore to make coins with. Obviously, the fact that we now have cryptocurrency and fiat consuming resources compounds the negative effect of money in general, but cryptocurrency is an experiment that may yet greatly reduce the impact money production and storage has on the planet. The Proof of Stake method of consensus consumes far less energy than Proof of Work, and as innovators in the space continue to explore new solutions we come closer to finding improved ways to create and transfer value. Meanwhile, the inefficient processes of the banking system with transfers taking days is another use case for cryptocurrency. Transaction uncertainty It’s true, the incident where users thought their transactions had been voided was unfortunate, and unacceptable when trying to store and transfer funds. Equally or perhaps more unacceptable are the many, many, many incidents in which users have lost their funds through the traditional banking system. The Venezuelan central bank printed out new bolivars to the point that the currency inflated almost 9,000 percent in the last year. Venezuelans were left with the same amount of money as before, but their savings became almost worthless. This is just one of many examples of central banks destroying the value of a fiat currency and negatively impacting lives throughout the world. It seems that the very things BIS accuses permissionless cryptocurrencies of are crimes taken to much greater extremes by the central banks of the world. Permissionless cryptocurrencies have no leader to hold accountable, it’s true – but in a world where bankers are never held accountable, the real takeaway is that no-one’s in control either. While not invulnerable to manipulation or force, the more widely-used a blockchain becomes the stronger it becomes as well, making it increasingly more difficult for elite groups to enrich themselves at the expense of others with no oversight as seen in the traditional banking system.