While citing multiple problems with the decentralization model for cryptocurrencies (some of them valid and some of them not), the Bank for International Settlements has concluded in a report released this week that crypto ‘can’t fulfill the role of money.’ As noted in the report:
“Building on permissionless blockchains, crypto and DeFi seek to create a radically different monetary system, but they suffer from inherent limitations. A system sustained by rewarding a set of decentralised but self-interested validators through fees means that network effects cannot unfold. Instead, the system is prone to fragmentation and costly to use.
Fragmentation means that crypto cannot fulfill the social role of money. Ultimately, money is a coordination device that facilitates economic exchange. It can only do so if there are network effects: as more users use one type of money, it becomes more attractive for others to use it. Looking to the future, there is more promise in innovations that build on trust in sovereign currencies.”
This falls in line with a previous report from the BIS in May that predicts the expansive rise of Central Bank Digital Currencies (CBDCs) in the near term.
Whether or not one is an avid supporter or investor of crypto, it’s safe to say that a defining flaw of blockchain assets is the fact that anyone with proper knowledge can produce a cryptocurrency that is similar or identical to any other in terms of performance and characteristics. This means that while crypto production or mining is often limited to a certain number of coins, which conjures up artificial rarity, this does not stop thousands of other coins from being invented that offer the same qualities.
In other words, a specific coin’s success is dependent not on the value of the technology (usually), but on branding and fickle popularity. This can be as fleeting as any other digital asset; for example, for every Facebook there are multiple Myspace-type failures that were once used by millions of people and then abruptly abandoned. Even Facebook has the potential to easily implode in terms of user significance in a short amount of time. The same dynamic goes for cryptocurrencies. Values are determined by market favor in the way that many stocks are valued.
That is to say, the users become a commodity, the ONLY commodity backing the value of a cryptocurrency.
Another factor that has a potential for adding “value” to crypto is the development of infrastructure that eases trading and use of a coin. It’s not enough for a cyptocurrency to exist, it also needs to have various assets in place that create functionality and convenience. Some crypto assets like Bitcoin already enjoy this kind of infrastructure development, often because of billions of dollars of investment by international banks. This seems to run contrary to the original motivation for crypto as a counter to major banks.
Is “fragmentation” in crypto a problem for central banks and the BIS to solve? No. It’s far outside of their purview, but they have decided to make it their business. The formation of the crypto world was intended to act as an alternative to the edicts and economic control of central bankers, at least that was how many people were sold on the idea. But it is quickly becoming obvious that central banks plan to co-opt the movement towards blockchain and digital products and exploit them as a means to gain even more centralized power than most people thought possible. Maybe that was the plan from the very beginning.
A BIS survey suggests that around 60% of central banks around the world are now planning on introducing digital currencies in the near term. These currencies would be “bridged” together through various infrastructure plans, and the BIS argues that crypto coins should be bridged together as well within the same system. They do not specify what the mechanism for that bridge would be, but the IMF has mentioned on multiple occasions that their Special Drawing Rights (SDR) basket would fill the role.
Essentially, the idea central banks have for crypto is to congeal all coins and currencies into one bridged basket system along with CBDCs, giving banks and the BIS even more control in the process.
Source: BIS
