According to a statement that was recently issued by the Bank of International Settlements, the cryptocurrency community is not quite ready yet to play with the big boys, and if the trend set by mainstream financial services is anything to go by, it’ll be near impossible for crypto to break through this barrier.
According to the BIS’s annual economic report which was released a few days ago, cryptos like Bitcoin would never live up to the hefty requirements needed to transform it into an actual asset class, even though cryptocurrencies have sparked a lot of interest and involvement since their initial entry into the public sphere.
It’s important to note here that the BIS is a long-standing institution that goes back almost a century, and not only is it based in Basel, Switzerland, but it’s basically the central bank which all other central banks report to. Some of the challenges noted by the BIS as faced by the cryptocurrency community include excess electricity consumption, too much instability, and a susceptibility to fraud and manipulation which count against it as a viable and globally utilized medium of exchange. What has before been considered strength for cryptos is now seen as a weakness, and that’s the ability to create, transact and account through a decentralized computer network.
According to the BIS’s analysis, the blockchain technology that backs Bitcoin and similar cryptos would simply buckle under the pressure of processing the volume and type of digital retail transactions that are currently controlled by national payment systems. The research indicates that the future upsurge of ledgers will inevitably destroy everything, from major servers to individual smartphones.
The report basically concludes that the weight of the transaction volume would simply ‘break the internet.’
A Potential Disaster
The research shows that the more Bitcoin miners compete to be the first in processing transactions, the bigger the electricity demand will be, to the point where this race could consume as much electricity as Switzerland does in a single day. The BIS equated the pursuit of decentralized trust to one of the biggest ecological disasters to ever happen.
The observations of the BIS just so happen to be coming in at a very critical time for the cryptocurrency community. On the one hand, you have institutions like the New York Stock Exchange and Goldman Sachs preparing to facilitate their clients’ entry into the crypto marketplace, and on the other hand you have the U.S. Securities and Exchange Commission taking extreme measures to discourage digital token offerings, based on the high fraud risk. It obviously doesn’t help that cyber-attackers seem to be targeting crypto exchanges more frequently than ever, with the most recent example of this being the previous week’s hack of South Korea’s biggest crypto exchange platform, which caused Bitcoin to plummet by 1 percent to $6,051.
These events are also stirring fear that it’s only going to be more difficult to protect blockchain transactions as the technology continues to grow and develop. When it was initially launched back in 2009, the blockchain technology seemed like a reliable way for computer geeks to make online purchases and connect with like-minded friends. However, it also opened the door for the creation of a digital black market where criminals could sell their items. Still, the technology continues to get support for its legitimization as a mass market platform that can be used by governments and companies alike, even even though safeguarding it might be too expensive.
That said, CoinMarketCap reports that the cryptocurrency market has seen a significant increase in value and has lurched by up to 54% this year alone, to $280 billion.
Benefits
The BIS report also indicates that blockchain technology comes with a few advantages for the global financial system, especially when it comes to its distributed ledger technology. This type of technology makes it possible to transfer payments across borders in a more efficient way. Blockchain related programs can also help to upgrade the process of business imports and exports as part of the trade.
However, Bitcoin’s ability to enable a simplified exchange of value between users is not just a great step forward but also an Achilles heel, as there are just too many risks associated with allowing the global economy to operate on a decentralized network.
The BIS report then concluded that an arrangement that calls for the decentralization of global financial transactions would ultimately be flawed in that it would cause uncertainty over the finality of individual payments thus leading to a lack of trust. Not only that but the report claims that cryptocurrencies can just stop working at any moment and expose the market to the dangers of value loss.
Bitcoin Backers Respond to BIS
The BIS report was met with a lot of backlash from the Bitcoin community, especially from crypto enthusiasts who strongly believe that digital currencies are the future of the global economy. For example, Saifedean Ammous who is an author for The Bitcoin Standard called the report “the most idiotic nocoiner propaganda against Bitcoin”, while well-known avid Bitcoin investor and entrepreneur Alistair Milne echoed Ammous’ sentiments in a tweet where he pointed out that the BIS report was either a direct attempt at spreading misinformation about cryptocurrencies, or it showed a fundamental misunderstanding of crypto by the BIS.
Circle (crypto company) CEO Jeremy Allaire was subtler in his observations of the report, simply calling it “really shallow” on an interview with Business Insider.
Also, Paddy Baker wrote an article for Crypto Briefing highlighting that the BIS report failed to mention recent developments such as the Proof-of-Stake (PoS) model which is much more energy efficient than its predecessor.
In the article, Baker states that the BIS report only focused on the Proof-of-Work (PoW) model and used it as the foundation of its analysis for the cryptocurrency industry as a whole, while overlooking the merits of the Proof-of-Stake (PoS) model.
Had the BIS done further research into the PoS model, they would have found that its protocols are slated to replace those of PoW in most networks, as evidenced by Ethereum’s commitment to switch to PoS blockchain in just a few years from now.
Eli Afram further explained the PoS matter for CoinGeek by stating that its protocols are way more energy efficient than anything that’s currently in use, because they’re able to go around the usual system which uses randomly chosen factors such as age or wealth in order to select a block creator — a process that is obviously costly in both time and energy.
Regulation Required for Bitcoin
In the midst of all this, it’s important not to lose sight of who the source of the report is. After all, it’s hard not to factor in the fact that the BIS is a global central bank.
On the other hand, it’s hard to ignore some of the more plausible concerns brought forward by the BIS report. As Lionel Laurent from Bloomberg says, the BIS report can alternatively be seen as a red herring that draws attention to more than a few areas that need improvement within the Bitcoin blockchain. Sure, the BIS report does exaggerate some of its findings and outcomes, but it makes some solid points on the importance of supervision in the crypto sector, as that could probably help the crypto market put a lid on the constant stream of scammers that are constantly damaging it.
Can You Break the Internet by Buying a Coffee with Bitcoin?
While the BIS report does make some sound arguments, it’s hard to overlook the fact that it makes a point of criticizing blockchain technology and its seeming shortcomings when it comes to handling the volume and type of digital retail transactions that are presently under the control of “selected national retail payment systems.” What the report is basically saying is that expecting blockchain technology to handle these types of transactions would simply break the internet, as it were.
With this one observation, this report brings to light one of the biggest challenges facing the cryptocurrency community at the moment, and that challenge is scalability.
The main concern is that the magnitude of the ledger aka transaction records could grow to such an extent that it would become near impossible for it to process the available internet infrastructure.
Nevertheless, it’s safe to say that the BIS’s statement is an oversimplification of the circumstances and challenges facing the cryptocurrency exchange.
The Number of Transactions Won’t Change Overnight
Needless to say, the process of switching non-cash retail transactions to blockchain technology will not happen overnight. Cryptocurrencies will experience improved efficiency as the internet data grows to meet the demand. Even the most eager cryptocurrency enthusiasts are not exactly expecting to see non-cash transactions doing a three-sixty to a complete crypto base.
It would also be wise to remember that once upon a time, there were also detractors who believed that the internet was just some useless news delivery service.
The real problem with the BIS’ statement arises when you consider the fact that service providers can always find innovative techniques to handle strained internet infrastructure to continue providing value to users.
Netflix is a good example to make here because in 2016 the platform generated a record amount of traffic that seemed to exceed the internet’s general capacity. Even so, the internet still managed to adapt and function, while the platform continued to provide value to its users.
What Netflix did to make this happen was to decentralize its data by keeping virtual copies of it internally. This proved to be a very effective strategy.
Solutions for Using Crypto for High Volume Are Coming
According to the available research, the basic assumption is that cryptocurrency ledgers will be used as they are to manage the overall transaction growth.
Obviously, none of the major cryptos have expressed any such plans. In fact, cryptocurrency technology is just getting warmed up regarding overall development, and Bitcoin itself is barely 10 years old.
Imagine what the crypto industry would achieve if solutions such as the Raiden and Lightning payment channels were upgraded. This would obviously affect the number of transactions that are kept on the main ledger while decreasing the transmission and storing size required.
Another solution to the transaction output problem would be to break the ledger down into smaller portions that are easier to manage, like what Ethereum is trying to do with its ‘sharding’ solution. Yet another solution would be to be to increase transactions into larger, more efficient chunks in the same way that Bitcoin Cash is doing.
As with any technological innovation, there still remains the task of finding out what the tech requirements of these solutions will be, and the right solution may come to light very soon.
Conclusion
It’s no secret that Internet has dramatically transformed human life as we know it. The guiding principle underpinning the Internet has always been to create “linked information systems” that would do away with gatekeepers that try to limit access to information.
The internet has basically revolutionized the way in which information is shared in the digital age. You can literally access all types of information no matter where you are in the world.
Therefore, it’s not surprising that cryptocurrency has a similar idea of democratizing online payments through the direct exchange of value from one individual to the other without having to use an intermediary.
Aside from the fake news and privacy issues, one of the biggest challenges facing the Internet has to be the presence of certain gatekeepers that are hell-bent on consolidating (thus limiting access to) knowledge that should be made freely available to all. Not only that but these gatekeepers have created a lopsided view of the value of knowledge. Cryptocurrencies represent a chance to decentralize the Internet.