Bitcoin mining, the process of creating new units of the cryptocurrency, is notoriously a huge energy-suck. One estimate puts its carbon footprint on par with the electricity consumption of more than 159 countries combined.
But the inefficiency of minting new units of the blockchain-based digital currency is only one complaint that skeptics of its utility have flagged. In a new report, the Switzerland-based Bank of International Settlements (BIS), a self-described “bank for central banks,” calls the technology “a poor substitute for the solid institutional backing of
Among the critiques that the BIS explores is the sheer computing power it takes not only to mine cryptocurrencies, but also to process transactions with them. Because records of all cryptocurrency transactions are stored on a decentralized ledger rather than by central bank, that ledger could become unsustainably large very quickly, the BIS hypothesizes.
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“To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions,” the report states, “the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months.”
Further, the authors of the BIS report explain that the amount of computing power to process transactions will surge -- and could spell the downfall of the internet on a global scale, the researchers warn.
“Only supercomputers could keep up with verification of the incoming transactions,” the report states. “The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte.”
Then there’s the issue of “congestion,” as the BIS describes. For one, new blocks on the blockchain (groups of transaction records) “can only be added at pre-specified intervals,” the way the technology is set up and based on computing limitations. So, when the system gets maxed out, they form a queue and transaction fees mount.
In a video released alongside the report, Hyun Song Shin, the BIS’ head of research, explained that someone buying a $2 coffee with bitcoin hypothetically could get hit with a $57 transaction fee (which was bitcoin’s transaction fee during the high-demand period of December 2017).
In other words, the more that people use bitcoin as money, the more difficult it will be to use. This is a catch-22 compared to how a centralized currency functions, according to the BIS: “the more people use it, the stronger the incentive to use it.”
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All of this should be read with the understanding that the BIS, being an organization that represents central banks, has a vested interest in the centralized banking system remaining the status quo.
It’s not all doom and gloom, though: The BIS report doesn’t rule out the potential for the “underlying technology” of cryptocurrencies (read: blockchain), just the currencies themselves. The report proposes that the tech might come in handy for the “simplification of administrative processes related to complex financial transactions, such as trade finance.”