Cryptocurrencies are not scalable and are more likely to suffer a breakdown in trust and efficiency the greater the number of people using them, the Bank of International Settlements (BIS) said on Sunday in its latest warning about the rise of virtual currencies.
"The quest for decentralized trust has quickly become an environmental disaster", the report summarised.
The paper calculated what it would take for the blockchain software underpinning bitcoin to process the trillions of retail transaction now swirling through national payment systems. One reason is that although users can verify that a specific transaction is included in a ledger, unbeknownst to them there can be rival versions of the ledger.
Besides the already hackneyed idea that for the production of bitcoin a year need as much electricity as it consumes all of Switzerland, Ireland, Denmark and other small States, BMR reminded of the complexity of cryptocurrency transfers.
BIS authors also raised long-standing concerns echoed in Washington that cryptocurrencies are a hotbed of money-laundering activity and illegal financing used by terrorists, drug kingpins, white-collar criminals and Russian cybercriminals.
Among the main problems are the instability, consuming excessive amounts of electricity to produce the cryptocurrency, and insecurity, because they are still manipulated and digital fraud around the world. There are now some 17 million bitcoins in circulation.
"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", Bank for International Settlements (BIS) wrote.
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It also noted the unstable value of cryptocurrencies, which has arisen from the lack of a central issuer guaranteeing its stability.
Based on the report, for a monetary system to efficiently make transactions, it needs to be flexible to handle demand and must be able to scale with the economy, a task central banks have been able to provide. The software can make sending cross-border payments more efficient, for example.
BIS explained that the credibility of currency is something that has public trust in the issuing entity or institution.
Shin says that here is talking about "uncertainty about the finality of individual payments, as well as trust in the value of individual cryptocurrencies".
"In a decentralised network of cryptocurrency users, there is no central agent with the obligation or the incentives to stabilise the value of the currency: whenever demand for the cryptocurrency decreases, so does its price".
In mainstream payment systems, once a payment goes through the central bank's books, it becomes final and can not be canceled.