Bank of International Settlements calls out Bitcoin
“The associated communication volumes could bring the internet to a halt,” is the warning from The Bank for International Settlements (BIS) in a scathing report released on Sunday which analyses Bitcoin, cryptocurrencies and decentralised models of financing.
The report looks at the distributed journal software structure of blockchain and its use in decentralised currencies such as Bitcoin.
A distributed journal is a record of transactions or interactions. Using Bitcoin as an example, two types of people interact with it, users and miners. Users want to move their coins around and have the ledger updated with the new transactions.
The Blockchain is a journal that adds a new block of transactions in intervals. Every user holds a copy of the complete chain, thus transactions can be pair and contrasted to make sure that the new block of transactions are correct.
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A computer is chosen to upload the next block by being the first to solve a mathematical equation. This consumes a massive amount of computational power and the miner is reward with Bitcoin for their effort.
As the computer which adds the block is random and must have the agreement of over half the other computers in the system, the system is decentralised. Thus you get an accurate record of transactions without the need for a centralised overseer.
Members of the cryptocurrency community have hit out at the report.
Kevin Murcko CEO of cryptocurrency exchange CoinMetro said that: “The report from the Bank of International Settlements promulgates a number of highly exaggerated opinions that we’re told time and again when it comes to cryptocurrency.”
Tackling the issue of volatility Murcko states: “historically, most fiat currency have also been highly volatile,” he notes the drop in the pound after Brexit as an example of this. He believes that cryptocurrencies will lose this volatility as “regulations and institutional trading comes into the space, volatility will naturally decrease.”
The BIS reported did note that: “The regulatory perimeter may need to expand to include entities using new technologies, to avoid the build-up of systemic risks.”
However it did also state that: “Cryptocurrencies live in their own digital, nationless realm and can largely function in isolation from existing institutional environments or other infrastructure. Their legal domicile – to the extent they have one – might be offshore, or impossible to establish clearly. As a result, they can be regulated only indirectly.”
However, the report highlights the high computational requirement, which equates to power consumption, as a major issue as: “the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland… Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster.”
Senior Lecturer in Governance of Advanced Information Technologies at the University of Derby, Richard Self told Computer Business Review that the report: “Is a very welcome analysis of the current and potential reality of Blockchain and cryptocurrencies compared to the excessive hype that is to be found regularly in the press and on the internet.”
“A key aspect that the report analyses is the problem of the volatility of cryptocurrencies which is caused by the fundamental design of the systems, which results in lack of trust in cryptocurrencies as a medium of exchange.”
The report notes that while more people using traditional currency tends to ensure a stronger incentive to use it, the opposite may be in fact true for Bitcoin.
As new blocks of transactions are added to the chain in intervals, a queue can form as blocks reach their maximum size as determined by the protocol. This can cause congesting and a waiting time for transactions to be processed.
The BIS investigation found that: “transactions have at times remained in a queue for several hours, interrupting the payment process…thus, the more people use a cryptocurrency, the more cumbersome payments become.” This makes it hard for the currency to be viable in day to day transactions such as those in coffee shops and retail establishments.
Richard Self stated that: “It is clear that it is very unlikely that cryptocurrencies will to be able to cope with the normal transaction volumes currently handled by organisations such as Visa or Mastercard.”
He went on to add: “due to the overall process of the Blockchain technologies, it is unclear when both parties to a transaction can have 100% certainty that the transaction has been completed, unlike current types of payment systems.”