Does Crypto Have Deep Structural Inadequacies?

June 23, 2022

London – The Bank for International Settlements (BIS) has said that cryptocurrencies have deeper structural inadequacies that have been demonstrated amid the current market turmoil impacting the space.

The combined value of cryptocurrencies has fallen approximately $350bn over the past two weeks and many significant firms in the industry such as Coinbase have made cuts to staff in recent months.

The organisation highlighted a variety of issues in its Annual Economic report including “unregulated or non-compliant intermediaries” as well as “structural limitations that prevent such currencies from scaling”.

The BIS acknowledged some benefits of cryptocurrencies including “innovations such as the ability to program payments”, however, it concluded that “they cannot fulfil the high-level requirements, such as safety, accountability, efficiency, inclusion and openness, for a usable digital monetary system”.

As an alternative, the BIS said a “digital version of money issued by the central bank could provide for many of the same features offered by cryptocurrencies and stablecoins”. This is commonly known as a Central Bank Digital Currency (CBDC).

The BIS said this CBDC could “be built on a sound nominal anchor and avoid the structural limitations and risks of crypto, which include congestion, high fees, fragmentation and pseudo-anonymity, characteristics that can also facilitate abuse and illicit activity”.

Despite the approval of the BIS, some bodies in the UK have poured cold water on the idea of a UK CBDC.

The cross-party Lords Economic Affairs Committee have said there is “no convincing case for why the UK needs a central bank digital currency”.

Regardless, the idea of CBDCs is gaining traction internationally.

The BIS’s report found that around 80% of central banks worldwide are looking into the concept of CBDCs.

“Innovation is not just a buzzword or latest fashion,” Hyun Song Shin, economic adviser and head of research at the BIS, said. “It should never lose sight of the concrete needs of users in the real economy.”

“Central banks are seeking to push the frontiers of what is possible, adopting new capabilities while ensuring financial services are stable and interoperable domestically and internationally.”

The BIS’s full report is set to be published on 26 June.

 

[Editor's Note: This story was originally published on AltFi]

 

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