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The Bank for International Settlements (BIS), which serves central banks in their efforts to promote monetary and financial stability, claims permissionless cryptocurrencies are not suited to serve as the basis of a monetary system, although the bank acknowledges there are niche areas where cryptocurrency can provide improved efficiencies.
The bank also acknowledges the possibility of central bank issued digital currencies, which several central banks are presently exploring.
Central Banks Provide Stability
The bank offered its assessment on cryptocurrencies and distributed ledger technology in its annual economic report.
According to the report, for a monetary system to successfully facilitate transactions, it must be elastic to address demand and must be able to scale with the economy, a function central banks have successfully provided, the report noted. The central banks ensure the payment system operates efficiently and ensure the supply of reserves responds properly to shifting demand.
Cryptocurrencies’ decentralized technology, by contrast, offers an insufficient substitute for the traditional, institutional backing of money.
Decentralized Consensus Risks
A decentralized consensus through which transactions are verified can undermine trust in the system, the bank contends. A breakdown in trust will cast doubt on the finality of individual payments, meaning the system could stop functioning, causing a loss of the currency’s value.
Beyond the issue of trust, cryptocurrencies are subject to inefficiencies and extensive energy consumption. Such currencies are unable to scale with rising transactions, making them subject to congestion and value fluctuation.
Matching the supply of the means of payment with transaction demand requires a central authority, such as a central bank, to expand or contract the supply. The authority has to be able at times to trade against the market, even if this means absorbing a loss. In a decentralized network, by contrast, no central agent exists with the incentive or mandate to stabilize the currency’s value.