The Bank of International Settlements (BIS) issued a warning on Sunday concerning the rise of virtual currencies in its annual report. The Bank asserted that since crypto-currencies are not scalable, they are more susceptible to a breakdown in trust as well as efficiency as more and more people use them. BIS which is an umbrella group for the globe’s central banks argued that any form of money with the aim of working across large networks necessitates the presence of trust in the stability of its value and a capability of scaling efficiently.
The BIS said that trust disappears almost immediately considering the fact that decentralized networks are fragile and crypto-currencies happen to depend on them. The decentralized networks are also vulnerable to congestion as more people use them, according to the BIS. The BIS also noted the high transaction fees of one of the best-known digital currency – bitcoin as well as the restricted number of transaction they can handle per second.
The Switzerland-based group indicated in their report that trust can be eroded at any time because of the fragility that characterizes the decentralized consensus through which there is recording of transactions.
The report calls into question the conclusiveness of individual payments and also translates to mean that crypto-currency can stop functioning at any time and result in a total loss of value. The head of research at BIS, Hyun Song Shin asserted that sovereign money was valuable because it had users compared to crypto-currencies which people hold often for speculative reasons. He also compared virtual coins to baseball cards or Tamagotxhi by saying that in the absence of users, crypto-currencies would be a completely worthless token irrespective of whether it’s a sheet of paper featuring a face on it or a digital token.
According to BIS, the reliance of users on the supposed miners for recording and verifying the crypto currencies also has its weaknesses often necessitating the use of vast and costly energy. Earlier this year, BIS had issued a number of warnings after a wave of followers were attracted by the significant increase in crypto-currency values.
The general Manager of the BIS, Augustin Carstens describes bitcoin as a mix of bubble, Ponzi scheme as well as an environmental disaster. The company had also advised banks to think carefully about the possible risks before issuing their crypto-currencies.
There is no central bank that has offered a digital currency even though Sweden’s Riksbank where there has been a fall of the use of cash is studying a retail e-krona for small payments. The BIS’s annual report also suggested that there is a need for global regulation of the digital coins.