Debunking BIS “Cryptocurrencies: Beyond the Hype” report

There have been a number of journalists reporting on the new BIS report “Cryptocurrencies: Beyond the Hype” — and the one in the Telegraph has been exceptional in its full throated (and un-examined) reporting. So — I thought I would write a short article debunking much of what the esteemed Mr. Ambrose Evans Pritchard has to say.

This is intended as a point/counter-point article:

Cryptocurrencies have no intrinsic worth and are useless as a form of exchange. They entail exorbitant transaction costs. They are very slow. Together they have turned into an ecological nightmare.

They are not backed by the assets and revenues stream of an established state. Most can be rendered worthless by fraud or digital manipulation. They are essentially ponzi schemes that masquerade as citizen currencies beyond government control.

Cryptocurrencies are of value and have been used successfully for exchange for more than 8 years. Transaction costs for bitcoin are variable. They are not always exorbitant — and there are a number of new cryptocurrencies coming with low/no transaction costs. Bitcoin may have a 3–5 transaction per second speed, but there are new Blockchain protocols coming with transactions speeds which exceed the current capacity of the Mastercard network. And while Bitcoin is using a huge amount of electricity — there are a number of new cryptocurrencies coming to market with a far smaller ecological impact.

Some (not all) cryptocurrencies are unbacked. China is establishing it’s own cryptocurrency as are a number of other nation states.

Short version: Bitcoin started the revolution — Future cryptocurrencies are evolving to address each of these points.

Cryptos are not in fact safe. They are vulnerable to a breakdown in confidence or an attack by those with computing firepower. “Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded. A cryptocurrency can simply stop functioning, resulting in a complete loss of value,” said the report, a chapter in the BIS’s forthcoming annual report.

Classic old school scare tactics. They lump all cryptocurrencies together in this condemnation. There are some cryptocurrencies where this is true — but certainly not all. This is part of the evolution of cryptocurrency and blockchain technology.

…Bitcoin and others fail the basic test of a working currency. “The more people use a cryptocurrency, the more cumbersome payments become. This negates an essential property of present-day money,” said the report.

Clearly the report authors spent an insufficient amount of time looking into the wide range of cryptocurrencies. New cryptocurrencies are being built specifically for broad adoption and high speed, low latency, low cost payments. Of course — balanced reporting was not a requirement of the BIS — nor of the Telegraph I guess!

There is a speed limit on the number of transactions added to the ledger at any given point in time. New blocks are rationed by intervals. If the ceiling is hit, the system backs up. “With capacity capped, fees soar.

Well — did this happen. Yes. Is it going to happen for all future cryptocurrencies — no. The shortcomings have been identified and new cryptocurrencies coming to market address many of these shortcomings.

This could bring the internet to a halt.

Ok. It is statements like this which are baseless and uninformed that make me question the entire report. Exactly what would bringing the Internet to a halt look like? I mean “really?”

Nor does the system guarantee “finality of payment”. You can lose your money. “Although users can verify that a specific transaction is included in a ledger, unbeknownst to them there can be rival versions of the ledger. This can result in transaction rollbacks. Cryptocurrencies can be manipulated by miners controlling substantial computing power. One cannot tell if a strategic attack is under way because an attacker would reveal the (forged) ledger only once they were sure of success,” it said.

Ledger forks can happen when new currencies are created. Shadow forks can happen in some consensus algorithms if a portion of the blockchain becomes isolated. The 51% Attack problem is well known for the Bitcoin blockchain — but is not present in all cryptocurrencies. This is just more #FUD — Fear Uncertainty and Doubt

That bubble has now definitively burst. Bitcoin has crashed from $19,187 to $6,474 since peaking in December. Most of the leading cryptos have dropped by two-thirds or more, slashing their notional value by at least half a trillion dollars. There is no obvious floor. These currencies are not redeemable. Nothing stands behind most of them.

Oh dear — Someone who assumes that $6,474 is a burst. And who doesn’t understand that most other alt-coins are linked to Bitcoin as a method of purchase. Some cryptocurrencies are indeed asset backed and can be redeemed for those assets (real-estate or other). Just lumping everything together like this is irresponsible at the least.

The BIS report is the final authoritative nail in the coffin.

The final nail in “THE BIS” coffin… not the coffin of cryptocurrencies. They are simply making a desperate attempt to protect themselves — which is one of the main reasons why cryptocurrencies are succeeding — BIS and institutions like them are part of the reason why consumers are moving to de-centralised currencies.

And as for Mr. Ambrose Evans — I am terribly sorry to say that any credibility he may have had has now been greatly reduced due to his lazy (or incompetent) approach to journalism.