Cryptocurrencies could bring the internet to a halt, says BIS

The BIS, which is owned by 60 central banks and acts a counterparty to central bank transactions, also described said that the move to build trust into the peer-to-peer blockchain-based network behind cryptocurrencies has "become an environmental disaster".

In a new paper (24-page / 463KB PDF), BIS also queried whether cryptocurrencies solve any "economic problem", and said they are "a poor substitute for the solid institutional backing of money".

Charlie Clarence-Smith, an expert in cryptocurrency regulation at Pinsent Masons, the law firm behind Out-Law.com, said: "Currently, cryptocurrencies lack the three main pillars associated with modern day 'money': to serve as a reliable store of value with which to transfer purchasing power from today to some future time; to be a widely recognised medium of exchange with which to make payments for goods and services; and maintain a consistent unit of account with which to measure the value of a particular good, service, saving or loan."

"The reality is that at the moment, regular users of cryptocurrencies are not using them to pay for things but instead are trading them or purchasing them as a 'high-risk' investment," he said.

BIS said: "The essence of good money has always been trust in the stability of its value. And for money to live up to its signature property – to act as a coordination device facilitating transactions – it needs to efficiently scale with the economy and be provided elastically to address fluctuating demand. These considerations call for specific institutional arrangements – hence the emergence of today’s independent and accountable central banks."

Much of the issues with cryptocurrencies stem from the way that trust is generated around their use, it said.

"For the trust to be maintained, honest network participants need to control the vast majority of computing power, each and every user needs to verify the history of transactions and the supply of the cryptocurrency needs to be predetermined by its protocol," BIS said.

However, it highlighted the knock-on impact of following such a model of trust through.

BIS said: "To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months."

"But the issue goes well beyond storage capacity, and extends to processing capacity: only supercomputers could keep up with verification of the incoming transactions. The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte," it said.

BIS also said identified the environmental impact that cryptocurrencies are having.

It said: "At the time of writing, the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland, and other cryptocurrencies also use ample electricity. Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster."

However, BIS said distributed ledger technology "could have promise" in some areas of payments, "such as the simplification of administrative processes in the settlement of financial transactions". It said potential use cases need further testing, though.

Clarence-Smith said: "There is no doubt that due to the decentralised and distributed nature of the bitcoin ledger, a huge amount of energy is required to 'mine' the transactions and generate copies of  the distributed ledger shared among the nodes of the network and mining rigs all around the world. However, other use cases for distributed ledger technology, particularly those that are of a centralised nature will be based on entirely different protocols which will not require anywhere near as much output which should not be confused."