While citing multiple problems with the decentralization model for cryptocurrencies (some of them valid and some of them not), the Bank for International Settlements has concluded in a report released this week that crypto 'can't fulfill the role of money.' As noted in the report:
"Building on permissionless blockchains, crypto and DeFi seek to create a radically different monetary system, but they suffer from inherent limitations. A system sustained by rewarding a set of decentralised but self-interested validators through fees means that network effects cannot unfold. Instead, the system is prone to fragmentation and costly to use.
Fragmentation means that crypto cannot fulfill the social role of money. Ultimately, money is a coordination device that facilitates economic exchange. It can only do so if there are network effects: as more users use one type of money, it becomes more attractive for others to use it. Looking to the future, there is more promise in innovations that build on trust in sovereign currencies."
Not surprisingly, this falls in line with a previous report from the BIS in May that predicts the expansive rise of Central Bank Digital Currencies (CBDCs) in the near term.
Whether or not one is an avid supporter or investor of crypto, it's safe to say that a defining flaw of blockchain assets is the fact that anyone with proper knowledge can produce a cryptocurrency that is similar or identical to any other in terms of performance and characteristics. This means that while crypto production or mining is often limited to a certain number of coins, which conjures up artificial rarity, this does not stop thousands of other coins from being invented that offer the same qualities.
In other words, a specific coin's success is dependent not on the value of the technology (usually), but on branding and fickle popularity. This can be as fleeting as any other digital asset; for example, for every Facebook there are multiple Myspace-type failures that were once used by millions of people and then abruptly abandoned. Even Facebook has the potential to easily implode in terms of user significance in a short amount of time. The same dynamic goes for cryptocurrencies. Values are determined by market favor in the way that many stocks are valued.
That is to say, the users become a commodity, the ONLY commodity backing the value of a cryptocurrency.
Another factor that has a potential for adding "value" to crypto is the development of infrastructure that eases trading and use of a coin. It's not enough for a cyptocurrency to exist, it also needs to have various assets in place that create functionality and convenience. Some crypto assets like Bitcoin already enjoy this kind of infrastructure development, often because of billions of dollars of investment by international banks. This seems to run contrary to the original motivation for crypto as a counter to major banks.
Is "fragmentation" in crypto a problem for central banks and the BIS to solve? No. It's far outside of their purview, but they have decided to make it their business. The formation of the crypto world was intended to act as an alternative to the edicts and economic control of central bankers, at least that was how many people were sold on the idea. But it is quickly becoming obvious that central banks plan to co-opt the movement towards blockchain and digital products and exploit them as a means to gain even more centralized power than most people thought possible. Maybe that was the plan from the very beginning.
A BIS survey suggests that around 60% of central banks around the world are now planning on introducing digital currencies in the near term. These currencies would be "bridged" together through various infrastructure plans, and the BIS argues that crypto coins should be bridged together as well within the same system. They do not specify what the mechanism for that bridge would be, but the IMF has mentioned on multiple occasions that their Special Drawing Rights (SDR) basket would fill the role.
Essentially, the idea central banks have for crypto is to congeal all coins and currencies into one bridged basket system along with CBDCs, giving banks and the BIS even more control in the process.
Source: BIS Calls For Centralization Of Crypto - Predicts Rise Of CBDCs
(Editor's note: Here's the money quote:
Whether or not one is an avid supporter or investor of crypto, it's safe to say that a defining flaw of blockchain assets is the fact that anyone with proper knowledge can produce a cryptocurrency that is similar or identical to any other in terms of performance and characteristics. This means that while crypto production or mining is often limited to a certain number of coins, which conjures up artificial rarity, this does not stop thousands of other coins from being invented that offer the same qualities.
We have some thoughts on this matter we'd like to share.
Let's start with a quote from Tom Stoppard's play, Rosencrantz & Guildenstern Are Dead:
Everything has to be taken on trust; truth is only that which is taken to be true. It's the currency of living. There may be nothing behind it, but it doesn't make any difference so long as it is honoured. One acts on assumptions.
Let us imagine a complex economy, based upon gold - gold dust, to be precise. We do not have to go far - right here, in California, in 1850, there was a flourishing economy based almost entirely upon gold.
Everyone agrees upon the value of gold, because it is self-evident that gold takes considerable labor to extract, and so if one wishes to acquire gold from a miner one is going to need to at least compensate the miner for the energy that miner invested in extracting the gold from the chaos of nature.
The miner may value - that is to say, either need, or want - calories, or the miner may value tools, or the miner may have all the calories and tools he needs and be in search of luxuries. For these things, the miner will offer what he has in abundance - gold dust.
Eventually the miner tires of carrying all that gold dust around. He may have more of it than he can physically carry. There is also the danger of theft. The first bank is born, taking deposits of gold dust and issuing receipts. These receipts are used as proof of gold dust, on deposit, in poker games - they are easier to handle, than money.
It's not long until someone comes up with the bright idea of forging bank deposit slips, of course - or, a customer receives a deposit slip, and adds a few zeroes to the sum. Or the person who won the deposit slip in a poker game does the same thing.
Soon, ledgers evolve, to detect fraud. But serial numbers are not enough. There are suspicions that some of the banks may be involved in this wave of crime and are playing both sides of the game.
Just because it's 1850 doesn't mean people are stupid. Calculus has already been invented. So, some clever math nerd comes up with the idea of encrypting the serial numbers on the receipts.
Now it is no longer possible for criminal forgers to pick a number at random and know that the number will correspond to a number actually in use. They need a real receipt.
Authentication is much easier - take the note to the bank and the bank will apply their algorithm. The algorithm uses the amount of the receipt as one of the inputs to the formula that generates the serial number so if either the serial number OR the amount on the check have been changed, the formula will not compute correctly and the fraud will be exposed.
Is this crypto? Yes, it is. The amount is not encrypted, but the serial number is. It would be trivial to encrypt the amount, too, if, for some reason, this became necessary.
Let us say we are not an 1850s gold dust economy.
Let us say we are an elementary school, in 2022, trying to drum up money by selling some sort of local money-like coupon - HumBucks is taken, we'll call these DumBucks, er, that sounds bad, how about KidzBucks? KidzBucks come in $1, $5, and $10 denominations. The local government prints them and sells them to schools at a discount. Schools sell them to parents at a smaller discount and keep the difference.
Parents use KidzBucks locally to purchase services. Businesses redeem KidzBucks at special county-authorized outlets, where KidzBucks can also be authenticated - and, of course, there is a website, maybe even an app, where you can do the same.
The "money" recirculates inside the county, over and over, paying for goods and services and never leaving the county, thus, making the local economy stronger.
Is this crypto? Yes, it is.
Should it be illegal? We leave this as an exercise for the reader.
Banks would say, 'yes, that should be illegal'. They want you to use their promissory notes - not to print your own. No, say the banks ... citizens - er, let us call them "customers" - must never be allowed to print monetary notes. We do that.
And so we see that crypto cash is so simple that even a small school district could put crypto into circulation, if it put its mind to it, and use it to pay for school lunches, school snacks, school supplies and uniforms, too.
The main reason we don't is because the people in charge of this county are all bad at math - except where calculating their commissions is concerned, of course, then, they are all rocket scientists - and lacking imagination.
[Which could bring us back to the need for auditors, if we cared to go there - but we won't.]
The California government's EBT program offers something similar to this - but their "bucks" are only good at the local farmer's market. I don't think there are any mechanisms in place to stop counterfeiting. Not all farmers are entirely comfortable with the system - they tolerate it only because it increases their sales, marginally.
Creating a local currency isn't a new idea. Teachers have been trying to teach children about money, and running businesses, and understanding value as distinct from currency, and balancing books, since the pencil was invented - maybe before. This would just be a 21st century update to an old idea.
You're probably wondering: Why doesn't the United States Government use encryption in the serial numbers of its currency?
My best guess is, they probably do - but it's probably embedded in an entirely different serial number, that is embedded in a metal strip, or in some dots hidden in the printing, etc, etc.
My sense is that TPTB don't want to confuse poor, stupid Americans with serial numbers that are not decimal-based, lest we be driven mad, and riot.
Food for thought.)