BIS Says Bitcoin's 'Dragon Energy' Could Break The Internet, Suggests Cryptocurrencies Are A Not-So-Beautiful 'Dark, Twisted Fantasy'

On the bright side...
Author:
Updated:
Original:

The Bank for International Settlements is a fun institution with a history that serves as endless fodder for conspiracy theorists.

If you're a crypto fanatic, you're almost by definition predisposed to loving yourself a good conspiracy theory, so on the off chance you get a second between trading Ethereum and playing Call of Duty (two activities that are, on many levels, complementary) you should spend some time researching the BIS.

Of course research isn't really required if you're a crypto proponent and what you're looking for are reasons to hate the 88-year-old bastion of Basel. All you need to know is that it's the "central bank for central banks" and if that characterization doesn't make you furious right off the bat, well then just have a look at the board:

Chairman: Jens Weidmann, Frankfurt am Main

Mark Carney

London

Jon Cunliffe

London

Alejandro Díaz de León

Mexico

Andreas Dombret

Frankfurt am Main

Mario Draghi

Frankfurt am Main

William C Dudley

New York

Ilan Goldfajn

Brasília

Stefan Ingves

Stockholm

Thomas Jordan

Zurich

Klaas Knot

Amsterdam

Haruhiko Kuroda

Tokyo

Fabio Panetta

Rome

Urjit R Patel

Mumbai

Stephen S Poloz

Ottawa

Jerome H Powell

Washington

Jan Smets

Brussels

François Villeroy de Galhau

Paris

Ignazio Visco

Rome

Pierre Wunsch

Brussels

Yi Gang

Beijing

Any questions?

In short, crypto enthusiasts, these are the people who print real money, which is distinct from the fake money you insist is real.

Back in September, the BIS had a subtle suggestion: central banks should just go ahead and create their own cryptocurrencies. To wit, from a paper out around the time Jamie Dimon was launching his broadside:

Lately, central banks have entered the fray, with several announcing that they are exploring or experimenting with DLT, and the prospect of central bank crypto- or digital currencies is attracting considerable attention. But making sense of all this is difficult. There is confusion over what these new currencies are, and discussions often occur without a common understanding of what is actually being proposed. This feature seeks to provide some clarity by answering a deceptively simple question: what are central bank cryptocurrencies (CBCCs)?

Fast forward to Sunday and the BIS is back with a 24-page paper called "Cryptocurrencies: looking beyond the hype" and let me tell you something sports fans, it does not mince words.

Let's just grab a few fun excerpts, shall we?

There's this on scalability:

Another aspect of the scalability issue is that updating the ledger is subject to congestion. For example, in blockchain-based cryptocurrencies, in order to limit the number of transactions added to the ledger at any given point in time, new blocks can only be added at pre-specified intervals. Once the number of incoming transactions is such that newly added blocks are already at the maximum size permitted by the protocol, the system congests and many transactions go into a queue. With capacity capped, fees soar whenever transaction demand reaches the capacity limit (Graph V.5). And transactions have at times remained in a queue for several hours, interrupting the payment process. This limits cryptocurrencies’ usefulness for day-to-day transactions such as paying for a coffee or a conference fee, not to mention for wholesale payments. Thus, the more people use a cryptocurrency, the more cumbersome payments become. This negates an essential property of present-day money: the more people use it, the stronger the incentive to use it.

BIS

And this on the extent to which price is a function of demand in the absence of a reliable manipulator of supply (and this is a key criticism that crypto proponents of the non-sophisticated variety - which is most of them - simply do not grasp):

The second key issue with cryptocurrencies is their unstable value. This arises from the absence of a central issuer with a mandate to guarantee the currency’s stability. Well run central banks succeed in stabilising the domestic value of their sovereign currency by adjusting the supply of the means of payment in line with transaction demand. They do so at high frequency, in particular during times of market stress but also during normal times. This contrasts with a cryptocurrency, where generating some confidence in its value requires that supply be predetermined by a protocol. This prevents it from being supplied elastically. Therefore, any fluctuation in demand translates into changes in valuation. This means that cryptocurrencies’ valuations are extremely volatile. And the inherent instability is unlikely to be fully overcome by better protocols.

Then this on forking fuckery:

Not only is the trust in individual payments uncertain, but the underpinning of trust in each cryptocurrency is also fragile. This is due to “forking”. This is a process whereby a subset of cryptocurrency holders coordinate on using a new version of the ledger and protocol, while others stick to the original one. In this way, a cryptocurrency can split into two subnetworks of users. While there are many recent examples, an episode on 11 March 2013 is noteworthy because – counter to the idea of achieving trust by decentralised means – it was undone by centralised coordination of the miners. On that day, an erroneous software update led to incompatibilities between one part of the Bitcoin network mining on the legacy protocol and another part mining using an updated one. For several hours, two separate blockchains grew; once news of this fork spread, the price of bitcoin tumbled by almost a third (Graph V.7, right-hand panel). The fork was ultimately rolled back by a coordinated effort whereby miners temporarily departed from protocol and ignored the longest chain. But many transactions were voided hours after users had believed them to be final. This episode shows just how easily cryptocurrencies can split, leading to significant valuation losses.

Fork

And these concerns on regulation:

  • A first key regulatory challenge is anti-money laundering (AML) and combating the financing of terrorism (CFT). The question is whether, and to what extent, the rise of cryptocurrencies has allowed some AML/CFT measures, such as know-your customer standards, to be evaded.
  • A second challenge encompasses securities rules and other regulations ensuring consumer and investor protection. One common problem is digital theft. Despite warnings by authorities, investors have flocked to ICOs even though they are often linked to opaque business projects for which minimal and unaudited information is supplied. Many of these projects have turned out to be fraudulent Ponzi schemes.
  • A third, longer-term challenge concerns the stability of the financial system. It remains to be seen whether widespread use of cryptocurrencies and related selfexecuting financial products will give rise to new financial vulnerabilities and systemic risks. Close monitoring of developments will be required.

But the real punchline comes when the BIS warns that these make-believe space tokens might ultimately break the entire fucking internet:

A thought experiment illustrates the inadequacy of cryptocurrencies as an everyday means of payment (Graph V.4, right-hand panel). 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.

Energy

In other words, making this work as advertised would require a whole lot of "dragon energy" -- maybe Kanye can tell us where we might procure that, but in the absence of any guidance on how to go about sourcing the kind of computing power we would need, it's probably safe to say that the promise of cryptocurrencies replacing standard means of electronic payments remains a "dark twisted fantasy."

This couldn't come at a worse time for Bitcoin. As you're undoubtedly aware, cryptocurrencies have been in a veritable tailspin, with their total combined market cap (and use of the term "market cap" in this context is patently absurd for any number of reasons, but c'est la vie) diving by more than 66% since January 7, according to Coinmarketcap:

MarketCap

As Oanda’s Craig Erlam told Bloomberg last week:

Things have changed for Bitcoin and the crypto space. There doesn’t seem to be as much hype, or positive news. Every time we get a negative news story now — after a period of consolidation — we don’t see bullish sentiment come in to support it. It’s almost as if people are waiting to sell it.

Indeed they are, Craig, indeed they are.

In fact, it seems like the only person who's enthusiastic these days is Steve Bannon and, as detailed extensively here last week, that's just about the worst news imaginable for bulls (or "cucks", whatever the case may be).

And so, with the DoJ staking out the Bada Bing!, John Griffin and Amin Shams calling bullshit on last year's rally, Tom Lee admitting that even rented Lambos and Snoop are no longer sufficient to reignite the old HODL spirit, and now the BIS basically saying that cryptocurrencies are hot garbage, one certainly wonders how much more the people who are still hanging in there can take.

On the bright side, I hear Bitcoin prices will find a lot of support once they converge on their intrinsic value of zero.

Related