Last Updated: 9 June 2022
In a new report, the Bank for International Settlements argues that crypto-currencies have a major disadvantage compared to the traditional financial system. As a result, they cannot possibly fulfil the role of ‘money’.
Fragmentation in the crypto landscape
In a new document, a ‘bulletin’, the Bank of International Settlements (BIS) has taken a close look at crypto-currencies. The bulletin asks whether crypto-currencies can play the role of a means of payment.
The answer, not surprisingly, is that it is impossible. The crypto-currency market is highly fragmented, according to the BIS researchers. As a result, there is insufficient network effect to fulfil the role of a generally accepted means of payment.
“The fragmentation of the crypto landscape is in stark contrast to traditional (payment) networks, which benefit from strong network effects. In the traditional system, the more users a particular platform attracts, the more attractive it becomes for new users to join that platform, creating a ‘virtuous’ circle,” the bulletin states.
As an example of such a ‘virtuous circle’, or in better words: upward spiral, the Brazilian company Pix is cited. In a short time, 114 million people (67% of the adult population) have used this service from the Brazilian central bank, which is similar to our iDeal.
Rely on fiat money
There are too many different layer-1 blockchains, such as Ethereum, Binance and Solana, to have this effect. The solution of using different crypto currencies alongside and through each other via cross-chain bridges involves too many security risks, according to the researchers.
The conclusion drawn by the BIS is that there are too many crypto-currencies to allow them to fulfil the role of a means of payment.
“Looking to the future, there is more potential in innovation that builds on trust in sovereign currencies,” the report concludes.
It is striking that the bulletin does not consider bitcoin. While it is interesting to test it for properties to serve as a base layer for payments in the future. Leaving it out means missing out on 47.2% of all crypto-currencies and almost $600 billion in market capitalisation.