Blockchain for Banking News

Central bank umbrella body criticizes crypto

central bank

Yesterday the BIS, the bank for central banks, pre-released the cryptocurrency chapter from its latest annual report. The Bank for International Settlements’ (BIS) primary aim is the pursuit of monetary and financial stability, and sixty central banks own it.

Although the BIS sees significant issues with using cryptocurrency as money, it is more optimistic about the underlying blockchain technology.


First on the list of issues was scalability and the concept of proof-of-work. This is the electricity-hungry method involved in adding a block of payments to a cryptocurrency. The report says ‘the quest for decentralized trust has quickly become an environmental disaster.’

The bank states that anybody making a payment has to have a copy of the entire ledger. (Comment: without qualification, this is an inaccurate generalization. Many consumer users do not have a full copy of the ledger, but in that case, they are trusting some third party). If all retail payments were recorded on a blockchain, it would fill up a phone’s disk within days.

The other aspect of scalability is congestion. It’s only possible to add a new block at specified intervals. In BIS’ opinion, this limits the usefulness for everyday transactions like buying a cup of coffee. There’s no reference in the report to side chains like Lightning which help with scaling.


The second major criticism is a lack of stable value with cryptocurrencies. The report refers to the Dai cryptocurrency that tried to peg itself to the dollar. The BIS states that central banks need to be willing at times to trade against the market to stabilize prices. This might include taking risks onto its balance sheet and incurring losses. Hence a lack of central authority is problematic for cryptocurrency price stability.

There are also numerous new cryptocurrencies which potentially are substitutes and can impact prices.


Finally, the report refers to fragility when it comes to trust. There’s a lack of finality or certainty. This happens for example if two miners try to add a block at the same time, one will get rejected. So it takes time before it’s clear that a block and hence a transaction is final.

Furthermore, there’s the issue of forking or splitting a blockchain. The reference is not particularly to governance forks but those caused by code bugs as happened to Bitcoin in 2013.

The last element of fragility relates to the concentration of miners who are responsible for creating blocks. Miners find it more efficient to work in pools, and these pools of miners dominate most major blockchains. Usually, if three or four mining pools were to cooperate, they could manipulate a blockchain.

The conclusion is that ‘while cryptocurrencies do not work as money, the underlying technology may have promise in other fields.’ As examples of permissioned blockchain applications, the report refers to low-volume cross-border payments and trade finance. Both of these applications are either live or about to launch.

Central Bank Digital Currency

The BIS also examined the potential for a Central Bank Digital Currency (CBDC).

While not precluding it, the BIS has concerns about the use of a CBDC for consumer purposes. It envisages a significant impact on payments, financial stability, and monetary policy. As yet there are no leading contenders with an appropriate design, and right now the risks are high and the benefits unclear.

Instead, it was a little more optimistic about the potential for a CBDC on a permissioned ledger between banks. It referred to experiments including the Bank of Canada (Project Jasper), the ECB, the Bank of Japan (Project Stella) and the Monetary Authority of Singapore (Project Ubin). Nonetheless, the conclusion was that, so far, results of these experiments were not clearly superior to existing infrastructures.