There's been plenty of pushback from cryptocurrency and blockchain aficianados to the recently released Bank for International Settlements (BIS) report which roundly panned digital currencies and ignored the many benefits of the underlying blockchain technology. Jeremy Allaire, CEO of the Goldman Sachs-backed crypto company Circle, was among many who hit back after the report was released on June 17.
Flawed Research, Shallow Perspective
In an interview with Business Insider he characterized the report as shallow and not up to date. And he pinpointed one of its key flaws—it barely considers the benefits of blockchains, the critical network technology on which most cryptocurrencies, including Bitcoin, operate:
”They [BIS] haven’t done much research at all clearly. They're looking back at stuff that's year's old, they're not looking at what's actually going on in terms of the real R&D in this space. It's just really poor research.”
Joseph Thompson, CEO and co-founder of AID:Tech argues that while the overall substance of BIS report is well-argued, it is only relevant in the context of the financial system. The report, called Looking Beyond the Hype, focuses on the lack of growth for digital assets, calling them a poor substitute for money. It also highlights the fact that cryptocurrency performance, or scalability, worsens as alt-currencies grow more popular.
Thompson notes that the report's underlying problem is it doesn’t touch on non-financial applications, the very areas where blockchain is having the most impact right now.
“It is important to remember that blockchain fundamentally revolutionizes ‘the transfer of value’ and not just financial value. For example: aid, welfare, donations, ID, content rights, ownership of data, distribution of resources other than just money, and therefore the particularly pessimistic tone of the report is not balanced in the slightest. It is a known fact that regulation is always one step behind innovation - how can regulation be in place without fully understanding the full potential of the technology? If relevant parties decide to take a collaborative approach, some of the key challenges, for eg. regulation, will inevitably be met.”
Blockchain's technological disruption, especially within the financial system, was also not properly examined says Manuel Martin, co-founder and senior project leader, blockchain expert at Orvium. It has already reduced both transaction time and transfer fees, changing the way people send money. As such, it should not and cannot be ignored.
“Today, banks and companies are recognizing the opportunity presented by blockchain and are taking a leading role in adopting these technologies. This, however, is just the tip of the iceberg. Similar to the technological revolution experienced during the 90s with the increased adoption of the internet, where many new projects emerged, innovating in almost every field, today we live in fascinating times for blockchain, where disruptive projects are creating a fast-evolving ecosystem of applications.”
Why Is The BIS Report Important?
The BIS, often referred to as "the central bank for central banks" is an umbrella organization with links to the US's Federal Reserve and the European Central Bank as well as the other regional central banks that set monetary policy for the the world’s developed, developing and emerging economies. These regional central banks, in tandem with the BIS, also work together to arrive at financial regulation that influences national government policies—including providing guidance for how local governmental financial organizations might wish to view digital currencies.
No surprise then that with regulatory issues regarding cryptocurrencies still in flux across the globe, and a broad and diverse range of regulatory mandates already on the books—everything from outright bans on crypto offerings, exchanges and sales in some areas to free and liquid trading in others—a negative release on alt-currencies could have a seriously adverse affect on the asset class and its uptake.
And the BIS report wasn't diplomatic. It claimed that high cryptocurrency trading volumes could crash the internet. It also stressed their lack of scalability which could drive a breakdown in trust and efficiency going forward. Plus, of course it points out that despite the hype, cryptocurrencies are a far cry from money. Clearly not an endorsement of any sort.
In contrast, the Deputy Director of the International Monetary Fund (IMF), Dong He, produced a report on May 31st saying that crypto assets may one day reduce demand for central bank money and suggesting a number of ways in which central banks might one day use the distributed ledger technology that's built into the blockchain. In his view, this would simplify the process and by authenticating the object used for payment—one of the primary benefits of distributed ledger technology—"the transaction can go through, regardless of trust in the intermediary or the counterparty." The report went on to say, "such a shift could also portend a change in the way money is created in the digital age."
Though earlier this year the BIS and IMF announced that they planned to work together more closely to help strengthen the expertise and skills of financial regulators and supervisors, particularly in the context of implementing the post-crisis financial reforms and dealing with emerging issues such as “financial technology,” based on the two releases it would appear the IMF has a much more progressive view on the influence and adoption of cryptocurrencies and blockchain.
Refute Arguments Point-by-Point
Perhaps the best way to deal with the BIS report is simply to refute its key arguments point-by-point says Vladislav Dramaliev, marketing lead at aeternity, a blockchain 3.0 platform. When that's done, the alarmist message can more easily be addressed and dissolved.
Consider each of the critical points mentioned, such as hard forks, mining concentration, volatility, scalability, and energy consumption, he says:
“Securing a censorship-resistant, open, transparent, multi-hundred-billion money ecosystem in a decentralized fashion is definitely a worthy cause and huge task. But will it break the internet? Certainly not. Take one of BIS’ concerns, hard forks, as an example, the very nature of cryptocurrency revolves around trust, with or without a hard fork – if trust is preserved – a hard fork will be short-lived."
Dramaliev also focuses on one issue raised n the report: mining concentration. In his view, though this is a concern for all public blockchain systems, any party that invests the time, money, and energy to attack Bitcoin or another digital currency would be better served to use those resources to follow the rules and earn the block reward.
The security provided by blockchain remains unassailable he says. Note that even if a miner or mining group attacks the system, they can only change future transactions Dramaliev says. Re-creating the history of transactions means rehashing old blocks, and re-building the blockchain from a point in the past (in case of Bitcoin). That's very expensive and nearly impossible to do.