BIS BS on Crypto

 

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I expected more from the Bank for International Settlements (BIS).

It’s the central bank of central banks, the world’s titan of modern finance.

But I was disappointed and, for a reason I’ll explain later, also quite gratified.

Initially, when I heard the BIS would be issuing a report about cryptocurrencies, I was looking forward to a balanced, rational, accurate review.

I expected the BIS would cover both the pros and cons of Distributed Ledger Technology (DLT) — its achievements and challenges, innovations and pitfalls.

Instead, the BIS’ annual economic report issued on June 17 reads more like a hit piece. (You can read the chapter on cryptos here: “Cryptocurrencies: Looking Beyond the Hype.”)

It’s riddled with misinformation.

It adds little of substance to the current debate among developers, investors and regulators.

And …

It Ignores the Fiat Currency
Nightmares of the Last Decade

The report begins by mostly ignoring the disasters and near-disasters that have haunted the financial world since 2008 — the same ones that inspired the creation of Bitcoin.

Instead, it begins with this self-congratulatory statement:

“Independent central banks have largely achieved the goal of safeguarding society’s economic and political interest in a stable currency. With this setup, money can be accurately defined as an ‘indispensable social convention backed by an accountable institution within the state that enjoys public trust.‘” (Emphasis ours.)

Accountable? Public trust? Sometimes, yes.

However, even in most democratic nations, central banks are several steps removed from democratic processes. Plus, at the same time, they are often heavily influenced by large financial institutions and financial elites.

Did the public have a say when, after the Lehman Bros. failure of September 2008, the world’s central banks suddenly abandoned tried-and-tested norms of monetary policy, rushed to create a series of new money-creation mechanisms, and immediately began doling out hundreds of billions?

Did the public have a say when they transformed those ad-hoc bailouts into a nine-year, nonstop money-printing binge dubbed “quantitative easing”?

And what about the Greek debt crisis? Did citizens have a say when the European Central Bank decided to force-feed draconian austerity measures onto their economy?

No.

And yet, the impacts of these central bank decisions go far beyond banking. As Weiss Ratings founder Martin Weiss shows in his Next Black Swans video, extreme Fed money printing may be a primary cause of wealth concentration and radical politics.

If you think I’m digressing from the topic of cryptocurrencies, consider this …

The popular perception that central banks are arbitrary — and that the financial system is unfair — is widespread.

It is the very reason cryptocurrencies were invented.

And it’s a powerful driving force behind the techno-evolution of today’s most-advanced cryptocurrencies.

“Central Banks” and “Transparency” Are Oxymorons

Despite vague monthly pronouncements about possible future interest-rate changes, central bank operations are often shrouded in secrecy.

Their transparency is very limited.

And the agenda to defend this model seems to color the BIS report on cryptocurrencies in its entirety.

Indeed, the flaws and errors in the BIS report are too numerous to cover in this short piece. But here are six major ones …

Flaw #1. The BIS argues that only supercomputers could keep up with verification of transactions, and the volume could bring the internet to a halt, as millions of users sync terabyte-size ledgers. This is not true. Most cryptocurrency platforms let you interact with their networks without synchronizing the entire history of their ledgers. And those that don’t can easily implement similar features.

Flaw #2. The BIS dwells on the high energy consumption of Bitcoin, but fails to recognize the efficiencies of new cryptocurrencies that rely mostly on energy-efficient Proof-of-Stake mining or its many variations.

Flaw #3.  The BIS falsely states that cryptocurrencies have no intrinsic value in terms of how they are used. However, this issue was addressed with the introduction of Ethereum, and many of today’s cryptocurrencies are effectively the fuel of decentralized ecosystems, giving them intrinsic value that’s hard to deny.

Flaw #4. The BIS correctly argues that Bitcoin cannot guarantee the finality of payments. However, cryptocurrencies like Stellar, Ripple, EOS, NEO, Ontology and Hedera Hashgraph rely on consensus protocols called Byzantine Fault Tolerance (BFT), which guarantee finality and 100% certainty that a payment has been accepted.

Flaw #5. The BIS points out that a fully permissionless cryptocurrency like Bitcoin would be too cumbersome to function as digital money. However, new technologies like EOS, NEO and Cardano include consensus algorithms that allow participants to vote for validators in a decentralized system. This will enable both broad democratic participation and fast, secure transactions.

Flaw #6: The BIS voices a valid concern about the price volatility of cryptocurrency markets. However, this is almost entirely due to their illiquidity. As they mature, they will gain more liquidity over time.

My Recommendations to the BIS:

1. Don’t get hung up on Bitcoin. Instead seek an up-to-date understanding of the fundamental building blocks of more advanced Distributed Ledger Technology.

2. Never underestimate the capacity of talented developers. They’re not only fully aware of the issues you’ve raised, but they’re already working hard to fix them. The Lightning Network, Byzantine Fault Tolerance and sharded networks are just three examples.

3. Open your eyes to the benefits of a more inclusive, democratic monetary system. If you do, a transition to DLT technology can be smooth and evolutionary. If you don’t, you risk a transition that’s disruptive and revolutionary.

To paraphrase Goldman Sachs’ Lloyd Blankfein, the world managed to shift from physical money to paper-based fiat money. Why can’t it shift from centrally controlled currency to consensus-based currency?

The silver lining in the BIS BS: If the smartest brains and most well-financed defenders of the financial system can’t find valid reasons to oppose cryptocurrencies, no one can.

This is good news for cryptocurrency investors. It’s a signal that the evolution toward DLT is unstoppable — that sooner or later, the central bankers of the world will change their tune.

In the not-too-distant future, we hope they will adopt a new mantra: “If you can’t beat ‘em, join ‘em.”

Best,

Juan

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Comments 1

Bob Schubring July 6, 2018

The one positive element I see in the BIS report, is their treatment of Trade Banking. When we buy things in a foreign country and have them shipped to us, unless we’re personally present to examine the goods, there’s a hazard to both parties. The seller wants to be paid in advance, in case the buyer takes the goods and does not pay. But the buyer wants to be sure the goods are sent, out of fear that the seller will take the money but not send the goods, or send defective goods. Trade banking is a process by which funds are held in escrow, to make certain that the purchase contract is fulfilled. The BIS report correctly identifies Trade Banking as a business that could be better-automated, saving money for buyers and sellers, and points out that the Smart Contracts used in Ethereum could provide such automation. Effectively, the present fiat banking system faces a challenge, says the BIS: Automation will cut costs, and it’s up to fiat bankers to employ the automation, or cryptocurrency may get there first.

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