BIS Calls Crypto Market ‘Fragmented,’ Incapable of Coordination

The Bank for International Settlements (BIS) said in a bulletin published Tuesday that it does not see the potential for payments infrastructure in a fragmented blockchain ecosystem.

The Bank for International Settlements published a report Tuesday criticizing crypto as a means of payment. The organization, which represents central banks from Australia, Malaysia, South Africa, and Singapore, amongst others, and specializes in international financial cooperation, argued that multiple blockchains create a fragmented system unsuited to money’s role as a means of coordination.

“Fragmentation without interoperability implies that cryptocurrencies cannot fulfill the role of money as a coordination device,” the report writes.

Its argument hinges on how, in traditional finance, adoption creates positive network effects. It lowers costs for users, while increased transactions on cryptocurrency networks lead to congestion and higher fees, driving users to other blockchains, and creating new forms of digital money and parallel blockchains. The report contrasts this with the traditional finance system, where the more users buy into a platform, the more attractive it becomes.

No single source of truth

The BIS report concedes that cross-chain bridges help solve this problem but that the number of cross-chain bridges increases as the number of blockchains increases. Users wishing to send funds using cross-chain bridges can send the cryptocurrency from their blockchain of choice to the bridge. The bridge then stores the ether or bitcoin, recording the transaction on the source blockchain. The bridge then converts the currency in the bridge to the destination cryptocurrency, and the second transaction is recorded on the second blockchain.

There is no way to create a single source of truth through sharing blockchain information since each blockchain uses information differently to reach a consensus, the report says, citing Ethereum co-founder Vitalik Buterin.

BIS banks on CBDCs as the way forward

The BIS is a known critic of cryptocurrencies, calling them “speculative assets rather than money, in a report released on June 23, 2021. “Bitcoin, in particular, has few redeeming public interest attributes when also considering its wasteful energy footprint,” it added.

The BIS has been a champion of central bank digital currencies, saying that they offer the benefits of fiat, such as settlement finality, liquidity, and integrity, but in digital form. However, without proper risk management, Fitch Ratings Agency predicts that CBDCs “may disrupt financial systems.”

The BIS believes there is more of a future based on trust in sovereign digital currencies than in a fragmented cryptocurrency landscape.