The crypto community isn't happy with a negative report by the 'bank for central banks'

The debate rages on. (Photo by Ronald Martinez/Getty Images)
  • The Bank for International Settlements released a research paper that was critical of cryptocurrency.
  • Crypto experts weighed in, disputing the assertions made in the report.
  • The BIS report highlighted an interesting argument about the inherent limitations of cryptocurrency as a means of exchange.

The Bank for International Settlements (BIS) has weighed in on the crypto debate, and it was less than positive.

The aim of the BIS is to foster global financial stability, and it’s owned by 60 central banks across the world. In that sense, the BIS also describes itself as the bank for central banks.

Given that one of the stated aims of crypto is to disrupt the status quo of centrally controlled currencies, it’s perhaps not surprising that the BIS was critical.

The report said crypto networks get less efficient the bigger they get. Along with scaling issues, they’re also volatile and subject to stability threats due to forks.

Here’s what the CEO of Dash coin — currently the 13th biggest crypto by market cap — thought about it:

Industry veteran and bitcoin expert Andrea Antonopolous was also critical:

While the debate about scaling capacity rages on, the BIS made an interesting point about volatility, that it said limits the use-case for cryptos.

The report said that central banks are effective mechanisms for stabilising the value of soveriegn currencies, because they have the capacity to adjust supply to meet demand.

In fact, they do it all the time — particularly in times of financial stress.

Here’s BIS on how that fundamentally differs from crypto, and why it’s important (emphasis ours):

This contrasts with a cryptocurrency, where generating some confidence in its value requires that supply be predetermined by a protocol. This prevents it from being supplied elastically. Therefore, any fluctuation in demand translates into changes in valuation. This means that cryptocurrencies’ valuations are extremely volatile.

Keeping the supply of the means of payment in line with transaction demand requires a central authority, typically the central bank, which can expand or contract its balance sheet. The authority needs to be willing at times to trade against the market, even if this means taking risk onto its balance sheet and absorbing a loss.

In a decentralised network of cryptocurrency users, there is no central agent with the obligation or the incentives to stabilise the value of the currency: whenever demand for the cryptocurrency decreases, so does its price.

It’s a view shared by economists from the New York Fed earlier this year. Analysts from Deutsche Bank also highlighted the inherent volatility of cryptos such as bitcoin as a limiting factor in their value proposition as a means of payment.

As the debate about the valuation of cryptocurrency rages on, bitcoin led the market higher overnight as the northern hemisphere digested the latest BIS research.

It’s up by around 4% this morning, holding comfortably above the $US6,000 mark which represents a key line of technical support.

You can read the full report by the BIS here.

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