RBA: The problem with cryptocurrencies is that 'trustless' blockchains are just too slow

The average bitcoin user has to wait an hour for transactions to clear. (Photo by Uriel Sinai/Getty Images)
  • The RBA’s head of payments, Tony Richards, says the scaling problems faced by cryptos mean they are unlikely to be adopted.
  • He said rather than the slow transaction speed of “trustless” blockchains, new systems will probably be underpinned by “permissioned” ledgers.
  • Despite that, Richards said the RBA will remain engaged with entities involved in cryptocurrency and distributed ledger technology.

The RBA’s Tony Richards gave a speech today on cryptocurrencies and the distributed ledger technology (DLT) that underpins them.

While both were “fascinating developments both from a payments and a broader economic perspective”, he said bitcoin doesn’t meet the criteria for sound money.

Richards assessed bitcoin’s legitimacy as a currency with reference to three main criteria: as a store of value, a medium of exchange and a unit of account.

He said it still misses on all three use cases.

And his reasoning for why it doesn’t meet the medium-of-exchange criteria put the spotlight on one of bitcoin’s main shortcomings: scalability.

In other words, bitcoin (and other cryptos) haven’t come close to addressing the scaling issues that result from using a trustless, rather than a permissioned, distributed ledger.

“Many of these shortcomings of cryptocurrencies stem from their design around trustless distributed ledgers and the costly proof-of-work verification method that is required in the absence of a trusted central entity,” Richards said.

“In contrast, in situations where there are trusted central entities in well-functioning payment systems, there may be little need for cryptocurrencies.”

Such a view would almost certainly be disputed by developers in the crypto community.

A similar report last week by the Bank of International Settlements — which critiqued the scaling capability of cryptos — was met with criticism from some corners, as developers highlighted the advancements in bitcoin scaling technology such as the lightning network.

But for now, Richards hasn’t seen enough to convince him of the scaling argument.

He said that where debit or credit card transactions are usually instant, bitcoin users usually have to wait for an additional six blocks to be mined on the network before a change of ownership is registered.

Each block of new transactions usually takes around 10 minutes to approve, which leaves the average bitcoin user waiting about an hour before their transaction is approved.

“I think the evidence to date is that trustless blockchain solutions are unlikely to be adopted.”

“Rather, the new systems are more likely to be permissioned shared ledgers, where a central body still plays a dominant role.”

A good example of a permissioned ledger is the blockchain platform under development for the ASX, which is scheduled to roll out in late-2020.

While the platform will provide a new way of clearing ASX trades using blockchain, it will still be centralised in the sense that the ASX will determine who has authority to use it.

Richards added that bitcoin’s inherent volatility, along with the lingering risk of exchange hacks, means it doesn’t yet meet the criteria for a stable source of value.

Neither does it function well as a unit of account.

“While a small number of businesses may accept bitcoin, their prices are posted in national currencies. Not even bitcoin conferences post their prices in bitcoin,” Richards noted.

Despite those inherent limitations, Richards said the RBA will continue to study the implications of cryptocurrencies, and plans to remain engaged with entities active in the space.

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