Cryptocurrency a 'Poor Substitute' for Traditional Money, Financial Institution Report Says

The Bank of International Settlement recently released a report that claims cryptocurrencies are a “poor substitute” for institutionally supported currencies. The report, titled “Cryptocurrencies: looking beyond the hype,” outlines the rise of the crypto market, its issues, and whether or not it can truly replace traditional money with a digital alternative, Coindesk reported.

Among the issues cited by the review are mining concentration, hard forks, the creation of new cryptocurrencies, the technology’s innate volatility, and scalability. All of these are indeed concerns in the crypto world and permanent solutions are being explored to address them.

The report concludes that cryptocurrency will be found wanting as a replacement for traditional money due to the issues cited above, but most particularly because of the massive ledger it’s going to create, or, basically, the scalability obstacle.

"To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months,” the report goes on.

This finding is somewhat in line with what the German federal government said last week, stating that cryptocurrency doesn’t pose a threat to traditional money since it cannot handle the amount of global financial transactions conducted on a daily basis. This was also the sentiment of Nasdaq Inc. president and CEO Adena Friedman, although both entities suggested that a lot of industries can leverage the advantages that the technology offers.

Aside from scalability, the BIS report also says that the block that would be produced by the handling of a retail transaction can only be managed by supercomputers. And even if there exists a decentralized supercomputer network for calculating the power needed to create the next block, users will still need to transfer a massive amount of data between each other. This, the report claims, has the potential to “halt the internet.”

Of course, the crypto sphere is finding solutions to this problem and other issues surrounding it. For instance, the scalability problem was solved by one of the issues pointed out by the paper, hard fork. There’s another solution called sharding, where the huge block is separated into smaller chunks in order to lower the processing power needed to calculate the next one.