Will cryptocurrencies live up to their immensely preached hype and be adopted by the masses globally giving it the status of a global currency or will it succumb to its demise due to the underlying flaws in the technology?
This question will only be answered by the passage of time, however Hyun Song Shin, head of research at the Bank for International Settlements in Switzerland, provided some valuable insight to this topic. In an interview Shin told that Bitcoin and subsequent cryptocurrencies “fall a long way short of being able to sustain a monetary system” and only “masquerade” as real currencies.
Previously, Agustin Carstens, the general manager of the Bank of International Settlements also voiced his concerns about the cryptocurrencies. He mentioned,
Novel technology is not the same as better technology or better economics that is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster.
On being asked about why people are getting obsessed with the idea of cryptocurrencies, Shin told that people view the cryptocurrencies as a solution to their problems. The tamper proof ledger that holds the record of the assets is a technological revolution that ensures that their money is being guarded by a decentralized platform. This decentralized platform, which is free for all to view and use. The banking system and the governments which hold power over the centralized currencies are subsided due to the advent of blockchain based technology. There are other advantages provided by the decentralized platform that includes tax evasion. Due to the transparency it offers, it has widely been used for the nefarious purposes like money laundering and fraud.
Shin further elaborated that bitcoin and several other cryptocurrencies hold only as much value as people choose to allot it. The more people want it the more value is added to it. Paper currency is no different from this. A dollar bill is just a piece of paper that has been approved to be accepted in exchange for services provided. The government centralizes the national currency, which gives it value. But this centralized currency is affected by the changing economic situation in that country. Whereas, cryptocurrencies being decentralized, do not get effected by the changing economic situation.
It was also suggested that since ancient times, to make a trade between two people a bookkeeper was required who kept record of the respective trade. In the modern world, this position of a bookkeeper is being fulfilled by the central banks. With blockchain technology, the role of bookkeeper is given to the network, which connects all the users of the distributive ledger. No one controls the tamper proof ledger. All the transactions that take place are recorded on it and the validity of that transaction may not be a 100% but it comes close to that. He said;
What is a valid payment depends on what the bookkeepers agree is a valid payment. It is the result of a collective decision of the bookkeepers themselves.
While shedding light on this topic, Shin also mentioned that though the blockchains are rendered to be tamper proof, if miners collude with one another they are able to hardfork a transaction that could in turn nullify that transaction. Due to this underlying shortcoming in technology, transactions made on blockchain are never really 100% and could lead to catastrophic results.
While discussing the incentives that the miners are allotted while mining, Shin elaborated that the miners collect the rewards as well as the voluntary transaction fees paid by the miners for that particular block. He went on to saying that if the capacity of the network is increased the transaction fee will become zero. This would in turn lead to miners losing incentive to verify blocks. Referring to this Shin said,
This is where economics really bumps into technology.
With the popularity of the digitized currency, increasing rapidly every day and the governments issuing regulatory framework to regulate the transactions being made all over the world, Agustin Carstens, GM of Bank of International Settlements, also said that the governments should not be encouraging the use of cryptocurrencies. He said;
Private digital tokens masquerading as currencies must not subvert this trust [in central banks].
He also mentioned that the transparency that the DLT provides, is aiding criminals to carry out their activities such as money laundering and fraud.
In conclusion, this is what Shin had to say about the blockchain technology.
I think where it becomes much more difficult is when the technology takes on the attribute of a financial asset, which then masquerades as a currency. And then gives rise to promises that may not be fully fulfilled.