Bankers suffer from Bitcoin fear

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The Bank for International Settlements (BIS) has existed for 89 years and is owned by 60 of the world’s most important central banks. It has just issued a new report called, “Beyond the doomsday economics of ‘proof-of-work’ in cryptocurrencies,” which claims “that proof-of-work cryptocurrencies are inherently doomed because the cost of transaction confirmation is prohibitively expensive and miners will leave the market once block rewards are phased out,” David Hundeyin reports.

However, not everyone buys its theories. For example, Ralph Auer, Principal Economist at BIS claims that a major drawback of transaction confirmations with PoW cryptocurrencies is that balancing security and speed leads to a prohibitively expensive outcome. In his own words, he said, “If the incentives of potential attackers are analysed, it is clear that the cost of economic payment finality is extreme. For example, to achieve economic payment finality within six blocks (one hour), back of the envelope calculations suggest that mining income must amount to 8.3% of the transaction volume — a multiple of transaction fees in today’s mainstream payment services.”

This might be true if he was talking about crypto scalability. Instead, as Hundeyin says, he is presenting it as an “existential threat to cryptocurrencies.” This is patently untrue, as many will use crypto regardless of cost. As Hundeyin also says, “There are factors that make crypto uniquely desirable enough to make up for such inconveniences, but this appears to be totally lost on Auer.”

Auer also claims that mining is not profitable and that this will result in a loss of liquidity. But then concedes that the Lightning Network can improve the economics of payment and scalability issues.

So why is the BIS promoting a report on crypto that is “so light on facts”? Hundeyin suggests the answer is at the beginning of the report’s abstract: “Methods other than proof-of-work could be used to achieve payment finality. But these might require coordination mechanisms, implying support from a central institution. Thus, the current technology seems unlikely to replace the current monetary and financial infrastructure. Instead, the question is rather how the technology might complement existing arrangements.”

It seems that the entire point of this report is to deny that cryptocurrency can disrupt central banks, or do what they do more efficiently. It also refuses to acknowledge that the success of cryptocurrencies lies in decentralisation; the thing that most centralised banks are most afraid of.

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