Central bankers claim bitcoin could break the internet — the crypto world thinks they're missing the point

Bank of International Settlements head Agustin Carstens.REUTERS/Carlos Jasso

The Bank of International Settlements on Sunday said bitcoin is "a poor substitute for the solid institutional backing of money."
Critics in the crypto world say the report missing the point — bitcoin and other cryptocurrencies are still in development and shouldn't be judged yet.
Circle CEO calls the report "shallow" and said: "They're not looking at what's actually going on in terms of the real R&D in this space."

LONDON — Who's right about bitcoin: the Bank of International Settlements (BIS) or cryptocurrency advocates?

The BIS, which is often dubbed the central bank of central banks, released a chapter from its upcoming annual report on Sunday dismissing bitcoin as "a poor substitute for the solid institutional backing of money."

"Trust can evaporate at any time because of the fragility of the decentralised consensus through which transactions are recorded," the report said. "Not only does this call into question the finality of individual payments, it also means that a cryptocurrency can simply stop functioning, resulting in a complete loss of value.

"Moreover, even if trust can be maintained, cryptocurrency technology comes with poor efficiency and vast energy use. Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value."

Much was made of the energy usage point. Bloomberg ran a headline stating that bitcoin could "break the internet" if used at a national scale.

Energy usage is a serious issue for bitcoin, which requires ever greater levels of computing power to validate transactions on its network. Bitcoin mining currently uses about as much electricity as Switzerland, according to BIS.

But crypto advocates say that this — and BIS's other criticisms of bitcoin and cryptocurrencies — misses the point.

Circle CEO Jeremy Allaire.Circle

"It was a really shallow report," Jeremy Allaire, the CEO of Goldman Sachs-backed crypto company Circle, told Business Insider. "They haven't done much research at all clearly.

"They're looking back at stuff that's year's old, they're not looking at what's actually going on in terms of the real R&D in this space. It's just really poor research."

To bitcoin adherents, bitcoin and other cryptocurrencies are still a work in progress. Yes, its energy usage is an issue but it's one that developers are aware of any trying to solve.

One blockchain professional I spoke to on Thursday compared the BIS report to saying the world would be in trouble if a baby was put in charge. Babies tend to grow up before they are given any responsibility and crypto developers are hard at work helping bitcoin and other digital currencies grow up.

"I don’t think many people appreciate just how early stage this technology is," Jamie Burke, the founder and CEO of specialist bitcoin and blockchain VC fund Outlier Ventures, told the Blockchain Alternative Investment Conference in London on Monday.

Something like 98% of bitcoin's original code base has been rewritten since it was first created in 2009 and developers around the world continue to work on new ideas, solutions, and technology.

Allarie said: "I'm deep, deep in it and I'm a pretty technical person and I cannot keep up. There's so much. I'm not even close. There's just so much activity and so much innovation happening. I've never seen anything like it, it's just happening at such a pace."

Matthew Newton, an analyst at eToro, which is a trading platform that supports cryptocurrencies, said: "Cryptocurrencies remain an emerging technology, albeit one that is moving towards the right infrastructure for everyday use."

Newton and Allaire both pointed to the bitcoin Lightning Network and other so-called "Layer 2" projects that are built on top of existing cryptocurrencies and allow for greater volumes to be processed without sucking up huge amounts of energy but still ultimately rest on the underlying trust of the bitcoin blockchain.

Allaire said: "There's a lot of infrastructure work going on and I think it's really, really key because I think the consensus within the industry is that if we can solve some of those issues in the next year to two years, then we can have products that are actually used by a billion people. That's when this gets to be a lot more interesting."

Other solutions are being looked at include ethereum's proof of stake protocol, which would make transaction validation more like a shareholder voting register rather than simply about computational brute force.

Newton said: "While it is far from guaranteed that these developers will troubleshoot all of the problems, the fact of the matter is that the work of these talented developers is coming on in leaps and bounds, and we have to be patient to see how things develop over time."

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