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Crypto’s Failure to Harness Innovation for Society

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The Bank of International Settlements (BIS) has published a report on cryptocurrencies and explains that the technology has serious “flaws.” BIS researchers insist that permissionless blockchains have “inherent limitations” that lead to network congestion and high fees.

BIS Report: ‘Crypto Has So Far Failed to Harness Innovation to the Benefit of Society’

In its latest report, the Bank of International Settlements (BIS) claims that cryptocurrencies in their present form are not suited to work with the global economy. BIS researchers stress that while the industry “operates under the banner of decentralization,” in practice “centralized intermediaries have played a key role in channeling funds into the crypto universe and intermediating within it.”

The BIS report details that the splintered landscape of the crypto sector sharply counters the unifying, ripple-like impact observed in conventional networks. The crypto industry, leaning heavily on decentralized validation methods, fosters a fragmentation that nullifies the function of money as a synchronizing tool, thus rendering crypto an ill-fit for a monetary system, BIS researchers argue. The BIS report adds:

Crypto proponents argue that decentralisation guarantees the safety of the system. However, there is often a de facto concentration of decision-making power. While centralisation is not a structural flaw per se, it introduces new risks and invalidates arguments made by proponents of crypto and defi that stress its purportedly decentralised nature.

Crypto’s Struggle with Decentralization

In a brisk span of little more than a decade, crypto has vaulted from a peripheral interest to an influential player in the mainstream financial arena, the report notes. The industry has drawn the attention of millions of everyday consumers and an escalating number of institutional investors, who’ve gravitated towards the crypto sector in recent years. The report does assert that crypto assets do offer bona fide innovation, such as programmability and composability.

The banking organization acknowledges that the capabilities of cryptocurrencies offer a level of automation in financial transaction sequences and facilitate their fluid integration. Paired with the concept of tokenization, these attributes could potentially minimize the requirement for manual oversight that presently hampers transaction speed and amplifies costs, the BIS report submitted to the G20 finance ministers and central bank governors explains.

“That said, crypto has so far failed to harness innovation to the benefit of society,” the BIS report concludes. “Crypto remains largely self-referential and does not finance real economic activity. It suffers from inherent shortcomings related to stability and efficiency, as well as accountability and integrity. These structural flaws result from the underlying economics of incentives rather than technological limitations.”

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