“Crypto cannot fulfill the social role of money”
Although the cryptocurrency industry is growing and advancing every day, many financial authorities and organizations, especially those overseeing the emerging decentralized finance (DeFi) industry, are still expressing concerns about the space.
One such organization is the Bank for International Settlements (BIS), which on June 7 published a bulletin titled “Blockchain Scalability and Crypto Fragmentation,” in which it presents its view that “crypto cannot fulfill the social role of money”.
In this report, the organization lists a number of issues it perceives in the crypto and blockchain industry, including high fees and network congestion that lead to fragmentation of the crypto landscape:
“By relying on permissionless blockchains, crypto and DeFi seek to create a radically different monetary system, but they suffer from inherent limitations. A system maintained by rewarding a set of decentralized but interested validators with fees means that network effects cannot unfold. Instead, the system is prone to fragmentation and expensive to operate. »
The crypto-fragmentation problem
In addition, the report explains that:
“Fragmentation means that crypto cannot fulfill the social role of money. Ultimately, money is a coordinating device that facilitates economic exchanges. It can only do this if there are network effects: the more users use a type of currency, the more attractive it becomes for others to use it. Looking to the future, innovations that build on reliance on sovereign currencies hold more promise. »
The report also mentions “limited scalability and lack of interoperability,” which “not only prevents network effects from taking root, but a parallel blockchain system also adds to governance and security risks.”
Regarding the different blockchains exhibiting strong co-movements in price despite fragmentation, the organization interprets this as these networks sharing the same investor base and growth being “supported by speculative buying of coins” .
This is not the first time that BIS has criticized crypto. In December 2021, Finbold reported that BIS Secretary General Agustin Carstens was discussing the “break in the manifestation of non-banking financial intermediation” and his belief that DeFi is “illusory”.