In a report submitted to the G20 leaders, the Bank for International Settlements (BIS), outlined the key elements of the crypto ecosystem while assessing its structural flaws.
BIS is an international financial institution that acts as a bank for central banks. It supports central banks’ pursuit of monetary and financial stability through international cooperation.
Dated today, 11 July 2023, the report, entitled ‘The crypto ecosystem: key elements and risks’, was sent to the G20 Finance Ministers and Central Bank Governors. It highlighted the “inherent structural flaws” of cryptocurrencies, making it unsuitable as a monetary tool.
One of the main takeaways of the report was the characterisation of the crypto ecosystem as congested, with high fees, leading to fragmentation. It then said that: “Despite an original ethos of decentralisation, crypto and decentralised finance (DeFi) often feature substantial de-facto centralisation, which introduces various risks.”
Furthermore, it stated that since DeFi mostly replicates services offered by the traditional financial system, it also amplifies known risks. On top of this, DeFi does not finance activity in the real economy as its growth is driven by the speculative influx of new users, posing substantial risks to investors.
Due to this, the report tagged crypto as largely “self-referential”, failing to finance real economic activity. In making its point, BIS also cited the catastrophic events of 2022 which exposed the risks of the industry, like the collapse of TerraUSD and FTX.
While the BIS did acknowledge the innovative elements of cryptocurrencies, such as programmability and composability, it also claimed that crypto has so far failed to harness innovation to the benefit of society.
Suffering from inherent shortcomings related to stability and efficiency, as well as accountability and integrity, it said that its structural flaws resulted from the underlying economics of incentives rather than technological limitations. Owing to these shortcomings, the BIS held its belief that cryptocurrencies play an insignificant role in the monetary system.