- 8 Oct 2008
BIS Wants To Ban Bitcoin
06 February 2018
Agustín Carstens, General Manager of the BIS: Bitcoin is a "combination of a bubble, a Ponzi scheme and an environmental disaster."
"Money in the digital age: what role for central banks?" Lecture by Mr Agustín Carstens, General Manager of the BIS, at the House of Finance, Goethe University, Frankfurt, 6 February 2018.
Reviewing the economic functions and historical foundations of money, this lecture asks whether new technology fundamentally alters the advantages of central banks being the ultimate issuer. The inquiry sheds light on current policy questions surrounding cryptocurrencies. It concludes that authorities should focus on the ties linking cryptocurrencies to the conventional financial system and apply the level playing field principle of "same risk, same regulation".
As I mentioned, we may be seeing the modern-day equivalent of clipping and culling. In Bitcoin, these take the form of forks, a type of spin-off in which developers clone Bitcoin’s software, release it with a new name and a new coin, after possibly adding a few new features or tinkering with the algorithms’ parameters. Often, the objective is to capitalise on the public’s familiarity with Bitcoin to make some serious money, at least virtually.
Last year alone, 19 Bitcoin forks came out, including Bitcoin Cash, Bitcoin Gold and Bitcoin Diamond. Forks can fork again, and many more could happen.
After all, it just takes a bunch of smart programmers and a catchy name. As in the past, these modern-day clippings dilute the value of existing ones, to the extent such cryptocurrencies have any economic value at all.
As the saying goes, trust takes years to build, seconds to break and forever to repair. Historical experiences suggest that these “assets” are probably not sustainable as money.
Cryptocurrencies are not the liability of any individual or institution, or backed by any authority. Governance weaknesses, such as the concentration of their ownership, could make them even less trustworthy. Indeed, to use them often means resorting to an intermediary (for example, the bitcoin exchanges) to which one has to trust one’s money.
More generally, they piggyback on the same institutional infrastructure that serves the overall financial system and on the trust that it provides. This reflects their challenge to establish their own trust in the face of cyber-attacks, loss of customers’ funds, limits on transferring funds and inadequate market integrity.
Novel technology is not the same as better technology or better economics.
That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster.
The volatility of bitcoin renders it a poor means of payment and a crazy way to store value. Very few people use it for payments or as a unit of account. In fact, at a major cryptocurrency conference the registration fee could not be paid with bitcoins because it was too costly and slow: only conventional money was accepted.
In conclusion, while cryptocurrencies may pretend to be currencies, they fail the basic textbook definitions. Most would agree that they do not function as a unit of account. Their volatile valuations make them unsafe to rely on as a common means of payment and a stable store of value.
They also defy lessons from theory and experiences. Most importantly, given their many fragilities, cryptocurrencies are unlikely to satisfy the requirement of trust to make them sustainable forms of money.
While new technologies have the potential to improve our lives, this is not invariably the case. Thus, central banks must be prepared to intervene if needed. After all, cryptocurrencies piggyback on the institutional infrastructure that serves the wider financial system, gaining a semblance of legitimacy from their links to it. This clearly falls under central banks’ area of responsibility.
The buck stops here. But the buck also starts here. Credible money will continue to arise from central bank decisions, taken in the light of day and in the public interest. In particular, central banks and financial authorities should pay special attention to two aspects.
First, to the ties linking cryptocurrencies to real currencies, to ensure that the relationship is not parasitic. And second, to the level playing field principle. This means “same risk, same regulation”. And no exceptions allowed
BIS Wants To Ban Bitcoin