While citing multiple problems with the decentralization model for cryptocurrencies (some of them valid and some of them not), the Bank for International Settlements has concluded in a report released this week that crypto ‘can’t fulfill the role of money.’ As noted in the report:
“Building on permissionless blockchains, crypto and DeFi seek to create a radically different monetary system, but they suffer from inherent limitations. A system sustained by rewarding a set of decentralised but self-interested validators through fees means that network effects cannot unfold. Instead, the system is prone to fragmentation and costly to use.
Fragmentation means that crypto cannot fulfill the social role of money. Ultimately, money is a coordination device that facilitates economic exchange. It can only do so if there are network effects: as more users use one type of money, it becomes more attractive for others to use it. Looking to the future, there is more promise in innovations that build on trust in sovereign currencies.”
Not surprisingly, this falls in line with a previous report from the BIS in May that predicts the expansive rise of Central Bank Digital Currencies (CBDCs) in the near term.