The General Manager of the Bank for International Settlement (BIS) Agustín Carstens, released an interview to the German Financial Newspaper Boersen Zeitung. The main object of the interview was trust, namely, what should be the best way to preserve trust in financial transactions. We report here an extract of the newspaper report.
With new cryptocurrencies proliferating, he underlines the importance of educating the public about good money as it is to build defences against fake news, online identity theft and Twitter bots. Conjuring up new cryptocurrencies is the latest chapter in a long story of attempts to invent new money, as fortune seekers have tried to make a quick buck.
However, they should not be conflated with the sovereign currencies and established payment systems that have stood the test of time. What makes currencies credible is trust in the issuing institution, and successful central banks have a proven record of earning this public trust. Above all, the technology behind cryptocurrencies makes them inefficient and certainly less effective than the digital payment systems already in place.
First, the highly volatile valuations of cryptocurrencies conflict with the stable monetary values that must underpin any system of transactions which sustains economic activity.
Second, the many cases of fraud and theft show that cryptocurrencies are prone to a trust deficit. Given the size and unwieldiness of the distributed ledgers that act as a register of crypto-holdings, consumers and retail investors in fact access their “money” via third parties (crypto-wallet providers or crypto-exchanges.) Ironically, investors who opted for cryptocurrencies because they distrusted banks have thus wound up dealing with entirely unregulated intermediaries that have in many cases turned out to be fraudulent or have themselves fallen victim to hackers.
Third, there are fundamental conceptual problems with cryptocurrencies. Making each and every user download and verify the history of each and every transaction ever made is just not an efficient way to conduct transactions. This cumbersome operational setup means there are hard limits on how many, and how quickly, transactions are processed. Cryptocurrencies therefore cannot compete with mainstream payment systems, especially during peak times. This leads to congestion, transaction fees soar, and very long delays result.
In the end, one has to ask if cryptocurrencies are an improvement compared with current means of payment. The technology behind cryptocurrencies could be used in other interesting ways, however. Central banks have long championed the use of new payment technologies – as long as they prove socially useful – in the interests of increased efficiency.