Is crypto fragmentation really an issue for central banks and the BIS to rectify? No. It is completely beyond their jurisdiction, yet they have opted to make it their business. Now, BIS calling for the centralization of cryptocurrencies.
The Bank for International Settlements determined in a paper (read below) published this week that cryptocurrency ‘can’t fulfill the role of money,’ despite highlighting several concerns with the decentralization model for cryptocurrencies (some of which are valid and some of which are not). According to 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.”
This is consistent with a recent BIS analysis from May, which predicted the rapid growth of Central Bank Digital Currencies (CBDCs) in the near future.
Whether or not one is a staunch advocate or investor in cryptocurrency, it is reasonable to conclude that a defining weakness of blockchain assets is the fact that anyone with the necessary information may create a cryptocurrency that is comparable or equal to any other in terms of performance and attributes.
This implies that, while crypto production or mining is frequently limited to a certain amount of coins, creating artificial scarcity, thousands of other coins with the same properties can be created.
In other terms, the success of a particular currency is frequently determined not by the technology’s value, but by its branding and fluctuating popularity.
Cryptocurrencies follow the same pattern. In the same manner that many stocks are priced, their values are established by market favor.
That would be to suggest, users become a commodity, the ONLY commodity backing a cryptocurrency’s worth.
Another component that has the ability to add “value” to cryptocurrency is the creation of infrastructure that facilitates coin trading and use. It is not enough for a cryptocurrency to exist; it must also have a variety of assets in place to provide usefulness and ease.
Some crypto assets, such as Bitcoin, already have this type of infrastructure development, thanks to billions of dollars in investment from international banks. This appears to contradict the fundamental rationale for crypto as a counter-measure to giant banks.
Is crypto “fragmentation” an issue for central banks and the BIS to rectify? No. It is completely beyond their jurisdiction, yet they have opted to make it their business. The establishment of the crypto world was supposed to operate as an alternative to the edicts and economic control of central bankers, or so many people thought.
However, it is becoming clear that central banks intend to co-opt the blockchain and digital goods movements and use them to obtain far more concentrated power than most people believed conceivable. Maybe that was the intention from the start.
According to a BIS survey, over 60% of central banks around the world want to introduce digital currencies in the near future. These currencies would be “bridged” together via various infrastructure designs, and the BIS believes that crypto coins should also be bridged together within the same system.
They do not specify the mechanism for that bridge, although the IMF has stated on numerous occasions that their Special Drawing Rights (SDR) basket would serve in that capacity.
Fundamentally, central banks’ crypto strategy is to consolidate all coins and currencies, together with CBDCs, into a single bridged basket system, giving banks and the BIS even more authority in the meantime.
Read the document below: