Featured Product

    BIS Paper on Economic and Technological Viability of Cryptocurrencies

    January 21, 2019

    BIS published a paper that discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations—that is, "proof-of-work." Additionally, it explores what the future might hold for cryptocurrencies modeled on this type of consensus algorithm. The analysis shows that liquidity of Bitcoin will fall substantially in the years to come in the absence of relevant technological advances.

    This paper introduces the concept of “economic payment finality” in the blockchain. A payment can be considered final only once it is unprofitable for any potential adversary to undo it with a double-spending attack. The conclusions are, first, that Bitcoin counterfeiting via "double-spending" attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of "mining" income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically, as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalization.

    The paper emphasizes that claiming that technology alone cannot do the trick is not to say that it is useless. It simply means that the focus could shift away from the issue of whether the technology can replace traditional sovereign money and financial institutions. One key question for future research is whether and how technology-supported distributed exchange can complement and improve on the existing monetary and financial infrastructure. For example, in mixed systems, normal market functioning could be guaranteed by decentralized economic consensus, yet should it fail there would be overarching coordination mechanisms that are also tied to the legal system. What would be the gains regarding efficiency, transparency, and resilience from such semi-decentralized exchange compared to current market designs? Answering these and related questions will require a more widely distributed understanding of the new technology and how it might be used in existing markets. However, for those already involved in distributed ledger technology, what is needed is an awareness of how institutions have sustained trust throughout mankind’s history, an issue that lies at heart of central banking and financial regulation. The authors also conclude that, in the long run, the value of cryptocurrencies might be to catalyze the thinking on how society can handle access to data and the right to edit it, a much-needed impulse at a time characterized by loss of privacy and the rise of technology-driven disinformation campaigns. 

     

    Related Links

    Keywords: International, Banking, Regtech, Fintech, Cryptocurrencies, Distributed Ledger Technology, Blockchain, Bitcoin, BIS

    Related Articles
    News

    BCBS Consults on Principles for Operational Risk and Resilience

    BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.

    August 06, 2020 WebPage Regulatory News
    News

    FSI Note Discusses Challenges Associated with COVID Relief Measures

    The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.

    August 06, 2020 WebPage Regulatory News
    News

    HKMA Announces Repayment Deferment Under Payment Holiday Scheme

    HKMA, together with the Banking Sector Small and Medium-Size Enterprise (SME) Lending Coordination Mechanism, announced a ninety-day repayment deferment for trade facilities under the Pre-approved Principal Payment Holiday Scheme.

    August 05, 2020 WebPage Regulatory News
    News

    ESRB Paper Presents Alternative Approach to EBA Stress Test Proposal

    The Advisory Scientific Committee of ESRB published a response, in the form of an Insights Paper, to the EBA proposals for reforms to the stress testing framework in EU.

    August 05, 2020 WebPage Regulatory News
    News

    MAS Announces Key Initiatives to Support Adoption of SORA

    MAS announced several initiatives to support adoption of the Singapore Overnight Rate Average (SORA), which is administered by MAS.

    August 05, 2020 WebPage Regulatory News
    News

    BoE Updates Template and Definitions for Form ER

    BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.

    August 05, 2020 WebPage Regulatory News
    News

    PRA to Extend Temporary High Balance Coverage Amid COVID Crisis

    PRA published the policy statement PS19/20 on the final policy for extending coverage under the Financial Services Compensation Scheme (FSCS) for Temporary High Balance.

    August 04, 2020 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure and Reporting of MREL and TLAC

    EBA published the final draft implementing technical standards for disclosures and reporting on the minimum requirements for own funds and eligible liabilities (MREL) and the total loss-absorbing capacity (TLAC) requirements in EU.

    August 03, 2020 WebPage Regulatory News
    News

    EBA Releases Erratum for Phase 2 Package on Reporting Framework 2.10

    EBA published an erratum for the phase 2 of technical package on the reporting framework 2.10.

    August 03, 2020 WebPage Regulatory News
    News

    EC Sets Out Updated Technical Information for Solvency II Calculations

    EC published the Implementing Regulation 2020/1145, which lays down technical information for calculation of technical provisions and basic own funds.

    August 03, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5635