The BIS' Report on Crypto as Money: A Critical Review

Cryptocurrency is a poor substitute for fiat money, claims the Bank of International Settlements in a chapter of its annual report, released on June 17.

The Bank of International Settlements is an institution owned by the world's 60-largest central banks that together command 95 percent of global GDP. The Bank's mission lies in promoting cooperation between central banks, for the sake of global monetary and financial stability.

Some particular areas of the BIS' jurisdiction include setting the standards of capital adequacy as well as ensuring liquidity and transparency of central banks' reserves.

In addition to the cooperation and supervision functions, the BIS serves as the 'bank for central banks,' by operating as a counterparty in their financial transactions, for example.

On a positive note, the text reveals a conceptual departure from the antiquated notion of asset-backed money, which manifests itself in the criticism of one of its 'decentralized' forms - money issued by private banks: "Bank-issued money is only as good as the assets that back it." It is trust and social convention that emerge as indispensable elements of the system of monetary exchange.

The tried, trusted and resilient way to provide confidence in money in modern times is the independent central bank.

The BIS opens its argument with drawing a distinction between cryptocurrencies based on permissioned ledgers and their permissionless counterparts, noting that the former shares the reliance on specific institutions as the source of trust with conventional money.

In the BIS economists' opinion, the gravest obstacles in cryptocurrencies' way to becoming a dominant form of money are those related to their ability to foster positive network externalities and facilitate economic activity.

Non-collateralized stable coins use an approach where smart contracts perform the same function as central banks, in that they regulate the supply of money contingent upon the market's supply and demand.

All in all, the BIS report presents exactly the kind of criticism of crypto that one could expect from a conglomerate of central banks.