The Bank for International Settlements, also known as BIS, is launching a full-scale attack on bitcoin. If you don’t know what the BIS is, you can think of it as the central bank of central banks. In a recent report, the BIS laid out its vision for the future of the monetary system.
The BIS is using the current bear market to point out flaws it sees in bitcoin and the broader cryptocurrency market.
One of the claims they make is that bitcoin lacks a “nominal anchor”. They argue that this lack of a nominal anchor, or in other words the high volatility of bitcoin, made it necessary to use stablecoins. But these stablecoins are unregulated, flawed and not as good as central bank digital currencies could be.
Another claim they make is that miners securing the proof-of-work network are rent seekers that could be eliminated with a central bank digital currency. They view proof-of-work mining as an intentional way of causing network congestion.
This shows that they either do not understand the purpose and necessity of proof-of-work mining or they are outright hostile and attacking it.
Bitcoin was also the fastest network to reach a market cap of US$1 trillion. It is being adopted faster than the internet was in the late 90s and early 2000s.
Despite this, the BIS claims that bitcoin lacks a sufficient network effect to function as money.
To conclude, the BIS focuses on the following three attack vectors:
The solution, according to the BIS, is the introduction of a central bank digital currency. A central bank digital currency, according to them, could provide a nominal anchor, doesn’t require a proof-of-work consensus mechanism and has a sufficient network effect to function as money.
So how does a central bank digital currency provide a stable anchor? It’s by controlling the supply and demand of money. But if we look at a longer time frame, fiat currencies provide no nominal anchor whatsoever. The US dollar has lost over 95% of its value in the last 100 years.
In the last year alone the US dollar and the euro have lost over 8% of their value. While these Fiat currencies are not volatile in the short term, they are consistently debased and lose a majority of their value over a longer period. Fiat currencies are terrible for saving.
In fact, central banks aim for 2% inflation to dis-incentivize saving. At the same time central banks have to aim for inflation because governments are overly in debt.
Inflation is a way for governments to get rid of their debt. When bond interest rates are kept below the inflation rate, governments can inflate away their debt. This is also known as financial repression.
Fiat currencies do not provide a nominal anchor in the medium to long-term.
All fiat currencies lose a significant amount of value in the long term and serve as a tool for financial repression. If you look at a 10-year time frame, bitcoin was a good savings device and increased in purchasing power while all major fiat currencies were terrible savings devices and lost value.
The only reason why bitcoin is volatile in the short term it’s because we are still early on in its adoption curves and a lot of people treat it as a speculative asset, which is why it behaves similar to a tech stock. As the market cap of bitcoin grows and the percentage of buyers shift from traders and speculators to long-term holders that use bitcoin as a savings device, the volatility will decline.
Stablecoins are used by some market participants to get access to fiat currencies with less limitations and in a fully digital way that doesn’t require the traditional banking system. Stablecoins or central bank digital currencies are not a replacement for bitcoin or hard money. At the end of the day they are fiat currencies or digital assets pegged to fiat currencies that lose most of their value over a longer period of time.
What about the attack on the proof-of-work consensus mechanism? Is it really about rent seeking and intentionally congesting the network? The general misunderstanding here is that bitcoin’s base layer functions more as a settlement later than a day today payment network.
Proof-of-work mining is necessary to secure the bitcoin network. In fact, the bitcoin network is the most secure computer network in the world. New blocks are mined approximately every 10 minutes. The block reward incentivizes miners to secure the network. It’s not about rent seeking or congestion, it’s about aligning incentives for the most secure computer network in the world.
The traditional financial system and fiat currencies are secured by governments and their financial and military power. Proof-of-work mining is not wasteful at all, it’s a peaceful and decentralized way to secure a monetary network. It is true that it’s sort of intentionally slow, but this is only to guarantee the maximum level of robustness and security.
Other cryptocurrencies that try to be faster by having higher block size limits usually do this as part of a trade-off. They are faster and more scalable but less secure. This brings us back to understanding bitcoin’s base layer as a settlement layer. It is most useful to settle payments or conduct large transactions. Smaller day-to-day transactions can happen on a secondary layer such as the lightning network.
A central bank digital currency is fast and doesn’t require proof-of-work mining and mining fees because it’s completely centralized and controlled by a small group of central bankers.
The more centralized a payment network is the faster it can operate. But this centralization also means that the rules of the monetary system are in the hands of a few people that can increase the money supply, program the money and surveil every thing that happens. In other words, central bank digital currencies are a dangerous tool that can be misused for authoritarian control, surveillance and repression.
When the BIS advertises central bank digital currencies as being faster and not requiring any form of mining or fees, we shouldn’t forget the trade-offs. A tool that can be misused for total control, surveillance and financial repression is hyped up with overall less important properties such as speed and lower fees.
But nobody talks about what the real costs are. You never hear the BIS mention that the speed and lack of fees is the result of complete and total centralization.
What about the argument about network effects? The only way that fiat currencies and central bank digital currencies achieve a network affect is because governments make these currencies legal tender by decree.
It is the monopoly on violence and the fact that we must pay taxes in these currencies and all businesses must accept them that leads to this network effect. Of course there is a long history of commodity money that the BIS doesn’t mention. Gold and silver used to be money. With time, paper receipts, which used to be redeemable for gold or silver, became the primary means of payment.
The fact that we have fiat currency today is a mix of unfortunate historic events and governments consistently spending more than they had in gold or silver reserves. The network effect of fiat currencies is based on government default, currency debasement, legal decree and violence.
Nobody would use paper money unless it were for these reasons. Fiat currencies do not have a natural network effect. In other words, market participants did not choose to use fiat currencies, they were coerced into using them.
The same will be the case for central bank digital currencies. The network effect of bitcoin on the other hand is natural and based on free choice by market participants. It does not require law, coercion or violence. The free market is choosing bitcoin and it’s doing so at an adoption rate faster than the Internet.
Claiming that bitcoin and private cryptocurrencies don’t have a network effect is both misleading and false. If we look at the history of fiat currencies it is also hypocritical.
As we can see, the three attack vectors or “arguments” that the BIS is using to advertise central bank digital currencies as a superior form of money are neither strong nor honest.
Furthermore, it’s concerning that the BIS is referring to central bank digital currencies and fiat currencies in general as real money. If we look at the history of money then we can see that gold, silver and other commodities served as money. Paper money was always a substitute for real money. Through government default, debasement and the threat of force, paper money and later digits on a ledger became money.
To call fiat currency or central bank digital currencies real money is misleading at best and historic revisionism at worst.