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Bank for International Settlements: ‘Crypto cannot fulfill the social role of money’

Despite the cryptocurrency sector expanding and advancing with each day, many authorities and financial organizations, particularly those supervising the emerging decentralized finance (DeFi) industry, are still expressing concerns about the space.

One of these organizations is the Bank for International Settlements (BIS), which released a bulletin on June 7 titled “Blockchain scalability and the fragmentation of crypto”, in which it presents its view that “crypto cannot fulfill the social role of money.”

In this report, the organization lists a number of problems it perceives in the crypto and blockchain industry, including high fees and network congestion that lead to fragmentation of the crypto landscape:

“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 decentralized but self-interested validators through fees means that network effects cannot unfold. Instead, the system is prone to fragmentation and costly to use.”

Layer 1 fragmentation, Ethereum gas fees, and periods of congestion. Source: BIS bulletin

The crypto fragmentation issue

Furthermore, the report explains that:

“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.”

The report also touches upon the “limited scalability and a lack of interoperability,” which “not only prevent network effects from taking root, but a system of parallel blockchains also adds to governance and safety risks.”

Blockchain fragmentation and the rise of bridges. Source: BIS bulletin

As for different blockchains exhibiting strong price co-movements despite fragmentation, the organization interprets this as these networks sharing the same investor base and growth being “sustained by speculative buying of coins.”

This is not the first time BIS has criticized crypto. In December 2021, Finbold reported on BIS General Secretary Agustin Carstens discussing the “break of the manifestation of non-bank financial intermediation” and his belief that DeFi is “illusive”.

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