Use of blockchain for retail transactions would cripple the Internet: Central Bank overseer

The Bank for International Settlements, which is also known as the central bank of central banks, said bitcoin is "a poor substitute for the solid institutional backing of money" in a part of the annual report released on Sunday.

The BIS counted multiple “shortcomings” behind its opinion. It said cryptocurrencies are too unstable, consume too much electricity, and are subject to too much manipulation and fraud to ever serve as bona fide mediums of exchange in the global economy.

The most striking finding of the 24-page-document was about blockchain, the underlying technology behind bitcoin. The 88-year-old institution also said the blockchain could not be used for the retail transaction as the size of ledgers would swell eventually leading to the collapse of the internet.

According to its calculations, the non-cash transaction just in the US in a year would swell the ledger size to 100,000 gigabytes.

“To process the number of digital retail transactions currently handled by selected national retail payment systems, even under optimistic assumptions, the size of the ledger would swell well beyond the storage capacity of a typical smartphone in a matter of days, beyond that of a typical personal computer in a matter of weeks and beyond that of servers in a matter of months,” the BIS said.

By design, every node connected to the blockchain network keeps a copy of the ledger at one’s device, hence the name distributed ledger. This might create problems as the storage size in smartphones are in a few gigabytes.

The report also blamed the electricity use in bitcoin mining as one of the hindrances for its scalability. “A key potential limitation in terms of efficiency is the enormous cost of generating decentralised trust… At the time of writing, the total electricity use of bitcoin mining equalled that of mid-sized economies such as Switzerland, and other cryptocurrencies also use ample electricity,” it said.

“Put in the simplest terms, the quest for decentralised trust has quickly become an environmental disaster.”