The Bank for International Settlements unveiled an examination of cryptocurrencies this past weekend, included within their 2018 Annual Economic Report. Their stated goal was to get past promotional c
The Bank for International Settlements unveiled an examination of cryptocurrencies this past weekend, included within their 2018 Annual Economic Report. Their stated goal was to get past promotional claims and assess whether blockchain and digital currencies genuinely solve pressing economic challenges. However, the analysis contains several substantial flaws. From overlooking how Bitcoin can grow through layered solutions beyond on-chain transactions to asserting that mining operations can unilaterally rewrite Bitcoin's rules through hard forks, the BIS clearly needed more technical investigation. Three major problems deserve attention.
Scalability Claims Fall Apart
The report's treatment of transaction throughput represents its most glaring weakness for anyone versed in Bitcoin mechanics. Acknowledging that cryptocurrencies underperform traditional payment infrastructure was reasonable enough, yet the scalability conclusions strain credibility. The authors argue Bitcoin "could overwhelm internet infrastructure" if adopted widely for retail purchases. Their projection: storing transaction records at 250 bytes each would exhaust smartphone capacity within days, desktop computers within weeks, and servers within months.
This overlooks developments from the past several years. Bitcoin developers have championed layered expansion models, moving transaction volume away from the primary chain toward secondary networks like the Lightning Network. While scaling to billions of participants presents legitimate technical hurdles, the scenario painted by the BIS is unnecessarily pessimistic. Additionally, conflating Bitcoin-as-currency with blockchain-as-infrastructure muddies the analysis. Bitcoin could theoretically match traditional finance through greater centralization, with firms issuing account balances rather than on-chain confirmations—but that defeats Bitcoin's original purpose. Paradoxically, Bitcoin demonstrates greater scalability potential precisely because it enables censorship-proof payments impossible within conventional systems.
Misunderstanding Miner Authority
The report's handling of miner influence on protocol governance presents another significant oversight. It describes hard forks as occurring "when some miners coordinate to implement incompatible protocol modifications," suggesting miners independently drive these decisions. This misses critical nuance. Miners attempting rule changes without node network endorsement would only generate blocks rejected across the blockchain—essentially removing themselves from the system. The 2017 SegWit2x episode demonstrated this dynamic perfectly. Despite sustained miner backing, futures trading and community sentiment revealed insufficient support for the incompatible upgrade, resulting in its cancellation. Miners cannot unilaterally dictate protocol evolution.
The Fundamental Misreading
Finally, the report neglects Bitcoin's foundational motivation. Critics highlight scalability, settlement speed, and fees as disadvantages against established networks, yet Bitcoin emerged from cypherpunk ideology targeting something different: eliminating intermediaries from monetary exchange. Lightning payments may seem primitive compared to Venmo's instant transfers, but Bitcoin wasn't engineered for that use case. Cypherpunks designed it to enable transactions previously impossible. Evaluating Bitcoin against traditional systems misses what makes it significant: constructing decentralized finance rather than optimizing existing models. Yes, decentralization carries costs. But those costs unlock capabilities the old infrastructure simply cannot provide.
