Nine years after its launch and almost five years after it crept into public consciousness, bitcoin continues to have structural flaws that make it unsuitable for many uses. That’s the view of the Reserve Bank of Australia, expressed by Tony Richards Head of Payments Policy Department.
Speaking at the Australian Business Economists Briefing he said many of these flaws stem from its inefficient verification process.
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“For example, while authorisation of a debit or credit card transaction is close to immediate, bitcoin users are typically advised to wait for the creation of about six additional blocks (i.e., about 60 minutes) before relying on their transactions being final.”
However, Richards, who ranged widely across the whole cryptocurrency debate during his speech also noted. “Of course, there are network effects in payments and ingrained habits in the behaviour of households and businesses, so observations about the current limited acceptance of bitcoin may not be surprising and may be a little unfair.”
Richards’ dived into the issue of whether bitcoin could really be thought of as money.
“The graphs of transaction fees and the queue of unconfirmed transactions raise the broader question of how well bitcoin (and other cryptocurrencies) perform when we look at the key attributes of money, namely that it should represent a store of value, a medium of exchange and a unit of account.”
He said there was general agreement that bitcoin and other cryptocurrencies are yet to establish themselves as reliable stores of value.
As an example, he compared bitcoin to one of the world’s more tradable currencies – the Aussie dollar.
“This is most obvious in a comparison of the volatility of bitcoin as opposed to national currencies like the Australian dollar. This graph illustrates the high degree of market risk in holding bitcoin.”
He also raised the issue of the many hacks of cryptocurrency exchanges and wallets over the past few years which he said demonstrated there is more risk in bitcoin intermediaries than there is in the supervised banks and financial institutions in which households can hold their Australian dollars.
Bitcoin and other cryptocurrencies have also failed to catch on as medium of exchange for regular purchases and if fact the situation may be getting worse.
“More broadly, although bitcoin has become more prominent over the past few years, the number of businesses accepting bitcoin may actually be falling. For example, some significant US online merchants announced a few years ago that they were accepting bitcoin, but some of these (for example, Dell) have since stopped doing so.”
Finally, he argued that on the third function of money — as a unit of account — it remains unsuccessful.
“Here, while a small number of businesses may accept bitcoin, their prices are posted in national currencies. Not even bitcoin conferences post their prices in bitcoin. Indeed, organisers of a high-profile US cryptocurrency conference recently apologised that they couldn’t accept bitcoin as payment for attendance fees.”
Many of these shortcomings of cryptocurrencies stem from their design around trustless distributed ledgers and the costly proof-of-work verification method that is required in the absence of a trusted central entity, said Richards.
“In contrast, in situations where there are trusted central entities in well-functioning payment systems, there may be little need for cryptocurrencies.”
The cash register, not the cash
While he was generally underwhelmed by the progress of bitcoin, blockchain – the distributed ledger underpinning it may have more application.
“Of course, there are payments use-cases where some form of distributed ledger might be useful. Examples that are cited include correspondent banking, international transfers, cross-border trade finance and post-trade activity in the equity market. These all involve many different parties, with existing processes that are very entrenched and where it has often been difficult to coordinate among the parties to bring about change. “
According to Richards, discussion of the potential of distributed ledgers has highlighted inefficiencies in the current processes and is acting as a catalyst for change.
“However, I think the evidence to date is that trustless blockchain solutions are unlikely to be adopted. Rather, the new systems are more likely to be permissioned shared ledgers, where a central body still plays a dominant role.”