The Bank for International Settlements (BIS) has weighed in on the cryptocurrency trend, stating they are an “environmental disaster” and have the potential to “bring the internet to a halt”.

The ‘central bank of central banks’ explained in its Annual Economic Report that distributed ledger technologies (DLT) are not currently able to scale up sufficiently, so are not suitable as a replacement monetary system.

“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,” read the report.

The BIS warned that multiple ledgers operating at full capacity would mean “the associated communication volumes could bring the Internet to a halt”, adding that the electricity consumption used by coin miners to generate new tokens are a potential “environmental disaster”.

Hyun Song Shin, economic adviser and head of research at the BIS, commented that money has value because it has users, adding: “Without users, it would simply be a useless token, that's true whether it's a piece of paper with a face on it, or a digital token.”

A decentralised consensus through which transactions are verified can undermine trust in the system, the BIS noted, with a breakdown in trust casting doubt on the finality of individual payments, meaning the system could stop functioning and the currency would lose value.

However, the BIS was not entirely critical, suggesting DLT has promise in areas such as cross-border payment systems, where decentralised access benefits surpass the cost of sustaining numerous copies of the ledger.

Regulatory challenges like anti-money laundering and terrorism financing must be addressed though, the BIS noted, along with consumer and investor protection.

Different countries and regulatory authorities have come out with different approaches to cryptocurrencies, with the Reserve Bank of India banning banks from dealing or settling them, while the Dutch central bank recently concluding that blockchain technology cannot meet the high demands of a financial market infrastructure.

In the UK, the Bank of England is considering whether central banks could issue their own digital currencies, while the Treasury Select Committee launched an inquiry into the risks and opportunities around digital currencies and DLT.

The BIS report also looked at whether regulations introduced after the last financial crisis should be extended to FinTech, warning that existing macroprudential tools might still not be effective enough in dealing with risks from new types of financial firm.

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