The world’s central bankers have  weighed in on the crypto debate — and it was less than positive.

The Bank for International Settlements — which is owned by 60 central banks across the world — aims to foster global financial stability. It describes itself as the bank for central banks.

In a new research paper, the BIS was heavily critical of cryptocurrency as an alternative currency.

Due to the fragile nature of decentralised trust, “cryptocurrency can simply stop functioning, resulting in a complete loss of value”, the bank said.

“Moreover, even if trust can be maintained, cryptocurrency technology comes with poor efficiency and vast energy use. Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value.

“Overall, the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money.”

Given that one of the stated aims of crypto is to disrupt the status quo of centrally controlled currencies, it’s perhaps not surprising that the bank was critical.

The report also said crypto networks get less efficient the bigger they get. Along with scaling issues, they’re volatile and subject to stability threats due to forks.

Here’s how the CEO of Dash coin — the 13th biggest crypto by market cap — responded:

Industry veteran and bitcoin expert Andrea Antonopolous was also critical:

While the debate about scaling capacity rages on, the BIS made an interesting point about volatility, that it said limits the use-case for cryptos.

The report said that central banks are effective mechanisms for stabilising the value of soveriegn currencies, because they have the capacity to adjust supply to meet demand.

In fact, they do it all the time — particularly in times of financial stress.

Here’s BIS on how that fundamentally differs from crypto, and why it’s important (emphasis ours):

This contrasts with a cryptocurrency, where generating some confidence in its value requires that supply be predetermined by a protocol. This prevents it from being supplied elastically. Therefore, any fluctuation in demand translates into changes in valuation. This means that cryptocurrencies’ valuations are extremely volatile.

Keeping the supply of the means of payment in line with transaction demand requires a central authority, typically the central bank, which can expand or contract its balance sheet. The authority needs to be willing at times to trade against the market, even if this means taking risk onto its balance sheet and absorbing a loss.

In a decentralised network of cryptocurrency users, there is no central agent with the obligation or the incentives to stabilise the value of the currency: whenever demand for the cryptocurrency decreases, so does its price.

It’s a view shared by economists from the New York Fed earlier this year. Analysts from Deutsche Bank also highlighted the inherent volatility of cryptos such as bitcoin as a limiting factor in their value proposition as a means of payment.

As the debate about the valuation of cryptocurrency rages on, bitcoin led the market higher overnight as the northern hemisphere digested the latest BIS research.

It’s up by around 4% this morning, holding comfortably above the $US6,000 mark which represents a key line of technical support.

You can read the full report by the BIS here.


This article first appeared on Business Insider Australia, Australia’s most popular business news website. Follow Business Insider on Facebook or Twitter.