It’s been a rough stretch for the world’s top central bankers, who are facing pressure to tame high prices without crashing their economies now that persistent inflation has defied their predictions. It doesn’t help that they face this challenge amid an explosion of interest in cryptocurrencies, a technology invented to bypass their power entirely. But the past few months have been even rougher for crypto. So as crypto markets melt down, central banks are not letting the moment go to waste. Yesterday, when the Bank for International Settlements released its 115-page annual economic report , it devoted the final third to a detailed takedown of crypto and decentralized finance. The BIS is the most institutional of institutional players — an international organization that acts as a bank for central banks and is also owned by central banks. The report seizes on the implosion last month of the algorithmic stablecoin Terra, arguing that the fiasco points to fundamental flaws that preclude the success of any monetary system that is not backstopped by central banks. In short, the report contends that crypto is “unsuitable as the basis for a monetary system,” citing issues like scalability and trust. “A system grounded in central bank money,” it concludes, “offers a sounder basis for innovation.” In recent years, papers published under the Bank’s aegis have gone from dismissive to defensive in their treatment of crypto. “Cryptocurrencies have failed,” declared a January 2020 report that surveyed central banks around the world. But late that year, crypto markets took off, and more recently, a couple of small countries have undertaken experiments in national adoption of Bitcoin as an alternative to sovereign currencies. By this April, a paper it published on emerging market economies extensively discussed the risk that widespread use of cryptocurrency or a foreign-pegged stablecoin could lead to steep declines in the use of a country’s currency, undermining the capacity of its central bank to conduct monetary policy. The paper describes the existence of accessible payment systems for sovereign currencies as a “line of defence” against crypto adoption. Meanwhile, a survey the Bank published last month found that 60 percent of central banks are pursuing their own versions of digital currency more urgently because of the growth in stablecoin and crypto markets. So the ongoing meltdown in crypto markets and decentralized finance offers central bankers a welcome reprieve, as well as an opening to push for their own vision of the future. The report argues that the incumbent system should co-opt innovations associated with crypto — like distributed ledgers and smart contracts — and even takes a stab at rendering the prosaic world of financial infrastructure in more poetic terms. “The metaphor for the future monetary system is that of a tree,” it states, “With a solid trunk provided by the central bank, the tree hosts a rich and vibrant ecosystem of private sector service providers.” The points marshaled against crypto’s viability aren’t exactly new. In fact, in arguing that that blockchain systems face inevitable tradeoffs between scalability, security and decentralization, it cites the work of Ethereum’s founder, Vitalik Buterin, who dubbed this tension the “scalability trilemma,” though Buterin and the Bank reach very different conclusions about the trilemma’s implications. Buterin conceived of Ethereum at the age of 19 . To understand the sort of the public figure he cuts, look no further than this 2019 video, where he plays a starring role in a painfully awkward rap-and-dance routine that celebrated technical upgrades to his blockchain’s code. Central bankers, on the other hand, have long enjoyed an air of august omnipotence. So, it is striking to see their umbrella group publishing a diagram of “Buterin’s scalability trilemma” — not to mention asking readers to close their eyes and imagine a forest… In that sense, the Bank’s report offers a memorable snapshot of this moment in time, as a pillar of the global system contends with a technological onslaught and makes its case for retaining a central role in governing the future.
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