The Bank for International Settlements (BIS) believes that the limit on the number of transactions in the blockchain will prevent cryptocurrencies from gaining an attractiveness similar to that of fiat money.
BIS posted a report in which the bank’s experts argue that cryptocurrencies, due to the “fragmentation effect”, cannot fulfill the social role of money in the global financial system and become an effective means of payment.
The authors of the report explain that as the number of blocks in the blockchain approaches its limit, the cost of transactions increases, which forces users to look for alternative blockchains. This fragmentation means that blockchains cannot take advantage of the beneficial network effects associated with traditional finance.
Money, according to BIS experts, is a coordinating mechanism designed to facilitate economic exchange. Such an exchange can only take place in the presence of network effects, when money increases its attractiveness as more people use it. Experts emphasize that without interaction between competing blockchains, cryptocurrencies cannot fulfill this role.
The Basel Committee on Banking Supervision BIS plans to issue a new, even more conservative version of recommendations on the regulation of cryptocurrencies after the collapse of Terra. In the previous version of the regulations, committee members divided digital assets into two groups: the first included tokenized traditional assets and stablecoins, and the second included all other tokens and cryptocurrencies. At the same time, it was recommended for the second group to have full collateral in banks.
