To commemorate ten years of cryptocurrency, the Reserve Bank of Australia has published a paper titled Cryptocurrency: Ten Years On. Authors of the paper are Cameron Dark, June Ma, and Clare Noon of the Australian Reserve Bank’s Payment’s Policy Department.
The paper gives a brief history of cryptocurrency including a beginners’ glance at how Bitcoin and some altcoins work. As expected from a paper by a bank, it does not look flatteringly on cryptocurrency.
It sometimes reads like a history book and sometimes like a Medium post. Sometimes it reads like praise of modern technology and sometimes like apologetics for conventional currency. Other times it’s a litany of the sins and shortcomings of crypto. Often, it reads like an advertisement for Australia’s new Fast Settlement Service.
If you want a read that will make you feel good about the history of crypto, this isn’t it. However, if you want an approachable overview of crypto and how it works, this paper is worth a read. If, on the other hand, you don’t want to read the whole twenty-page paper, I’ve pulled out some highlights.
A Less Than a Fond View of Cryptocurrency
Reading through the paper, you will find that it hides nothing and makes no apologies.
[…]Bitcoin is unlikely to become a ubiquitous payment method in Australia, reads the third sentence of the abstract.
[…] Despite the developments in cryptocurrencies, none are currently functioning as money in the economy.
It doesn’t take a crypto advocate to disagree with this statement. Surely, crypto has not been unanimously or even very widely adopted. However, the statement that no cryptocurrency functions as money is simply not true. The statement likely comes from the authors’ often reductionist and two-dimensional views of crypto.
People are more likely to view cryptocurrencies as a speculative high-risk investment class than a payment system, reads the introduction.
[…] We see little likelihood of a material take-up of cryptocurrencies for retail payments in Australia in the foreseeable future.
This may be the way that many people view cryptocurrency, especially with the introduction of institutional investors late last year. However, it is by no means the attitude of every or even the average crypto owner. Further, the ideas are not mutually exclusive. Many treat their crypto as high-risk now with the conviction that volatility will shrink as more and more people adopt crypto. Where many see crypto’s survival of the Crypto Winter of 2018 and 2019 as proof of its legitimacy as a currency, the paper positions the fact of the Crypto Winter as proof of crypto’s status as an investment class.
Cryptocurrency and the Scalability Trilemma
Volatility isn’t the only reason that the paper rejects crypto as a currency although it is a recurring theme. The authors state that money must be able to serve as a store of value and suggest that crypto’s volatility prevents it from meeting that classification. Not discussed are the currencies in some countries that are less stable than crypto leading to large-scale adoption in places like Turkey and Latin America.
Also used as an example of crypto as a non-currency has to do with finality of transactions. According to the paper, a block is processed every ten minutes but it may take up to five blocks for a given transaction to be listed on the chain. As a result, a transaction cannot be seen as finalised for nearly an hour. While cash and credit transactions are certainly much faster, the paper doesn’t point out that it can take days for cheques to clear. Further, while credit transactions seem faster to the purchaser, they also take much longer to finalise on the part of the retailer.
The paper also states that blockchain-based cryptocurrencies are limited in terms of scale. According to the paper, Bitcoin blockchain can process only ten transactions per second. This, the author’s say, means that the blockchain could never support global adoption.
The paper also takes issue with the anonymity of crypto and the trustless system. This is introduced only briefly to segue into the paper’s discussion of “The Scalability Trilema”. That is, a trade-off between decentralisation, scalability, and security.
Crypto as a Whole: Bad. Crypto as Individual Parts: Good.
The authors of the paper do admit that some other cryptocurrencies address many of the issues with Bitcoin that they point out.. However, they suggest, no crypto is better than another because of The Scalability Trilemma. Bitcoin, they argue, is decentralised and secure, but not scalable.
Stablecoins, they say, are secure and scalable but not decentralised. As a result, no one would want to use stablecoins unless they were doing something illegal, imply the authors. Further, there are few stablecoins pegged to that Australian dollar, giving them little benefit in Australia.
The paper also addresses the issue of scalability with off-chain payment channels. The authors discuss this but maintain that these transactions take too long to verify. That argument, as earlier, remains arguably arbitrary.
The authors also mention the upcoming Facebook’s Libra coin, pegged to a basket of currencies and commodities, but seem largely unimpressed.
The authors are most interested in Ethereum and its use of smart contracts. Smart contracts, write the authors, maintain security and decentralisation but do not solve the problem of scalability. However, they seem to believe that smart contracts have a future.
Indeed, it may be the case that additional functionality offered by smart contracts can be integrated into centralised systems, including into some of Australia’s existing payment systems, suggest the authors. Further,
[…Distributed Ledger Technology] is likely to continue to evolve, including in ways that are unrelated to cryptocurrency.
Is It Worth the Read?
As a whole, the paper rails against the inability of cryptocurrency to provide the benefit of any conventional currency. When you look at the claims individually, however, the article regularly states that the technology behind cryptocurrency could benefit conventional currencies. It takes little to imagine that if the technology behind crypto is so valuable, the only reason that crypto itself would be worthless is if one chooses to see it that way.
The article certainly doesn’t praise crypto and its constant attacks on crypto are week and tedious. However, the paper introduces a number of important cryptocurrency concepts and terms, and remains quality reading for anyone wishing to learn more about crypto or brush up on their knowledge.