NEW YORK  - It’s hardly surprising that the Bank for International Settlements should prove skeptical about cryptocurrencies like bitcoin. As the coordinating agency for the world’s central banks, the BIS is by definition conservative. Officials at the Basel, Switzerland-based institution even questioned the wisdom of bond-buying by the Federal Reserve and the European Central Bank after the financial crisis. In this case, though, the BIS has a point.

Digital coins come up short on all three measures of usefulness as currency, the BIS says bluntly in a new analysis. Their prices can fluctuate wildly, making them poor substitutes for fiat currencies for transactions, which require relative stability for price comparison. For similar reasons, they fall short for investing purposes because they can’t be relied upon as a store of value. And the need to constantly update the entire history of transactions – the blockchain – to verify them makes cryptocurrencies impractical.

The bitcoin infrastructure can process only a tiny fraction of the transactions that conventional payments systems like Visa handle, and it requires too much energy. Bitcoin alone sucks up as much electricity as Switzerland uses, the BIS reckons.

Those problems aren’t new, but having the BIS spell them out coincided with a downturn in the prices of bitcoin and ether, the two largest cryptocurrencies, late Sunday and early Monday. Both had rallied modestly last week after a senior official at the U.S. Securities and Exchange Commission suggested they did not run afoul of securities regulations. SEC chief Jay Clayton has indicated that, distinct from ongoing transactions, most so-called initial coin offerings – of which more than 4,000 have been made to date, issuing digital coins with a combined market value of nearly of $300 billion, according to Coinlib – should be subject to regulation.

The BIS isn’t completely Luddite about cryptocurrencies, either. It concedes blockchain technology might have potential for facilitating trade finance. The Bank of Canada, in another example, has set up a research project to study the potential use of distributed-ledger technology to make payments faster and more secure. Dollars, euros, yen and the rest may not be ripe for the kind of destructive disruption some crypto-apostles have in mind, but there may be ample room for new technology to complement their use.

CONTEXT NEWS

- Bitcoin and other cryptocurrencies are a poor substitute for dollars, euros and other central bank-backed monies because they don’t scale with growing demand, require excessive amounts of energy and fluctuate greatly in value, the Bank for International Settlements said in an article in its annual report, published on June 17.

- Digital currencies require complex computational work to mint new units and to verify transactions via a so-called blockchain, a decentralized, distributed ledger. Such activity currently requires more than 60 terawatt hours a year of electricity for bitcoin alone, roughly equivalent to the electricity consumption of Switzerland, the BIS estimates. Commercial payments operators like Visa and Mastercard can process nearly a thousand times as many transactions per second as the networks behind bitcoin and ether.

- Offers and sales of ether, the digital currency backed by the ethereum network, are not securities transactions, the Securities and Exchange Commission’s director of corporate finance, William Hinman, said in a speech on June 14. That would suggest they do not require approval by the Securities and Exchange Commission. Likewise, Hinman said, applying federal securities disclosure requirements to bitcoin transactions “would seem to add little value.”

- Hinman was referring to current offers and sales of the two established cryptocurrencies, as opposed to any fundraising that accompanied their creation. The SEC's chairman, Jay Clayton, said earlier this month that most new fundraising efforts, known as initial coin offerings, may fall under the scope of SEC regulation.

(Editing by Richard Beales and Amanda Gomez)

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