Agustin Carstens: Bitcoin "May Well Break Down Altogether"

Bitcoin is highly speculative, "hugely energy-intensive," lacks "value backing," and "may well break down altogether"—this is how Bank for International Settlements General Manager Agustin Carstens summarized his opinion on Bitcoin at a policy seminar by The Hoover Institute on Wednesday.

In his talk titled "Digital currencies and the future of the monetary system," Carstens addressed the digitization of national currencies through central bank digital currencies (CBDCs) and commented on privately issued stablecoins as well as Bitcoin's recent developments.

Showing himself generally open to the concept of CBDCs, Carstens shared data indicating that the likeliness of central banks around the world issuing their own digital currencies is increasing. The development should not be seen as a reaction to the emergence of cryptocurrencies or corporate stablecoin projects, however, but rather as proactive research into "a new form of money [...] in line with central bank mandates."

And it should be the central banks that issue digital currencies, according to Agustin, as "sound money is central to our market economy, and it is central banks that are uniquely placed to provide this."

Private stablecoins fared less well in Carsten's speech. While he acknowledged that "there may be meaningful use cases for stablecoins," he emphasized that there are "serious governance concerns if a private entity issues its own currency and is responsible for maintaining its asset backing." Referring to Facebook's Diem (previously called Libra) as an example, Carstens stated that private stablecoins "cannot serve as the basis for a sound monetary system," and that any privately issued stablecoins should be subject to heavy regulation and supervision.

Carstens Is Not a Fan of Bitcoin

Still, private stablecoins are "certainly more credible than Bitcoin," according to Carstens.

Notably, Carstens described Bitcoin's consensus mechanism rather aptly, as a "decentralised governance system, where the validity of a payment depends on achieving consensus among network participants on what counts as valid payments."

In practice, however, Carstens sees Bitcoin as a "speculative asset," not a form of money, referring to it as "Tesla without the cars:"

"Observers are fascinated by it, but the actual value backing is lacking."

Diving deeper into comparisons, Carstens described the Bitcoin network as a "community of online gamers, who exchange real money for items that only exist in cyber space."

He further believes Bitcoin to be a "poor store of value" with an opaque market structure that is subject to price manipulation.

In short, "Bitcoin may well break down altogether," as "scarcity and cryptography alone do not suffice to guarantee exchange."

Carstens also referred to Bitcoin's Proof-of-Work algorithm as "hugely energy-intensive" and stated that Bitcoin's "uses more electricity than all of Switzerland."

In addition, in the future, according to Carstens, it will become easier for attackers to "[rent] mining equipment on a short-term basis and [execute] a change-of- history attack," making the network increasingly insecure. One of Carsten's sources for this assumption is listed as a paper published by BIS in January 2019, in which the author describes that the cost required to "amass equipment that, in total, would wield 101% of the hash power of all current bitcoin miners" has become "substantially cheaper" thanks to a "steep recent fall in the price of mining equipment."

Notably, at press time, the cost of attacking the Bitcoin network hovers at around $715,000 per hour, according to data site Crypto51—a cost that is largely understood to be economically unfeasible for an attacker. At Bitcoin's current hash rate, it would further be highly impractical for a single entity to amass the hash power required to attempt an attack in the first place.

Security expert Andreas Antonopoulos noted in 2015 that it was no longer possible to carry out such an attack on Bitcoin:

“The effort to do so, which requires a massive covert operation of chip fabrication, then the coordinated assault that would give them dominance over the next block over the ten minutes, until we kick those bastards off the network, rework the protocol around them, they would be revealed, lost a billion dollars doing this, and all they got to do was one double spend.”