Wednesday, 26 June 2019

Central Bank of Spain considers bitcoin inefficient payment system

Since its foundation and until nowadays bitcoin went through difficult times being called “ real bubble” by one of the most famous investors in the world, Warren Buffett, and having many politicians and businessmen like Bill Gates that have decided to take this crypto under their wing. It seems that appeared another obstacle that bitcoin will have to struggle.
The Central Bank of Spain, Banco de España (BDE), has recently reported that bitcoin is inefficient as a payment system. However, it does ignore second layer protocols such as Lightning Network.

Bitcoin report overview in brief

Author of the report, Deputy General Director of BDE for Financial Innovations and Market Infrastructure Carlos Colesa entitled his paperwork as "Bitcoin: a solution for payment systems or a solution in search of a problem?"

According to the paper abstract, the report aimed to review the aims and basic functioning of bitcoin, analyses its strengths and weaknesses, and discusses its usefulness as an exchange mechanism. In the following 10 pages analysis of bitcoin the Central Bank representative explains what bitcoin is and how it works.

The author mentions growing interest in recent years surrounding bitcoin, and, in addition, the debate that it prompted. Carlos Conesa reflects on bitcoin as the traditional fiat money alternative, the fall, and rise of the value of this cryptocurrency its possibilities as a system of payment or compensation and liquidation of securities or other assets.

After that Conesa gives a vision of the functioning of the exchange mechanism of the cryptos in the following pages of his report and explains basic concepts of cryptography and how well the blockchain is protected from frauds.

Decentralization reduces system efficiency

The second part of the report explains whether bitcoin is a good payment system or not. The criteria used to evaluate bitcoin as a retail payment system were the the following: security, speed, cost, privacy, scalability, efficiency, and sustainability of the business model over time.

The proponents of bitcoin, the author states, present their security as one of the strong points of the scheme.

While talking about bitcoin security Colesa mentions few exchange hacks and crypto robberies, outlining the importance of securing crypto wallets private keys. The author concludes that due to the decentralized system the bitcoins can be easily stolen from their users.

Colesa explains his manifest stating that the ownership of bitcoins is demonstrated by the possession of the private key which can be easily lost or stolen.

Among other cons, the report author mentions a lack of intermediaries which operates as a limitation to mass value exchange. By comparing cryptocurrency exchanges and crypto wallet to the traditional bank accounts and payment transactions through traditional systems the Central Bank of Spain official giving a hint that traditional payments are safer because supervised by the entities that have wide experience in information security. In addition, in case of fraud, the regulation protects users, who can claim financial institutions for the refund of funds lost from certain amounts.

Decentralization, as the report outlines, requires a “process of intensive validation in the consumption of resources, which reduces system efficiency.”

In contrast, “centralized systems with an intermediary trusted by the parties allow the design of much simpler and cheaper systems.” In Conesa opinion, the design of bitcoin does not pursue simplicity, low cost, high speed and safety of sending money between two parties, but that of a system without censorship.

Among other disadvantages of bitcoin as a payment system, the author in his report mentions its ability to process transactions. He outlines that bitcoin’s potential 600,000 daily transactions are “insignificant” compared to global retail payment systems.

However, according to the blockchain experts with the development of Lightning Network, the statistic which Colesa based on becomes “insignificant”. Despite all cretisim and certain legit comments, certain cryptocurrency experts consider the BDE report no more as a criticism of bitcoin and out of date.

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