Bitcoin's Vision of Decentralized Digital Currency for Direct Peer-to-Peer Payments Remains Unfulfilled

Since its 2009 inception, Bitcoin's vision was clear: a decentralized digital currency for direct peer-to-peer payments, cutting out intermediaries.

Since its inception in 2009, Bitcoin's vision has been clear: a decentralized digital currency for direct peer-to-peer payments, cutting out intermediaries. While Bitcoin has certainly gained global prominence, its journey has largely seen it embraced as a speculative asset rather than a widespread, everyday payment method.

While you can certainly pay for some (mostly online) services with Bitcoins, such as web hosting or VPNs, the truly mainstream purchase for everyday items remains largely out of reach for the average person. On average, Bitcoin transactions still take about 10 minutes on average to confirm, and that’s not something quite user-friendly. Not to mention that transaction fees can become prohibitively high during peak periods, making small or everyday transactions less feasible.

However, a new report by the Bank for International Settlements (BIS) might shed light on why exactly Bitcoin and other cryptocurrencies never quite reached their full potential and mainstream adoption.

This month, BIS researchers published a report titled "Cryptocurrencies and Decentralised Finance: Functions and Financial Stability Implications," examining the economic functions of cryptocurrencies and decentralised finance (DeFi) and their potential risks to financial stability, proposing regulatory measures.

The paper highlights how cryptocurrencies and DeFi, aiming to mirror many services offered by traditional finance (TradFi) like lending, borrowing, and trading, actually introduce new financial stability risks thanks to their unique characteristics.

For example, while smart contracts and decentralised exchanges (DEXs) offer efficiency gains, the report notes they also create challenges like information advantages for some users (asymmetries) and market inefficiencies. Stablecoins also have a notable role in DeFi, however, they can be a source of instability if not properly regulated.

In addition, the paper establishes that the adoption of cryptocurrencies in emerging markets can lead to a term called 'cryptoisation', where traditional financial systems are bypassed, potentially undermining monetary sovereignty and financial stability.

The report concludes that cooperation between regulators and policymakers is crucial to mitigate these risks and ensure the stability of the financial system as decentralised finance continues to evolve.

"The rapid development of cryptocurrencies and decentralised finance poses new challenges for financial stability," said Fabio Balboni, a researcher in the BIS monetary and economic department and co-author of the paper.

"While these technologies offer interesting possibilities for innovation and efficiency gains, they also come with unique risks that need to be carefully managed."

The researchers suggest that regulators consider the specificities of crypto technologies and products when designing regulatory frameworks, striking a balance between promoting innovation and protecting the financial system. They also highlight the importance of international cooperation to ensure consistent and effective regulation across different jurisdictions.

As cryptocurrencies continue to evolve and gain attention, the findings of this report provide valuable insights for policymakers and regulators seeking to navigate the complex landscape of decentralised finance and ensure its stability in the years to come.

The post Bitcoin: Unfavorable Regulations and High Transaction Fees Hinder Mainstream Use Despite Hype appeared first on Coin Edition.