The Central Bank makes a separate focus on the analysis of the beneficial and negative impacts of cryptocurrencies, ICOs and the distributed ledger technology.
On the Distributed Ledger Technology
The authors of the study by the Bank of England list sustainability among the advantages of the DLT, as far as the storage of replicated data with multiple participants reduces the risk of losing them, for example, due to hacking. Another consequence of decentralization is the single "source of truth" that reduces the likelihood of disputes between counterparties.
The benefits of the distributed ledger technology mentioned in the study also include the automation of reporting, auditing and oversight. Thus, the supervisor can access reliable real-time data.
These characteristics enable the efficient use of the DLT in trade finance, electronic money, payment systems and insurance.
At the same time, the researchers note that this is a relatively new technology with a number of drawbacks associated mainly with the peculiarities of the decentralized architecture that makes all the stakeholders face a trade-off between performance, stability and confidentiality. In addition, the point of the transaction completion remains unclear in some versions of the DLT due to the inability to organize instant synchronization.
Researchers also identify a number of barriers to the widespread adoption of the technology, namely the lack of technological standards, special legal regulation, the unresolved management issue (in the absence of the central body, participants will have to develop a way to segregate their responsibilities for the system maintenance), the cautious attitude of the banking system, low awareness and understanding of the technology in society.
The researchers at the Bank of England are more skeptical about cryptocurrencies. Having listed a number of benefits offered by the use of a cryptocurrency, they don't waste time to present counter-arguments. The report notes, for example, the possibility of the effective use of cryptocurrencies as a means of exchange in the field of international money transfers and international trade, indicating that cryptocurrencies enable transparent and traceable transactions and offer a reliable system. At the same time, the researchers note that these advantages are characteristic of the distributed ledger technology itself rather than of cryptocurrencies specifically and will cover the currently existing means of exchange in the event of their tokenization.
They also list a number of negative consequences of the expanded use of cryptocurrencies. They can be used for criminal purposes, e.g. for terrorism financing and money laundering. According to the researchers, this is due to the global nature of cryptocurrencies, their availability online and pseudo-anonymity. Another threat is the risks for consumers. They "stem from consumers purchasing unsuitable products without having access to adequate information; from fraudulent activity; and from the immaturity or failings of market infrastructures and services ."
In general, the report notes that the drawbacks of cryptocurrencies are more significant than their benefits. The cryptocurrency market, according to the researchers, remains immature due to the illiquidity of cryptocurrencies, lack of information about the subjects and conflicts of interests, susceptibility to manipulation. However, it does not pose a material risk to the financial stability of the country due to its small volume.
According to the researchers from the Bank of England, ICO is the most promising embodiment of "crypto-assets". They argue that ICOs support innovation and competition; form an efficient system directly linking crypto-asset issuers with investors, which has the potential to make the capital raising process more streamlined, faster and cheaper; provide an opportunity to raise funds for high-risk projects. The global accessibility of ICOs builds a new investor base, enabling new sources of capital to be unlocked.
However, without appropriate protections, these benefits are most likely to accrue to developers and issuers rather than investors. According to the authors of the report, this is due to the fact that "white paper" documents are not standardized and often feature exaggerated or misleading information, making it particularly difficult for investors to assess risks. ICOs can be currently used for fraudulent activities and deception of investors.
The Bank of England summarizes its position as follows, "The Taskforce has concluded that the DLT has the potential to deliver significant benefits in both financial services and other sectors." HM Treasury, the FCA and the Bank of England will take action to mitigate the risks connected with the use of cryptocurrencies and to encourage their "responsible development."