Blockchain Papers

John Taskinsoy

No abstract is available for this record.

David Andolfatto, Andrew Spewak

W hat are the long-run prospects of Bitcoin as an investment?The bullish case is that Bitcoin will appreciate indefinitely due to its capped supply and an ever-growing demand.The bearish case is that Bitcoin's price will fall to zero, as it's an intrinsically worthless asset.We think the future price path is more likely to remain bounded between these two extremes.Consider first the bullish case for Bitcoin.We think this idea is too optimistic even if one grants that its supply is fixed and its demand is likely to grow. 1 The U.S. dollar price of Bitcoin will also depend on how its exchange rate relative to other cryptocurrencies evolves over time in the face of an ever-expanding supply of alternative cryptocurrencies, which we refer to as Altcoin. 2 The bullish case assumes that the nominal exchange rate between Bitcoin vis-à-vis other cryptocurrencies will adjust in proportion to their relative supplies.That is, Bitcoin is expected to appreciate relative to its competitors or, equivalently, its market-capitalization share will stay constant over time.But must this necessarily be the case?Consider the following thought experiment.

Richard K. Lyons, Ganesh Viswanath-Natraj

We take this question to be isomorphic to, "What Keeps Fixed Exchange Rates Fixed?" and address it with analysis familiar in exchange-rate economics. Stablecoins solve the volatility problem by pegging to a national currency, typically the US dollar, and are used as vehicles for exchanging national currencies into non-stable cryptocurrencies, with some stablecoins having a ratio of trading volume to outstanding supply exceeding one daily. Using a rich dataset of signed trades and order books on multiple exchanges, we examine how peg-sustaining arbitrage stabilizes the price of the largest stablecoin, Tether. We find that stablecoin issuance, the closest analogue to central-bank intervention, plays only a limited role in stabilization, pointing instead to stabilizing forces on the demand side. Following Tether's introduction to the Ethereum blockchain in 2019, we find increased investor access to arbitrage trades, and a decline in arbitrage spreads from 70 to 30 basis points. We also pin down which fundamentals drive the two-sided distribution of peg-price deviations: Premiums are due to stablecoins' role as a safe haven, exhibiting, for example, premiums greater than 100 basis points during the COVID-19 crisis of March 2020; discounts derive from liquidity effects and collateral concerns.

Pierpaolo Benigno, Linda Schilling, Harald Uhlig

We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk-adjusted martingale. Deviation from interest rate equality implies the risk of approaching the zero lower bound or the abandonment of the national currency. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.

Peter K. Hazlett, William J. Luther

No abstract is available for this record.

Robert J. Kirkby

Abstract Current generations of cryptocurrencies are not money, but future ones may be. While Bitcoin performs poorly as a store of value, it is actually on par with the Venezuelan bolívar over the last decade, and the Argentinian peso over the decade from 1986. I evaluate arguments in favour of central banks issuing digital fiat currency—intended to replace cash—and digital fiat money—intended to replace money more broadly. Digital fiat currency appears a natural step forward, but digital fiat money would be a bad idea as it makes the central bank responsible for the entire money supply.

Claudio Borio

This essay examines in detail the properties of a well functioning monetary system - defined as money plus the mechanisms to execute payments - in both the short and long run, drawing on both theory and the lessons from history. It stresses the importance of trust and of the institutions needed to secure it. Ensuring price and financial stability is critical to nurturing and maintaining that trust. In the process, the essay addresses several related questions, such as the relationship between money and debt, the viability of cryptocurrencies as money, money neutrality, and the nexus between monetary and financial stability. While the present monetary system, with central banks and a prudential apparatus at its core, can and must be improved, it still provides the best basis to build on.

Sudhakar Sukhadeo Morey

The passage of the constitution (Seventy-third Amendment) Act, 1992 marked a watershed in the history of Modern India. With this amendment, a uniformity structure of Panchayats emerged throughout the country. Similarly, the passage of the constitution (Seventy-Fourth Amendment) Act, 1992 was a land mark in the history of municipal administration in India. As a result of these amendments, Panchayats and Municipalities are now constitutional bodies forming third tier of the federal policy of India.1 India’s decentralization initiative in the form of seventy-third and seventy fourth Amendments poses challenges and offers opportunities. Tenth Finance Commission onwards every Finance Commission allocated the grants funds to Panchayati Raj Institutions (PRIs).

Amber Wadsworth

Over the past decade the financial services industry has been disrupted by a range of new technologies. This has included the launch of new, private, digital currencies such as Bitcoin. In this environment, central banks are considering how they can take advantage of these new technologies to help deliver their core functions. This article contributes to this discussion by evaluating the pros and cons of a public digital currency issued by a central bank across four functional areas: currency distribution, payments, monetary stability and financial stability. We distinguish between two kinds of digital currency – ‘conventional’ digital currencies, which rely on existing payments technology to operate, and crypto-currencies which rely on distributed ledged technology (similar to Bitcoin). We find the pros and cons of a central bank issuing a digital currency are mixed across each of the central bank functions, revealing the complexity in evaluating such a currency. In particular, we find the implications for monetary policy and financial stability could be significant, both positively and negatively.

Grégory Claeys, Maria Demertzis, Konstantinos Efstathiou

This Policy Contribution tries to answer two main questions: can cryptocurrencies acquire the role of money? And what are the implications for central banks and monetary policy? Money is a social institution that serves as a unit of account, a medium of exchange and a store of value. With the emergence of decentralised ledger technology (DLT), cryptocurrencies represent a new form of money: privately issued, digital and enabling peer-to-peer transactions. Historically, currencies fulfil their main functions successfully when their value is stable and their user network sufficiently large. So far, cryptocurrencies are arguably falling short against these criteria. They resemble speculative assets rather than money. Primarily this is because of their inherent volatility, which is the by-product of their inelastic supply, and which limits their widespread use as a medium of exchange. Cryptocurrency protocols could theoretically evolve to limit their volatility and correct their current deficiencies. If successful, this could lead to an increase in their popularity as an alternative to official currencies. A successful alternative to official currencies could put pressure on those who manage official currencies to provide better policies. But the widespread substitution of central bank currency for cryptocurrencies would effectively create parallel currencies. This by itself could create risks to the effectiveness of monetary policy, to financial stability and ultimately to growth. Nevertheless, the risks of cryptocurrencies becoming serious contenders remain small as long as fiat currencies issued by the world's major central banks continue to deliver effectively the three traditional functions of money. It would take a deep crisis of trust in official currencies for their widespread substitution by cryptocurrencies to materialise. For cryptocurrencies to replace official currencies they would have to overcome a triple challenge. First, the supply of cryptocurrency would need to act as an instrument (or identify a different instrument) that affects the economy. Second, in the presence of fractional reserve banking, the supply would need to respond to liquidity crises and act as a lender of last resort in order to safeguard financial stability. Third, there would need to be a system of checks and balances to keep the agent, ie the cryptocurrency issuer, accountable to the principal, ie society, which is not possible because cryptocurrencies are automatically and privately-issued. For these reasons, official currencies controlled by inflation-targeting independent central banks still appear to be a far superior technology than cryptocurrencies to provide the money functions.

Douglas McWilliams, Cristian Niculescu-Marcu, Beatriz das Neves Abreu Marques da Cruz

Long Finance's Distributed Futures research programme is pleased to announce the publication of the report, “The Economic Impact Of Smart Ledgers On World Trade”, the latest in a series of exciting projects in the programme. The report, sponsored by the Cardano Foundation, came as a result of the the Worshipful Company of World Traders and the Distributed Futures' interest in quantifying the potential impact of Smart Ledger technology on international trade. Written by Douglas McWilliams, Cristian Niculescu-Marcu, and Beatriz Cruz from the Centre for Economics and Business Research (Cebr), it includes a Foreword by Michael Parsons FCA, Chairman of Cardano Foundation, and a Preface by Professor Michael Mainelli, Executive Chairman of Z/Yen Group. The report features a description of the econometric approach that maps trade frictions that Smart Ledger technology might be able to offset, especially in the realm of non-tariff and bureaucratic barriers to trade. The authors draw the following conclusions: Smart Ledger technology could boost world trade in goods by at least $35 billion dollars per annum. The cost of importing a single container could, therefore, be reduced by around $46, by simplifying procedures. These potential benefits are driven by a 2.5% cost claw-back assumption, supported by case studies on previous technological advancements in trade. One such case study is containerization, where the cost savings have been calculated to be in the range of 20%. If reduced uncertainty is, also, taken into account, using option pricing theory, the potential gains become even larger, with a potential monthly net cost saving of $172 million (or, approximately, $2 billion per annum). This would boost world GDP by $10 to $20 billion and could, potentially, add between 450,000 and 900,000 to the worldwide demand for labor, boosting wages and living standards worldwide. The World Bank estimates that 10.7% of the world’s population still lives in extreme poverty, with an income below $1.90 a day (2011 prices). The report also includes the results of a global survey of 247 contract and commercial managers, focusing on the respondents' awareness and use of Smart Ledgers, the importance they attach to various aspects, and the areas of ‘pain’ that could be relieved by the adoption of Smart Ledger technology. There are some truly insightful results. Smart Ledgers are based on a combination of mutual distributed ledgers (multi-organisational databases with a super audit trail) with embedded programming and sensing, thus permitting semi-intelligent, autonomous transactions. Smart Ledgers are touted as a technology for fair play in a globalized world. There are numerous projects building trade systems using this technology with announcements from governments, shipping firms, large IT firms, and the like. As Michael Mainelli wrote in his Preface to the report: Trade reaps economic benefits from specialization and comparative advantage, creates prosperity, distributes success and wealth, and collectively enriches all of our societies and communities. Hopefully, knowing the scale of relative benefits can help speed adoption of some boring technology – ‘multi-organisational databases with a super audit trail’ - for the benefit of all of us. Z/Yen and Long Finance would like to acknowledge the significant contribution of the Worshipful Company of World Traders, Cardano Foundation, IACCM, the City of London Corporation, and the Centre for Economics and Business Research.

Dirk Niepelt

No abstract is available for this record.

Mark Holub, Jackie Johnson

No abstract is available for this record.

MR Islam, Omar Faruque, A. H. M. Kamruzzaman

No abstract is available for this record.

Leah Crane

No abstract is available for this record.

Nicolás Cachanosky

The growing literature on Bitcoin can be divided in two groups. One performs an economic analysis of Bitcoin focusing on its monetary characteristics. The other one looks takes a financial look at the price of Bitcoin. Interestingly, both of these groups have not given much more than passing comments to the problem whether or not Bitcoin has the right monetary rule. This paper argues that Bitcoin in particular, and cryptocurrencies in general, do not have a good monetary rule, and that this shortcoming seriously limits its prospect of becoming a well-established currency.

John Maynard Smith

The old school -which consists largely of middle-aged and elderly men- tend to claim that bitcoin is a "bubble", and seize on every downturn in the price of bitcoin as evidence that the bubble has burst or is about to burst. The bubble only gets fatter, and all of the anti-crypto arguments -notably the argument that currencies need themselves to possess, or to be based on something with "intrinsic" value, and cryptocurrencies lack intrinsic value- are fallacious. Here we propose that there are deep mathematical reasons why the conservatives are mistaken, and why cryptocurrencies will increasingly replace their traditional counterparts.

Aleksandar Đorđević, Dordevic, Aleksandar

During the history there have been different examples of incorporating technology into economics. Some of them include SWIFT, e-banking, mobile payments, and many more. Technology had to be commercialized and put into service of facilitating economic processes. International finances underwent the process of development too. With the globalization process national economies became more interconnected and dependent from each other. Individuals demanded a faster and more convenient way to make international payments. Internet trade is on the rise, social media rule the contemporary world, and then appears the inception of so-called crypto currencies. The most famous is Bitcoin. Where lays its place in the economic science? It looks like that Bitcoin is going towards decentralization of the monetary system known by now. The goal of this paper is to raise the awareness of the changes happening in economy and in economic science.

Jesús Fernández‐Villaverde

Abstract This article reviews what cryptocurrencies are, and it frames them within the context of historical monetary experiences and contemporary monetary economics. The article argues that, as pure fiduciary private money, cryptocurrencies are a bubble without a fundamental value and they will not provide, in general, optimal amounts of money or deliver price stability. Nevertheless, cryptocurrencies can play a role in improving the current means of payments and in disciplining central banks into providing better government‐run fiduciary monies.

Thomas S. Umlauft

No abstract is available for this record.

Alistair Milne

Abstract This paper documents inconsistent terminologies and misleading analogies in current discussions of digital money and payments. It offers a more consistent framework for understanding the potential of technological innovation in providing the functions of money and payments: as media of exchange, stores of value, and units of account and the implications of cryptographic technologies underpinning cryptocurrencies for the future of money and payments. These could support efficiency gains in money and payments, but decentralization is not inherent to their application. Radical reform leading to improved economic outcomes is conceivable, but not through disruptive displacement of existing institutional arrangements.

Sheila Dow

The modern debate about monetary reform has taken on a new twist with the development of distributed ledger payments technology employing private digital currencies. In order to consider the appropriate state response, we go back to first principles of money and finance and the case for financial regulation: to ensure provision of a safe money asset and a stable supply of credit within an inherently unstable financial system. We consider calls to privatise money or to restrict money issue to the state against the background of the increasing marketisation of the financial sector and money itself. Following an analysis of private digital currencies, we then consider proposals for state issue of digital currency. It is concluded that the focus of attention should instead be on updating of regulation, not only to encompass digital currencies, but also to address other innovations in the financial sector which generate credit and liquidity, in order to meet the needs of the real economy. JEL Classification: E3, E5, G1

Jón Danı́elsson

No abstract is available for this record.

Feng Dong, Zhiwei Xu, Yu Zhang

There has been a burgeoning Fintech literature in the past years, especially on cryptocurrencies. However, there is lack of research handling cryptocurrencies in a mainstream macroeconomic model. To bridge the gap, we develop a model for Bitcoin-like cryptocurrency as risky and costly bubbles in an infinite-horizon production economy. This model is consistent with the following facts: i) the surging Bitcoin market presents enormous volatility, ii) its price dynamics are significantly sensitive to both market sentiment and policy stances. Entrepreneurial firms choose to hold Bitcoins as liquid assets to buffer idiosyncratic investment distortions. The intrinsically worthless Bitcoins can emerge as rational bubbles when the market sentiment is optimistic enough. On the one hand, bubbly Bitcoins provide market liquidity to facilitate investment in the real sector, while on the other hand, they deteriorate the investment efficiency and crowd out aggregate production. Our quantitative exercise produces various cyclical features of Bitcoin bubbles and find that the collapse of Bitcoin bubbles can improve social welfare by decreasing distortion-driven real investment.