BIS: Regulating cryptocurrencies, assessing market reactions

Despite the entity-free and borderless nature of cryptocurrencies, regulatory actions as well as news regarding potential regulatory actions can have a strong impact on cryptocurrency markets, at least in terms of valuations and transaction volumes. (Raphael Auer and Stijn Claessens, BIS, September 2018)

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BIS: Money and trust: lessons from the 1620s for money in the digital age

The source of the success of public deposit banks was their role in instilling common knowledge in monetary transactions by establishing a platform for standardised settlement of transactions, both for goods and for financial instruments. Common knowledge refers to not only the fact that everyone knows, but also that this knowledge is transparent to all concerned. . . . The importance of common knowledge is especially relevant in monetary economics in the age of distributed ledger technology (DLT) and Bitcoin, as one interpretation of money is as a score-keeping device on the history of past transactions. The analysis of money as a score-keeping device was given emphasis by the paper by Kocherlakota (1998), whose title is “Money is memory.” (Isabel Schnabel and Hyun Song Shin, BIS, February 2018)

IMF: Crypto Currencies and Monetary Policy

Cryptocurrencies today do not do a good job at fulfilling the main functions of money. They may be favored by some for ideological, technological, or monetary policy reasons. The blockchain technology they use does have some important advantages in controlling for fraud and maintaining privacy. But they also open up avenues for tax evasion and criminal activity. (Jeffrey Banks, IMF, January 2019)

ADB: Bursting the Bitcoin Bubble: Assessing the Fundamental Value and Social Costs of Bitcoin

[T]he fundamental value of a bitcoin is equal to the miners’ equipment and electricity costs relative to their expected block reward and fees. While Bitcoin is a decentralized peer-to-peer network with no central authority, the mechanism for adjusting the level of difficulty encoded in its protocol amounts to inflexible system of supply management. Hence, demand shocks have an exaggerated effect on the price of the bitcoin and each adjustment in the level of difficulty of mining a bitcoin results in social welfare losses. (Andrea Podhorksy, ADB, March 2019)

BIS: Cryptocurrencies: looking beyond the hype

Cryptocurrencies such as Bitcoin promise to deliver not only a convenient payment means based on digital technology, but also a novel model of trust. Yet delivering on this promise hinges on a set of assumptions: that honest miners control the vast majority of computing power, that users verify the history of all transactions and that the supply of the currency is predetermined by a protocol. Understanding these assumptions is important, for they give rise to two basic questions regarding the usefulness of cryptocurrencies. First, does this cumbersome way of trying to achieve trust come at the expense of efficiency? Second, can trust truly and always be achieved? (Hyun Song Shin, BIS, June 2018)

BIS: Cryptocurrencies and the economics of money

Achieving trust in money through the consensus of self-interested bookkeepers imposes too many constraints and cuts too many corners for it to replace the monetary system. The technology is only a small part of the issue of the viability of cryptocurrencies. The underlying incentives and the economics are key. Even leaving aside the many important issues to do with illicit activities and consumer protection, cryptocurrencies fall a long way short of being able to sustain a monetary system. . . . The decentralised technology of cryptocurrencies, however sophisticated, and useful for many other purposes, is a poor substitute for the solid institutional backing of money through independent and accountable central banks. (Hyun Song Shin, BIS, June 2018)

BIS: Beyond the doomsday economics of “proof-of-work” in cryptocurrencies

In the digital age too, good money is likely to remain a social construct rather than a purely technological one: the efficiency of decentralised exchange via proof-of-work exclusively is much lower than would appear at first sight, and alternative technologies still need to demonstrate that they can function without institutional backing. But claiming that technology alone cannot do the trick is not to say that it is useless. It simply means that the focus could shift away from the issue of whether the technology can replace traditional sovereign money and financial institutions. (Raphael Auer, BIS, January 2019)

BIS: Central bank cryptocurrencies

Whether or not a central bank should provide a digital alternative to cash is most pressing in countries, such as Sweden, where cash usage is rapidly declining. But all central banks may eventually have to decide whether issuing retail or wholesale CBCCs makes sense in their own context. In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains – in terms of payments, clearing and settlement – but also the risks it may entail for the financial system and the wider economy, as well as any implications for monetary policy (Bordo and Levin, 2017). Some of the risks are currently hard to assess. (Morten Linnemann Bech and Rodney Garratt, BIS, September 2017)

WB: Bitcoin Versus Electronic Money

One way to comprehend virtual currency is to first understand fiat currency. Fiat currency is any legal tender designated and issued by a central authority that people are willing to accept in exchange for goods and services because it is backed by regulation and because they trust this central authority. Fiat money is similar to commodity-backed money in appearance and usage, but differs in that it cannot be redeemed for a commodity, such as gold. (Sarah Rotman Parker, WB/CGAP, January 2014, cit. the European Central Bank, 2012)

IMF: What Are Cryptocurrencies?

[Cryptocurrencies] rely on distributed ledger technology, such as blockchain, to construct a ledger (effectively a database) that is maintained across a network. To ensure that the same cryptocurrency is not spent twice, each member of the network verifies and validates transactions using technologies derived from computing and cryptography. Once a decentralized consensus is achieved among members of the network, the transaction is added to the ledger, which is validated. The ledger provides a complete history of the transactions associated with a particular cryptocurrency that is permanent and cannot be manipulated by a single entity. This ability to achieve consensus on the validity of transactions between accounts in a distributed network is a foundational technological shift. (Antoine Bouveret and Vikram Haksar, IMF, March 2018)

IMF: Lucre’s Allure

[Bitcoin] marks a transformational shift in the perception of fundamental value. The metallic currencies of the premodern world encouraged the formulation of a labor theory of value: value was produced when humans added their labor to nature. Blockchain technology means that value reflects a combination of stored energy and intelligence, none of it human. It may point to a new age when most and eventually all value may be created by the nonhuman interaction of machines and energy. It is not surprising that the fear of instability—and the association of new money with diabolical qualities—has reappeared. (Harold James, IMF, June 2018)