How will cryptocurrency affect the central bank

Cryptocurrencies - a problem for monetary policy?

An asset that fulfills the function of a medium of exchange is called money. The manifestations of money have changed over the course of time, from commodity money to coins and paper money to bank money with no material value. The most recent development are cryptocurrencies such as the system designed by Satoshi Nakamoto and labeled “Bitcoin ”.1 In particular, two properties are characteristic of cryptocurrencies: Because they use blockchain technology, there is no need to involve a trustworthy third party in financial transactions of all kinds become. In the case of financial transactions, these are usually the commercial banks, and in the case of cross-border money transfers, the central banks.2 In addition, the state monopoly of banknotes is eroding. So far, cryptocurrencies have only been issued by private individuals; there are no dependencies on state institutions. This means that the real income from the money issue (seigniorage) also falls exclusively to the private sector.

The central banks are aware of the challenges, and accordingly have placed cryptocurrencies on their research agenda.3 The problem areas are diverse: Can the stability of the payment and clearing systems continue to be guaranteed? Which factors determine the demand for cryptocurrencies and to what extent does this substitute the demand for conventional central bank money? What repercussions on the mode of operation and the design of monetary policy are to be expected? Can central banks counteract the erosion of the banknote monopoly by issuing their own crypto currencies?

Are cryptocurrencies money?

Economists define money as anything that is generally accepted to pay for goods and services and to settle debts. This definition is usually concretized with the help of the three monetary functions (medium of exchange, unit of account, store of value). In particular, the criterion of general acceptance has not (yet) been met for cryptocurrencies, so that they are denied monetary status by the central banks, but also in the relevant specialist literature.4 However, everyone involved is aware that this verdict is a snapshot. Last but not least, the extremely dynamic technological development can make a reassessment necessary very quickly.

Similar to paper money or bank money, cryptocurrencies have no intrinsic value. A user will only accept it as a medium of exchange if he can trust that at a future point in time a sufficiently large number of other actors will be ready to exchange them for goods and services again. This dependency on trust is inherent in all currencies, in particular it applies to the same extent for a legal tender. By defining a legal tender, the state can try to generate such trust, but the legal tender is neither necessary nor sufficient for the function of a medium of exchange. Both legal tender and crypto currencies are so-called external money, i.e. the assets measured in euros or in bitcoins are not matched by the same amount of liability from another actor. In the case of the euro or the US dollar, a banknote is legally a claim against the central bank, and therefore a liability for the central bank. But since the liability does not include an obligation to exchange the banknote for goods or services, it is only on paper in the truest sense of the word. In order to serve as a medium of exchange, legal tender as well as crypto currencies must equally gain the said trust, for example by creating value stability.

The number and volume of transactions processed in cryptocurrencies have so far been comparatively low. Currently (as of March 2017) around 300,000 transactions per day are made worldwide with the help of the Bitcoin network, the technical capacity of around seven transactions per second is half exhausted. In comparison, around 25 million transfers are carried out every working day in Germany alone, and established online payment methods such as Visa or Mastercard perform up to 2000 transactions per second.5 The technological restrictions on cryptocurrencies are still severe, but they are of the first generation New technology should not be expected to exceed the basic functionality of the system, and that is undoubtedly a given.

Cryptocurrencies are a network good - this is far more important for establishing itself as a medium of exchange than the current technological restrictions. Why should customers switch to cryptocurrencies when they are only accepted in a few stores? And why should business owners accept them when few customers want to pay with them? Because the consumption of network goods goes hand in hand with positive external effects, the market provides an “insufficient” amount. Even if everyone involved knows and accepts the fundamental superiority of the new payment technology, network effects plus switching costs can prevent the transition to the new technology. The decentralized organization of the system makes it difficult to reach the critical mass of users, but overcoming this threshold is likely to be the acid test that will ultimately determine the success of cryptocurrencies. Hyperinflation of legal currencies or the designation of a cryptocurrency as legal tender would make it easier to leave the inferior equilibrium, but such scenarios are not to be expected

Now, using a payment technology is usually not a 0-1 decision. The typical consumer uses two or three methods, such as cash for daily purchases and credit cards for larger transactions. A new payment method such as cryptocurrency does not have to be superior to previous technologies for all transactions according to all criteria such as cost, speed or security. The superiority in individual sub-areas is sufficient to find substantial dissemination. As empirical studies show, consumers react quite sensitively when choosing the payment method if the new technology better suits their needs

Somewhat paradoxical, at least with Bitcoin: its use as a medium of exchange is limited, precisely because it is a successful store of value. As Figure 1 shows, the increase in value of Bitcoin compared to the US dollar has been exorbitant at least since 2013. The increases in value are anything but steady, but a buy-and-hold strategy seems lucrative. In addition to the interest in a new technology, the function as an investment is the most important motive for holding bitcoins. At least for US consumers, this motive is more important than the demand for bitcoins to process purchases of goods and services.8 The use of newly mined bitcoins points in a similar direction; the majority of them are not spent, but remain in the hands of the as an investment Miners. 9

illustration 1
Bitcoin-dollar exchange rate volatility compared to the euro-dollar exchange rate

Source: The figure is based on Quandl's data and own calculations.

Given the extreme volatility of the Bitcoin exchange rate (see Figure 1), its property as a store of value is quite controversial. The daily fluctuations in the Bitcoin exchange rate to the US dollar are often several percent, so that an intertemporal transfer of assets from today to tomorrow or the day after tomorrow is sometimes not stable in value. The high volatility reflects the low level of liquidity in the Bitcoin market. In view of the around 16 million Bitcoins currently in circulation, the trading volume is low and, as to be expected in a "thin market", even minor changes in supply and / or demand lead to substantial price fluctuations. Because the maximum number of Bitcoins in circulation is technologically fixed, the Bitcoin market will also be poorly liquid in the future, and the high price volatility will not decrease. For risk-averse consumers, this may be a sufficient reason not to experiment with cryptocurrencies like Bitcoin in the first place. In any case, this is an additional hurdle to general acceptance as a means of payment. The high price volatility generates two further effects:

  1. The reflection of the exchange rate risk is the uncertainty about the real value of a transaction. This applies to both buyers and sellers of goods. The latter often react to this by using a service provider (software) who immediately exchanges Bitcoins for euros or US dollars and credits the seller with the equivalent value. In this case, the consumers pay with Bitcoin, but it is unclear whether it can really be said that the sellers accept Bitcoin
  2. The high price volatility prevents the use of Bitcoin as a unit of account. The companies that accept Bitcoin also formulate their prices in euros or US dollars; the Bitcoin price is only calculated after conversion using the current exchange rate. Another obstacle to the function as a computing unit is the large number of zeros that result from the conversion; at today's exchange rate, the 50-cent roll costs around 0.0005 Bitcoin. Due to the purely digital character of the crypto currency, this is a solvable problem, the scaling could easily be changed to a level that is easier for the consumer to handle.

Relative strengths of cryptocurrencies

In order to establish themselves permanently as a means of payment, cryptocurrencies must be classified as "better" than the previous currencies or payment methods, at least with regard to individual properties. A first, primarily macroeconomic, point of view is the stability of value already mentioned. The history of currency so far is to a large extent a history of doom, with governments rendering currencies worthless over and over again through inflation. The outsourcing of monetary policy to an independent central bank is a comparatively recent development that has put a stop to this. But central bank independence can be changed quickly by law, it is fragile. In addition, independent central banks can also pursue unsound monetary policy.

Cryptocurrencies rigorously overcome these problems. At least so far, cryptocurrencies have been issued exclusively by private individuals, no government and no other central authority is involved. The incentive to inflate by private individuals (a frequently used argument against private currency competition à la Hayek) does not apply for two reasons. On the one hand, there is no private individual who issues the cryptocurrencies, the newly created currency units fall to those who are the first to solve a cryptographic task. This mining process is carried out according to rules that are transparent and visible to all, everyone can basically participate. On the other hand, the amount of the money supply is not decided on a discretionary basis, but the money supply follows the rules of mathematics by solving the cryptographic tasks. In the case of Bitcoin, the offer is limited to around 21 million units, so Bitcoin inflation is definitely excluded. Other cryptocurrencies such as Peercoin do not fix the supply in absolute terms, but also allow a positive growth rate in the long term. The fact that binding to mathematical rules is not entirely sensible from an economic point of view will be discussed further below.

At the microeconomic level, blockchain technology allows traditional financial intermediaries to be circumvented, and commercial banks in particular are threatened with an erosion of their business models. Similar to peer-to-peer lending, where lenders use platforms to transfer financial resources directly to borrowers, blockchain transfers can be made directly between payers and payees. The technology ensures that if a money transfer is requested from Ms. A to Mr. B, only Mr. B can be the actual recipient, that Ms. A can be shown to have the appropriate credit and that the amount actually comes from Ms. A. A trustworthy third person or institution such as the commercial bank to clarify these questions for Ms. A and Mr. B so far is not necessary.

The processing and transfer fees charged by traditional financial intermediaries allow a rough estimate of the savings potential. The extreme point is formed by cross-border transfers, where the fees averaged 8.9% of the transfer amount.11 Credit card companies such as Visa and Mastercard pay a fee of 2% to 3% of the turnover, PayPal charges a fee of 1.9% of the sales value plus 0.35 euros per transaction. These savings have to be compared with the fees that Bitcoin payment service providers such as BitPay or Coinbase charge when exchanging traditional currencies for Bitcoin and vice versa, currently around 1% of the exchange amount. Whether Bitcoin businesses will retain their current cost advantage in the long term is sometimes questioned, with reference to presumably rising transaction fees.12 The currently dominant remuneration of miners in the form of new Bitcoins will have to be replaced by fees as a reflex of the increasingly complex mining process Amount at the present time can only be speculated.

An undisputed plus point: transactions processed via the blockchain or the Bitcoin system have a speed advantage. Transfers made in the traditional way take one working day within the EU, around five working days for transfers to the USA and up to 20 working days for transfers to developing countries. This is anachronistic. With the Bitcoin system, the respective information (sender, amount, recipient, etc.) must be recorded in a block; the generation of a block takes about ten minutes. A transaction is usually considered confirmed after six blocks, so transactions within an hour can be considered secure. With Litecoin, the processing time is reduced to around 15 minutes. It took a while for the central banks to react to this technological development, but they are currently working intensively on the development of instant payment systems that will at least mitigate this disadvantage of bank-based payment transactions. 13

Security aspects

If crypto currencies are to gain acceptance, they must offer their users a level of security that is at least comparable to traditional currencies. In particular, this means that transactions must be forgery-proof. Basically, the risks of a cryptocurrency system can be divided into two groups: Risks that arise within the network and risks that arise at the interface, i.e. when using the network. The internal risks include the security of cryptography, the de-anonymization of users, the possibility of "double spending" and the security of the consensus algorithm.

In a direct comparison, the interface risks predominate. In the roughly eight years of use of the Bitcoin blockchain to date, no substantial technical malfunctions have come to light, and even if the security of cryptography is a fundamental problem, 14 the encryption technology chosen by Nakamoto can (so far) be classified as secure.

The concept of pseudonymity, which should not make transactions visible to third parties, is being discussed intensively. Cash offers the "perfect" anonymity to outsiders, only those directly involved in the exchange are involved. The opposite pole is formed by conventional bank transfers, in which the inspection and tracing of transactions are unproblematic, at least for the respective bank, and the forwarding, for example, to state authorities such as the tax office can hardly be prevented. Here, cryptocurrencies strike a middle ground: all transactions are recorded on the blockchain and are publicly visible to all network participants. But the transactions are only available under pseudonyms. They are only identified by payment addresses that are generated by a private-public key pair. In the first instance, these prevent users from being identified, even if complete de-anonymization - at least under certain conditions - cannot be ruled out

The possibility of 51% attacks on the Bitcoin system is also often emphasized: the blockchain, which has been accepted by the majority of computing power, applies. If an attacker has this majority, he can retrospectively change blocks and thus his own transactions. In short, the attacker can decide which transaction is mapped in the blockchain.16 As a result, the network is subject to an inherent risk. However, the computer capacities required for this are so extensive and therefore cost-intensive that this risk can be classified as low. A reassessment may be necessary if there is an even greater concentration in the mining pools.

The interface problem is much more critical for security. The majority of cryptocurrency transactions take place with the help of payment service providers who convert traditional currencies into cryptocurrencies and vice versa, who store the private key in an online wallet, etc. he - like a commercial bank - has to trust. So intermediaries also appear in the cryptocurrency system. These are not only a potential target, but can even act with fraudulent intent. The consequence is the risk of a corresponding loss of assets. The same problem arises with traditional financial intermediaries, the cryptocurrency system is a relative improvement in this regard, since it makes the use of intermediaries at least partially obsolete and does not require the permanent use of intermediaries. A similar risk of loss arises in transactions with small transaction volumes. Customers and retailers generally don't want to wait until the transaction has been confirmed in the blockchain, as the retailer in particular bears a residual risk. This basically also applies to card payments, but here - unlike with crypto currency systems - there are insurance solutions that limit the risk of payment default.

A major advantage of cryptocurrencies is the absence of counterfeit money. Based on the knowledge of the entire transaction history, each user can check whether a transaction is valid and accept it (if necessary after a waiting period or if the transaction has been confirmed by a given number of blocks). In order to guarantee the security of the transaction history, certain reference blocks are permanently recorded in the source code of the Bitcoin system and thus finally fixed

Since cryptocurrencies are ultimately software-controlled, risks and security gaps cannot be eliminated with absolute certainty. However, this also applies to traditional payment systems, so that in summary it can be said that cryptocurrencies are not inferior to traditional money in terms of technical security, but may even be superior, provided that the users comply with the appropriate framework conditions.

Regional distribution of bitcoin

Cryptocurrencies know no national borders and no regional or geographical barriers that limit their use. Its digital character makes it extremely easy to use globally. Nevertheless, the extent of regional use of cryptocurrencies is of great interest to national actors, because the regional distribution provides information about how intensively they are actually affected by cryptocurrencies. Examples include the German commercial banks, for whom the intensification of competition is fierce if cryptocurrency transactions become widespread in Germany. The same applies to national authorities such as the Federal Financial Supervisory Authority (BaFin), which may have to intervene because it has classified cryptocurrency transactions as financial instruments in the form of units of account. Or monetary policy: The European Central Bank (ECB) could practically ignore crypto currencies if Bitcoin & Co. were not used in the euro area, but almost exclusively in China or the USA.

In the case of a regional classification, a distinction must be made between the creation and use of cryptocurrencies. The creation of the most important cryptocurrency, bitcoin, can be localized regionally using the data from the mining process. At least 99% of the blocks on the Bitcoin blockchain are created by mining pools. This shows a twofold concentration: the five largest pools together generate around 80% of the blockchain blocks, and four of these five mining pools operate from China (because of the low energy prices). Accordingly, the Chinese renminbi is the most important currency in Bitcoin trading (31%), followed by the US dollar (25%) and the euro (9%)

The assignment of users to certain countries is much more difficult compared to the creation of Bitcoin, since the system is pseudonymous and therefore there is no central directory with which the regional structure could be studied. Other data sources must therefore be used. A first source of information is the distribution of the currently 126 trading venues worldwide.19 A clear regional focus cannot be identified, the Bitcoin exchanges are spread across the globe, 37 exchanges are in Asia, 35 in Europe, 19 in North America, 13 in South America, twelve in Australia / Oceania and three in Africa. The country with the most Bitcoin trading venues is Great Britain with 19 stock exchanges, followed by China with twelve stock exchanges and the USA with nine stock exchanges. With an exchange, Germany is more of a bitcoin developing country.

If you consider the download frequency of Bitcoin software as an approximation of Bitcoin usage, the USA, China, Germany, Great Britain, Canada and the Netherlands can be identified as the main areas of use.20 If these figures are corrected for the different population sizes, however, something results Another picture: it is in particular the Scandinavian countries and their neighbors that have a higher spread of Bitcoin, i.e. those that are already - relatively speaking - less keen on cash.

Utopia: a pure cryptocurrency world

Today, cryptocurrencies have a market capitalization of around 20 billion euros, which corresponds to 0.3% of the euro money supply M1. The central banks, including the ECB, are therefore monitoring developments in cryptocurrencies, but they are not perceived as an immediate “threat”. This assessment may also prove to be correct in the medium term if the aforementioned critical mass of users is not exceeded. Then crypto currencies would be more comparable to the multitude of regional currencies (“Chiemgauer”, “Bürgerblüte” etc.), the repercussions of which on monetary policy can be viewed as negligible.

But the assessment can be wrong. To outline the implications, it is illustrative to imagine the other borderline case: a pure cryptocurrency world. Suppose there were only bitcoins. A pure Bitcoin world will be characterized by deflation. This is quickly outlined using the quantity equation, MV = PY. With Bitcoin, the amount of money M in circulation is technologically limited to around 21 million Bitcoins. If, plausibly, the velocity of circulation of money V does not increase continuously, the price level P must fall as income Y increases. So far, little research has been done on how an economy with inherently designed deflation behaves. The investment form “money” receives a positive real interest rate, which at least reduces the interest rate difference to other forms of capital investment. The expectation of falling prices may result in a shift in the demand for goods into the future, resulting in negative output effects in the short term. The scenario of a deflationary economy can be avoided if the digital currency is not limited in terms of quantity, but also shows a positive growth rate in equilibrium. This is the case with Peercoin, for example, which appears ad hoc as a superior alternative from a monetary theoretical point of view.

A previously unanswered question concerns the formation of interest rates in a cryptocurrency system. Similar to coins and cash, cryptocurrencies like Bitcoin have a nominal interest rate of zero. However, once traditional currencies are held in the form of deposits, they typically generate positive interest rates that are funded by borrowers. This process of financial intermediation, which now runs primarily through commercial banks, threatens to erode in a cryptocurrency world that uses blockchain technology. Three alternative scenarios are conceivable:

  1. The credit terms will be agreed directly, i.e. peer-to-peer and decentralized, between the parties involved. However, this requires an extremely high level of information from savers and investors alike.

2. Those involved are looking for help from platforms such as BitBond or BTCJam, which are already bringing together loan seekers and lenders today. The determination of the interest rate here is diverse and is similar to crowdfunding. 21

3. It seems realistic: A system of securities and derivatives is formed that are denominated on Bitcoin and traded accordingly. The interest rate then reflects the supply and demand of Bitcoin-denominated loans. It remains to be seen whether such a cryptocurrency world will achieve a maturity transformation similar to that of today's financial intermediaries.

The real value of a cryptocurrency like Bitcoin is measured today with the help of the exchange rate to the euro or US dollar. If more US dollars are to be paid for a Bitcoin, all other things being equal, the real value of the Bitcoin increases. If, in extreme cases, the state currencies are completely displaced, the problem of determining an adequate price index arises. What is the real value of a bitcoin in a pure bitcoin world? It would be possible to create a harmonized consumer price index that reflects the price of a basket of goods that is representative on a world scale. Given the massive global differences in national preference and thus consumption structures, such an index would be largely devoid of content. In analogy to the euro area, there is an alternative to the use of national indices, with which the real value of bitcoin is then defined differently from country to country. The formulation of all prices in the same currency unit makes it easier to compare prices, but the more economically relevant determination of real values ​​is still complex.

The world as a whole is definitely not an optimal currency area in the Mundell sense. The setting aside of the nominal exchange rate as an instrument to influence the real exchange rate and even more the setting aside of the national monetary policy is already controversial in the euro area, on a world scale it would be absurd. This fact answers the question of whether utopia in the sense of a pure cryptocurrency world is even worth striving for with a clear “no”. Even competition between several crypto currencies would not change anything here, because the exchange rates between the respective crypto currencies would have nothing to do with the economically necessary adjustments between two countries or groups of countries. Should crypto currencies partly displace traditional currencies in a competitive process, this speaks for a gain in efficiency, the resulting market solution is generally to be welcomed. Complete displacement, on the other hand, would mean the loss of the stabilization instruments that are undoubtedly necessary. From a macroeconomic perspective, the continued existence of traditional currencies with traditional monetary policy is therefore preferable to the pure cryptocurrency world.

Cryptocurrencies and Central Bank Policy

Both extreme scenarios - crypto currencies remain a marginal phenomenon or they completely displace traditional currencies - appear unrealistic. A permanent coexistence of cryptocurrencies and traditional currencies can be expected. The macroeconomic implications of such coexistence are largely unexplored territory. A notable exception is the study by Barrdear and Kumhof, which was carried out at the Bank of England.22 The authors integrate a cryptocurrency into a “dynamic stochastic general equilibrium” model (DSGE model), with the relationship between cryptocurrency and central bank money being fixed as an assumption so that monetary policy remains as a stability policy instrument. An interesting result of their analysis: the implementation of crypto currencies acts like a growth engine, in the long term the output in a world with crypto currencies is around 3% higher than in the world without crypto currencies. Hanl and Schwanebeck come to a very similar result.23 The process of financial intermediation improves through the use of cryptocurrencies, the coming together of savers and investors is associated with less frictional losses, the equilibrium real interest rate decreases, capital formation is accelerated.

The cryptocurrency not only influences the long-term equilibrium, but also the adjustment behavior of an economy in the event of macroeconomic shocks. A first point concerns the correction of monetary policy errors mentioned by Bitcoin inventor Nakamoto, i.e. traditional monetary policy is seen less as a stabilizer than as a source of interference or shock intensifier. As Hanl and Schwanebeck show, the cryptocurrency does indeed act like a buffer. Monetary policy shocks, for example in the form of an unexpected rise in interest rates, are mitigated in their effects on output, consumption and investment. The cryptocurrency creates a substitute for traditional banking transactions, so that the monetary policy-induced increase in the price of bank loans implies an evasive reaction in the direction of cryptocurrency, i.e. increased financial intermediation via the cryptocurrency channel.

The other side of the coin: Monetary policy is becoming less efficient. If the decline in investments is smaller as a result of an increase in interest rates, the interest rate instrument loses its effectiveness. If there are shocks in the demand and / or supply of goods, the output and inflation effects of which are to be cushioned by monetary policy, the optimal response of monetary policy to the reduced efficiency is an increased use of the interest rate instrument. Monetary policy will therefore act more aggressively through the cryptocurrency channel. 24

Because research into the interaction between cryptocurrencies and monetary policy is only just beginning, various problems can simply be described as open. This applies, for example, to the changed role of commercial banks in the transmission process of monetary policy. If the increased financial intermediation by means of cryptocurrencies goes hand in hand with an increased migration into the area of ​​shadow banks, the regulatory authorities will not least become active here. This also applies to any effects on financial market stability. The role of monetary policy as the “lender of last resort” needs to be reconsidered. It should also be mentioned that cryptocurrencies themselves can cause shocks. The collapse of a platform like Mt. Gox, which accompanied the loss of 650,000 bitcoins, would be an event with real economic implications that would force a response from central banks.

Final consideration

Crypto currencies have left the narrow circle of computer nerds, they are now a living part of the financial market. Accordingly, it is important to understand how they work and how they work, which is not easy due to the rather complex technological background. If further technical developments make handling easier, they have the potential to become a generally accepted means of payment. This is not yet the case, but the central banks are well advised to put the dynamic field of cryptocurrencies on their research agenda and try to anticipate the consequences for monetary policy conception and for the effectiveness of the traditional set of instruments.

The fact that cryptocurrencies are not to be regarded as temporary hype is largely due to the technological innovation of the blockchain, possibly "the next big thing" after the Internet 25. For the central banks, the immediate consequence is massively increased competition in the area of ​​payment systems. If a large proportion of (cross-border) payments are made peer-to-peer, central banks can no longer guarantee the stability of payment traffic to the same extent. Some central banks are actively taking up the challenge and are considering using blockchain technology for themselves by issuing their own digital currency. 26

  • 1 S. Nakamoto: Bitcoin - A Peer-to-Peer Electronic Cash System, 2008,
  • 2 Generally understandable descriptions of blockchain technology and the Bitcoin system can be found at V. Brühl: Bitcoins, Blockchain and Distributed Ledgers: Functionality, Market Developments and Future Perspectives, in: Wirtschaftsdienst, 97th year (2017), no. 2, p. 135-142; W. Blocher: The Next Big Thing: Blockchain - Bitcoin - Smart Contracts: How the disruptive potential of Distributed Ledger Technology will (not only) demand the law, in: Anwaltsblatt, 66th year (2016), no. 8 + 9 , Pp. 612-618.
  • 3 See e.g. European Central Bank: Virtual Currency Schemes - A Further Analysis, Frankfurt a.M. 2015; R. Ali, J. Barrdear, R. Clews, J. Southgate: Innovations in Payment Technologies and the Emergence of Digital Currencies, in: Bank of England Quarterly Bulletin, Q3 / 2014, pp. 262-275.
  • 4 Cf. D. Yermack: Is Bitcoin a Real Currency? An Economic Appraisal, in: D. K. C. Lee (Ed.): Handbook of Digital Currency, Amsterdam, 2015, pp. 31-43; S. Lo, C. Wang: Bitcoin as Money ?, in: Current Policy Perspectives, No. 14-4, 2014, Federal Reserve Bank of Boston.
  • 5 Cf. Deutsche Bundesbank: Payment behavior in Germany 2014: Third study on the use of cash and cashless payment instruments, Frankfurt a.M. 2015; P. Franco: Understanding Bitcoin: Cryptography, Engineering and Economics, Chichester 2015.
  • 6 cf.on this W. Luther: Cryptocurrencies, Network Effects, and Switching Costs, in: Contemporary Economic Policy, 34th Jg. (2016), No. 3, pp. 553-571.
  • 7 Cf. S. Koulayev, M. Rysman, S. Schuh, J. Stavins: Explaining Adoption and Use of Payment Instruments by US Consumers, in: RAND Journal of Economics, Volume 47 (2016), No. 2, p 293-325.
  • 8 S. Schuh, O. Shy: U.S. Consumers ’Adoption and Use of Bitcoin and other Virtual Currencies, Working Paper, 2015,
  • 9 See S. Meiklejohn, M. Pomarole, G. Jordan, K. Levchenko, D. McCoy, GM Voelker, S. Savage: A Fistful of Bitcoins: Characterizing Payments Among Men with No Names, in: IMC '13 Proceedings of the 2013 Internet Measurement Conference, pp. 127-140.
  • 10 See M. Rysman, S. Schuh: New Innovations in Payments, NBER Working Paper, No. 22358, June 2016.
  • 11 Goldman Sachs: All About Bitcoin, in: Global Market Research, Issue 21, March 2014. Due to intense competition and regulatory initiatives, for example at the EU level, fees have recently fallen somewhat.
  • 12 Cf. N. Houy: The Economics of Bitcoin Transaction Fees, in: GATE Working Paper, No. 1407, February 2014.
  • 13 See M. Tompkins, A. Olivares: Clearing and Settlement Systems from Around the World: A Qualitative Analysis, Bank of Canada Staff Discussion Paper, 2016-14, June 2016.
  • 14 Cf. e.g. I. Giechaskiel, C. Cremers, K. B. Rasmussen: On Bitcoin Security in the Presence of Broken Crypto Primitives, IACR Cryptology ePrint Archive, 2016/167.
  • 15 Cf. S. Meiklejohn, M. Pomarole, G. Jordan, K. Levchenko, D. McCoy, G. M. Voelker, S. Savage, loc. Cit .; and A. Biryukov, D. Khovratovic, I. Pustogarov: Deanonymisation of Clients in Bitcoin P2P Network, in: CCS ’14 Proceedings of the 2014 ACM SIGSAC Conference on Computer and Communications Security, pp. 15-29.
  • 16 See S. Nakamoto, loc. Cit.
  • 17 Cf. e.g. I. Giechaskiel, C. Cremers, K. B. Rasmussen, loc. Cit.
  • 18 See European Central Bank, op.
  • 19 See Exchange War: List of Crypto-Exchanges, (6.3.2017).
  • 20 See also for an analysis of the Bitcoin nodes: JA Donet Donet, C. Pérez-Solà, J. Herrera-Joanconmartí: The Bitcoin P2P network, in: R. Böhme, M. Brenner, T. Moore, M. Smith (Ed.): Financial Cryptography and Data Security, FC 2014 Workshops, BITCOIN and WAHC 2014, Christ Church, Barbados, March 3, 2014, Revised Selected Papers, Berlin 2014, pp. 87-102.
  • 21 Cf. A. K. Agrawal, C. Catalini, A. Goldfarb: Some Simple Economics of Crowdfunding, in: Innovation Policy and the Economy, 14th year (2014), pp. 63-97.
  • 22 J. Barrdear, M. Kumhof: The Macroeconomics of Central Bank Issued Digital Currencies, in: Bank of England Staff Working Paper, No. 605 2015.
  • 23 A. Hanl, B. Schwanebeck: Financial Intermediation and Bitcoin: Using Bitcoin as Alternative Investment Vehicles, presentation at the DLT workshop of the University of Kassel in March 2017, fb07 / 5-Institute / IVWL / Michaelis / Kryptow% C3% A4hrungen_als_Geld_der_Zukunft_korrigiert.pdf.
  • 24 This is analogous to the so-called cost channel of monetary policy, see J. Palek, J. Michaelis: Optimal Monetary Policy in a Currency Union: Implications of Country-specific Financial Frictions, in: Credit and Capital Markets, 49th year (2016) , H. 1, pp. 1-36.
  • 25 Cf. W. Blocher, op. Cit.
  • 26 See B. Fung, H. Halaburda: Central Bank Digital Currencies: A Framework for Assessing Why and How, Bank of Canada Staff Discussion Paper, No. 2016-22, November 2016.

Title: Cryptocurrencies: A Monetary Policy Problem?

Abstract: Cryptocurrencies such as Bitcoin may revolutionize the financial system by at least partially replacing intermediaries such as central banks and commercial banks. The blockchain technology enables users to perform financial transactions on a peer-to-peer basis. This imposes a serious threat on the financial intermediaries as well as on monetary policy authorities. In this paper, we examine how well cryptocurrencies fulfill the functions of a fiat money and discuss the comparative advantages of cryptocurrencies. We proceed by exploring the implications of digital currencies for the concept and conduct of monetary policy.

JEL Classification: E42, E52