Christie Smith, Aaron Kumar
2018 Journal of economic surveys (Print)  
This paper introduces the distributed ledger technology of crypto-currencies. We aim to increase public understanding of these technologies, highlight some of the risks involved in using cryptocurrencies, and discuss some of the potential implications of these technologies for consumers, financial systems, monetary policy and financial regulation. Crypto-currencies have no physical existence, but are best thought of as electronic accounting systems that keep track of people's transactions and
more » ... nce remaining purchasing power. Cryptocurrencies are typically decentralised, with no central authority responsible for maintaining the ledger and no central authority responsible for maintaining the code used to implement the ledger system, unlike the ledgers maintained by commercial banks for example. As crypto-currencies are denominated in their own unit of account, they are like foreign currencies relative to traditional fiat currencies, such as dollars and pounds. We examine the 'monetary' attributes of crypto-currencies, and describe some of the reasons they have been adopted. While crypto-currencies are clearly used for exchange, we argue that they are not yet generally accepted, and for the most part they are not used as a unit of account. Bitcoin, the most-traded crypto-currency, has been a volatile and hence imperfect store of value. In the particular case of Bitcoin, the ultimate supply of bitcoins approaches a fixed limit, which means that any fluctuation in the demand for bitcoins is reflected in substantial movements in its price. Like fiat currencies, crypto-currencies have no secondary use. Their utility as a payment mechanism stems from a belief that others will continue to use the corresponding ledger systems to exchange goods and services in future. The paper discusses the mechanics of Bitcoin -the original crypto-currency -to illustrate the fundamental elements of decentralized crypto-currencies. In short, transactions are implemented as messages that debit or credit account balances in duplicate ledgers. Programming protocols ensure that ledgers are synchronized, and agents are rewarded for updating and quality-assuring the ledgers with transaction data, which accumulate in 'blocks'. Cryptography is used to secure the transaction messages and the integrity of the ledgers containing account balances. The latter part of the article provides a high-level summary of the implications of crypto-currencies for consumers, financial systems, monetary policy, and regulatory policy. Crypto-currencies ex-1 We would like to thank Jonathan Chiu and Thorsten Koeppl for providing access to their own research on blockchain technology, which helped to improve our understanding of its implementation and the issues that arise. Helpful comments were also received from
doi:10.1111/joes.12289 fatcat:7vgz5yppvve2zb5ib7dbgn2fxe