Cryptocurrencies: A Crash Course in Digital Monetary Economics

• DOI: http://doi.org/10.1111/1467-8462.12306
• Published date: 01 December 2018
• Date: 01 December 2018
• Author: Jesús Fernández‐Villaverde

Policy Forum: Cryptocurrencies

Cryptocurrencies: A Crash Course in Digital

Monetary Economics

Jes

us Fern

andez-Villaverde*

Abstract

This article reviews what cryptocurrencies are,

and it frames them within the context of

historical monetary experiences and contem-

porary 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, crypto-

currencies can play a role in improving the

current means of payments and in disciplining

central banks into providing better govern-

ment-run f‌iduciary monies.

1. Introduction

Cryptocurrencies, digital currencies, Bitcoin

miners, the blockchain, distributed consensus.

Rare is the day when the popular media does not

discuss one aspect or another of the exciting

landscape of contemporary monetary systems.

From being the quiet resort of mild-mannered

theorists, monetary economics has become the

centre of unprecedented public attention. What is

a cryptocurrency? Why does it hold value? Does

it have a ‘fundamental’value? Alternatively, is it

a pure bubble? Do cryptocurrencies increase

social welfare? How should governments regu-

late them? How should central banks react to

them in their conduct of monetary policy?

Contemporary monetary economics has

many answers to these questions.In this article,

I will discuss how cryptocurrencies are a new

step in the process of using money as the

memory of society (Kocherlakota 1998).

1

As

such, theyprovide an alternative to government-

run memory systems (i.e.,public monies). This

private alternative presents not only some

potential advantages, but also some fundamen-

tal drawbacks. In particular, and contrary to

suggestions by Hayek (1999), I will defend the

argument that the private issuance of monies is

unlikelyto deliver good outcomes. There will be

either too little or too much private f‌iat money,

and the issuance costs will be too high.

The intuition is simple (and it is developed in

detail in Fern

andez-Villaverde and Sanches

2018). To talk about money is to talk about

trading frictions: the former exists because of

the latter. However, under trading frictions, one

should not expect the welfare theorems to hold.

More concretely, prices (in this case the value

* University of Pennsylvania, Philadelphia, PA 19014 United

States of America; email <jesusfv@econ.upenn.edu>.Part

ofSection7andmuchofSection8ofthisarticleborrow

extensively from my Vox column ‘On the economics of

currency competition’. Much of what is here comes from my

conversations and work with Daniel Sanches.I thank Eugenio

Rojas for excellent research assistance.

The Australian Economic Review, vol. 51, no. 4, pp. 514–526 DOI: 10.1111/1467-8462.12306

°

C2018 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd