The Crypto Craze: A Beginner's Guide to Understanding and Investing in Cryptocurrency

1
Cryptocurrencies and the Future of Money
Crypto-
currencies
and the
Future
oF Money
GoinG beyond the hype:
how can diGital currencies
serve societ y?
2019

contents
03 executive summary
04 Introduction / preface
07 Chapter 1 — the Nature of Money and
possibility of Cryptocurrency Money
17 Chapter 2 — A Brief History of Money in the 20th
century
35 chapter 3 — Money in the 21st century
45 chapter 4 — what are cryptocurrencies?
69 chapter 5 — central bank digital currencies
79 Chapter 6 — perceptions of Money and the
Future of Cryptocurrencies
96 conclusion
98 List of Figures / List of Tables
100 References
105 Annex

3
executive
summary
The shortcomings of existing financial systems became
widely criticised in the aftermath of the 2007–08
financial crisis leading to an unprecedented wave of
interest in new ways of efficiently executing economic
transactions while ensuring high levels of transparency
and accountability. With over 2,000 in existence at
the time of writing this report, cryptocurrencies have
received a great deal of attention as a potential tool for
radically altering financial landscapes for the betterment
of society. The purpose of this report is to provide a
comprehensive overview of how crypto-currencies
could be used to achieve this purpose. This includes
how cryptocurrencies currently function relative to the
intentions of their pioneers, and how the general public,
use, understand, and trust them.
Some of the main findings include:
Modern discussions and debates about crypto-
currencies tend to confuse ‘money’ with ‘systems of
payments’ or, the mechanism by which transactions
are processed and settled.
Cryptocurrencies have the potential to vastly improve
systems of payments if designed and implemented
correctly.
In practice, existing cryptocurrencies have failed to
achive the objectives envisioned by their pioneers and
would generally not be considered as money.
New innovations (stablecoins, proof of stake, CBDCs)
are helping to make digital currencies more realistic
candidates to replace traditional money and create
benefis for users across large volumes of transactions.
In addition to these technical challenges, the value
added in this report comes from a unique empirical
examination of how citizens undertand cryptocurrencies
and trust in different institutions to issue and manage
money across a unique sample of eight countries
including Argentina, Brazil, France, Germany, Mexico,
Spain, the UK and the US.
Some of the main findings include:
Knowledge, use, and understanding, of crypto-
currencies remains highly limited in all countries.
The vast majority of citizens in all countries agree that
money should continue to be issued by central banks.
While all central banks enjoy a significant trust
premium when it comes to the creation and
management of money, large differences exists
between Latin American countries (Argentina,
Brazil, Mexico) and European countries (France,
Germany, Spain, UK) and the US.
Countries where central banks experience lower trust
premiums are more open to adopting new digital
currencies issued by alternative institutions
Trust in Facebook to issue and manage a currency
remains very limited, especially in Europe and the US.
The degree of acceptability and price stability play
a key role in determining preferences for holding of
money, regardless of who is issuing it.
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4
Since their inception in 2008 and the subsequent en-
thusiasm, media attention, delusion, reflection, and
continuous innovation, ‘cryptocurrencies’ have be-
come one of the most interesting and perhaps most
misunderstood phenomena of the early 21st
century.
Their popularity and potential for ‘disrupting’ and
improving traditional financial systems, however, have
led to an expanding list of media commentaries, re-
search papers, and policy reports. Unfortunately, many
of these contributions have tended to focus on the
contemporary positivist side of cryptocurrency without
considering the normative intentions of its creators or,
perhaps more importantly, the historical context under
which money and monetary systems have evolved.
These contributions have also tended to focus on dig-
ital money from a single disciplinary viewpoint (com-
puter science, economics, finance) without a great deal
of consideration or integration of the valuable inputs
from other perspectives.
The idea of money has evolved continously over time.
In the context of the technological innovations of the
21st
century, it has become a phenomenon with a wid-
er range of feasible possibilities, some of which were
in fact proposed as far back as the early 20th
century.
To give some idea of the new range of types of money,
the Bank for International Settlements (BIS) published
a series of taxonomies including the ‘money flower’
and more general taxonomies that distinguish between
central bank-issued currencies (which are a liability on
the central bank balance sheet) and private-sector
issued digital currencies (which are not the liability of
anyone). Within this wider context, there exists a va-
riety of types of money, each of which has different
underlying characteristics, or attributes.
Introduction/
preface
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5
Source: Bank for International Settlements (BIS)
© Bank for International Settlements
not the
liability of
anyone
Commodity
money
Crypto-
currency
Bank deposits
Cash
peer-to-peer electronic
central bank-
issued
Central
bank
digital
currency
Bank
account
money
Reserves
Cash
universally
accesible
electronic
CrypToCurrenCy, CpmI (2015) CenTraL Bank dIgITaL CurrenCy, Bjerg (2017)
central bank-issu
e
d
w
i
d
e
l
y
accessible peer-to
-p
e
e
r
digital
Crypto-
currency
(permissionless
dlt)
Virtual
currency
Central
bank
reserves and
settlement
accounts
Central
bank
deposited
currency
accounts
Commodity
money
Cash
Cryptocurrency
(permissioned DLt)
Central
bank
digital
currencies
(wholesale)
Bank
deposits
Central
bank
digital
currencies
(retail)

6
For example, a physical cash transaction is issued and
is backed by (a liability of) the central bank and is sub-
ject to some degree of inflation over time, has low
transaction costs and is accepted by all sellers of goods
and services. On the other hand, a credit card transac-
tion is backed by (a liability of) a commercial bank, is
subject to the same degree of depreciation as cash, may
come with some (explicit or implicit) transaction costs,
and is accepted by all sellers of goods and services.
Given some of the shortcomings of money and existing
financial systems that became apparent in the after-
math of the 2007-08 financial crisis, Nakamoto (2008)
proposed a new type of money which would effectively
remove many of the third-party participants in trans-
actions, making a more efficient, and less costly, way
to make transactions with strangers. With over 2,000
cryptocurrencies in existence at the time of writing this
report, cryptocurrencies have since become progres-
sively embraced by speculative investors and growing
market caps, but have yet to be adopted by the wider
public as a viable form of money due to practical tech-
nical challenges along with a lack of trust in the issuing
authorities and understanding of how to use them.
Some of the more fundamental questions that deserve
closer attention within ‘monetary ecosystems’ revolve
around who creates the money and what is their rela-
tionship with the entity who creates and obtains value
from it. This is especially important in a fiat currency
environment where the value of money (digital or phys-
ical) depends on the degree of trust users have in those
who issued or back the currency. The purpose of this
report is to provide a more comprehensive overview of
how cryptocurrencies could be used for the betterment
of society, how they currently function and how the
general public uses, understands and trusts cryptocur-
rencies across a sample of eight countries.
The first chapter of this report will examine the nor-
mative nature of money including the role of commu-
nity trust and the role that government plays in ensur-
ing this trust. In this normative framework, we can
think about the possibility of cryptocurrency as money
and how this might be possible. A key part of this in-
troductory chapter is the idea of trust and money, es-
pecially in the fiat currency system that has emerged
in the late 20th
century.
The second chapter will provide a brief history of
money over the 20th
century, including the gold stan-
dard era, the design of Bretton Woods and the adop-
tion of fiat currencies. This chapter will also touch on
some of the historical themes that have re-emerged
in the context of cryptocurrencies, including Hayek’s
idea relating to currency competition and some of the
challenges involved with fractional reserve banking
systems.
Moving into the 21st
century, Chapter 3 will consider
the possibility of realistic possibility that ‘money’ will
dramatically change in the coming years with the
evolution of cryptocurrencies. This chapter will con-
sider some of the arguments against the use of phys-
ical and untraceable cash including fraud and health
concerns. More generally, this chapter will consider
the social benefits of moving towards digital curren-
cies and the associated risks/barriers.
Chapter 4 will provide an overview of how cryptocur-
rencies work in terms of their degree of centralization,
security and anonymity, token supply and governance
(consensus protocols). This chapter will examine cryp-
tocurrencies in terms of what they were meant to be
from the perspective of Nakamoto (2008) and what
they have become in practice. This chapter will large-
ly draw on the case of Bitcoin, but will also discuss
briefly new generation tokens (stablecoins, Libra).
Chapter 5 will consider the arguments for the issuance
of Central Bank Digital Currencies, including a review
of the literature and survey of what Central Banks are
currently doing in terms of the adoption of a central
bank-backed cryptocurrency. This chapter will also
discuss the implications for monetary policy and fi-
nancial stability from adopting this new type of dig-
ital money.
Lastly, Chapter 6 will discuss the results of the new
IE Survey on ‘Cryptocurrencies and The Future of
Money’ in the context of Chapters 1--5. From a diverse
sample of countries (Argentina, Brazil, Mexico,
France, Germany, Spain, UK, USA). The results show
that residents tend to place a trust premium on central
banks-backed money. However, significant differenc-
es appear across countries, especially those in Latin
America.

7
the nature
oF Money
and the
possibility
oF Crypto-
currency as
Money
B y professor tony Lawson,
University of Cambridge
chapter
1

8
A form of money, just like any other social phenomenon, is
apropertyofaparticularcommunity,andsotypicallypos-
sessing various community-specific features. Many com-
munities have produced money, however, and the concern
here is with commonalities of all the numerous forms.
In this regard, the most obvious common or shared
feature is that by which a money can everywhere be
identified or recognised. This is its property of being
employed as a general means of payment, of being
useable to discharge any debt in the community in
which the money is produced.
If, say, in any specific money community, an individual
participant requests of a seller, a loaf of bread, or per-
haps a meal, then, when the bread is handed over, or
after the meal has been consumed, the buyer is in debt
to the seller. It is an identifying property of money that,
in all such transactions (excepting in cases where a
specific alternative agreement on means of payment has
been reached in advance of a debt being occurred), the
money can be used to settle the resulting debt.
A basic condition for a general means of payment to
exist in any community is that the latter has a system
of value accounting that includes, as a component, a
(community-specific) unit of value. This is simply a unit
of value measurement or assignment -- such as pound
sterling, US dollar, euro -- in terms of which all goods,
services, or assets in a community will have their as-
sessed values expressed. Clearly all items of money
must also be denominated in the same units as the
debts, if the money is to be used to cancel them. So,
money will itself be a feature of a system of value ac-
counting that includes a unit of value (or account) as
an additional accepted component.
If the nominal property of any money, i.e. that by which
it is identified, lies in its being accepted as a general
means of payment, a further more fundamental feature
that grounds this property is the manner of the mon-
ey’s incorporation as a component of the community’s
system of value accounting. Most social phenomena
(not just money) are in fact constituted through pro-
cesses whereby certain kinds of things are incorporat-
ed into community systems as components. In all
cases, the phenomena are created by processes of social
positioning, whereby selected kinds of things are al-
located to positions, thereby constituting them as
different types of phenomena qua system components,
and whereupon their uses, qua positioned items or
system components, are governed by community-ac-
cepted sets of rights and obligations. To see this, it is
enough to think of the creation and acceptable uses of
means of transport, motorways, car parks, traffic
lights, passports, schools and hospitals, etc.1
Money is simply a specific conforming instance of this
general process of social reality constitution. The
A.the Nature of Money
Can forms of cryptocurrency become money? to pursue this question, it
is necessary first to be clear on what is meant by money, and on what
precisely is required for something to be, or to become, money. the con-
cern of this opening chapter is precisely with this issue, to identify condi-
tions that must be met for a form of cryptocurrency to qualify as money.
1. See Lawson, 2019.
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9
creation of money involves the
community acceptance of a money
position within the community’s
value accounting system and the
allocation of a certain kind of
thing (currently, it is typically
bank debt – see below) to the mon-
ey position, producing money as a
system component. As part of this
positioning process, rights and
obligations are allocated to com-
munity members, determining
that holders of instances of the
money have the right to use it to
cancel their debts and correspond-
ing creditors typically have a
matched obligation to accept the
money, if it is offered.
The ability of money to serve as a
general means of payment is, then,
grounded in its additional proper-
ty of being positioned (in the com-
munity’s system of value account-
ing) in such a manner that its uses
are governed by the noted rights
and obligations.
As with all social phenomena, the
existence of money is seen, final-
ly, to depend on community ac-
ceptance. However, the notion of
acceptance that is key here should
be interpreted not as involving
any necessary agreement or con-
tentedness of community partic-
ipants with the situation, only as
a willingness to go along with it,
at least for the time being. Typi-
cally, this general acceptance, in
the case of money, takes the form
of a preparedness to go along with
the declarations of designated
bodies to whom authority has
been delegated. In modern soci-
eties this delegated authority
takes the form of the government
or central bank.

10
To this point the concern has been on the nature and
constitution of money per se. However, the focus of
primary interest here is on more than money per se and
specifically on a money that functions successfully. An
additional nominal property for a successful money is
that (as well as being a general means of payment) it
has generalised purchasing power.
The manner in which money is constituted as a com-
ponent of a community’s system of value accounting
ensures, as we have seen, that a participant who holds
money has the right to use it to discharge any debts
already held. However, there is no agreement entailed
that participants must become creditors in the first
place, that they must allow others to run up debts with
them that can be discharged using the money. In coun-
tries with hyperinflation, is not unusual to see signs
displayed saying goods or services can be acquired only
if there is an advance agreement (i.e. prior to a debt
being created) for payment to be made in a foreign
currency. Thus, a restaurateur, say, will allow custom-
ers to order a meal and so acquire a debt if they in effect
take out a contact in advance to pay by something
other than the local currency.
So, a successful money is in place where participants
can easily use it to make purchases, meaning that sell-
ers, etc., are ready to become creditors in the knowledge
that the money will be used to discharge the debts that
so arise. For this to be the situation, community par-
ticipants must trust in the money. Trust is key to the
successful functioning of any money.2
Specifically,
community participants must trust that if they hold
items of money, others will be willing to take such
money from them, a condition of which being that no
one expects items of money to lose value in the mean-
time. In short, to function successfully, a money must
be trusted as a stable store of liquidity, a store of liquid
(i.e. easily transferable) value.
The dominant worry of recent monetary history is that
money will lose value, as is markedly the case in epi-
sodes of countries experiencing hyperinflation. But an
additional concern that can arise, one that will be seen
to be especially relevant when considering the possi-
bilities for cryptocurrencies, is that the money instead
appreciates in value. In the face of an anticipated de-
cline in its value, participants will not want to hold
money; however, in the face of an expected appreciation
in its value, participants will not want to let go of it.
Either development undermines the usefulness of mon-
ey for performing its canonical functions.
B.purchasing power and
trust
2. Trust is, of course, fundamental to all social constitution and human action (see
jamie morgan and Brendan Sheehan, 2015; Stephen pratten, 2017; Lawson, 2019
chapter 1), a condition for rights/obligations everywhere to work, though often
difficult to sustain in the economic sphere, not least where money is involved.

11
What, then, are the capacities or capacity required of a
successfully functioning money? It is precisely an abil-
ity to instil trust in community participants that the
money so formed through its positioning will be a sta-
ble form of liquid value. This will be most easily
achieved where prior to positioning, the money has
been found to be a store of value that is easy to pass on.
Currently the money position, was indeed already re-
garded as a store of value, and became so positioned
precisely to instil a trust in the money so hold. This is
bank debt.
Here the term debt is understood to be an obligation
held by a debtor to satisfy a creditor. It is internally
related to a credit, where the latter, technically and
legally speaking, means a specific right to payment or
satisfaction. Credit and debt, in other words, are two
aspects of the same social relation - a credit/debt (or
debt/credit) relation - connecting a creditor and a debt-
or; you cannot have one aspect without the other.
Credit is simply this relation viewed from the perspec-
tive of the creditor; it is debt from the point of view of
the debtor. In fact, in classical accounting terms, this
credit/debt relationship was seen as an exchange of
credere (‘to trust’) for debere (‘to owe’),3
which conclud-
ed in the exchange of real underlying assets. Simply
put, two entities bind themselves, at a specific point in
time, to remain bound to, and trust each other, over
the course of the agreement.
How does bank debt/credit (positioned) as money work?
Two forms of bank debt are involved, commercial and
central bank debt. If, for example, a commercial bank
makes a loan to a customer, it records the amount of
that loan in the customer’s account. The entry shown
(or resulting increase in any entry) marks an amount
of money thereby acquired by the customer. In the case
of the loan, this money is created on the spot. It is done
so through the formation of a debt of the bank to the
c.Money as positioned
bank debt
3. pacioli’s Summa, 1494.

12
customer. But the result is automat-
ically an amount of money. For,
since bank debt was at the relevant
point in history first positioned as
money, all new items of bank debt
come into the world already posi-
tioned as money. That is, just as a
child of members of the UK Royal
Family arrives in the world already
positioned as royal, or indeed a
child born in the UK of two UK cit-
izens arrives in the world already
positioned as a UK citizen, so, cur-
rently, all instances of bank debt
arrive in the world already posi-
tioned as money.
Of course, not all money held in an
individual’s deposit account was
created by loans. But all the money
there recorded takes the form of
commercial bank debt positioned as
money.
The ability to create new debt/cred-
it as money generally lies in the
power of commercial banks and the
central bank. The central bank can
create money by extending loans to
commercial banks in the form of the
latter’s reserves. Many indeed refer
to the two cases as producing com-
mercial bank money and central bank
money respectively, the two togeth-
er being bank money.4
So, the occupant of the money posi-
tion currently relied upon to instil
trust in a money formed out of it is
bank debt (a kind of thing that to
serve its intended role usually also
requires a degree of continuous state
backing, an orientation that can in-
volve, but does not reduce to a reli-
ance upon, laws of legal tender).
Finally, as is the current situation
with bank debt, the item posi-
tioned as money is not observable,
a necessary additional feature of a
community’s system of value ac-
counting is a set of markers or
identifiers of money, or of those
that hold it. In the case of com-
mercial bank money, its markers
are electronic entries in the com-
munity participant’s bank account.
In the case of central bank money,
the markers may take the form of,
first, cash, in particular where the
money is held by the public, and,
second, electronic markers, indi-
cating money held as deposits at
the central bank, including com-
mercial bank reserves. So strictly
speaking, neither electronic re-
cords nor cash are money but rath-
er are markers of it.
Tosummarise,acommunity’smoney
possesses generalised debt-discharg-
ing power and, when it functions
successfully, generalised purchasing
power. The first of these powers is
grounded in money’s property of be-
ing positioned as component of a
community’s system of value ac-
counting in a manner such that its
uses are governed by a specific set of
community-accepted rights and ob-
ligations, in particular that debtors
have a right to discharge their debts
using the money and the correspond-
ing creditors have an obligation to
accept the money when offered. The
second of these powers, i.e., gener-
alised purchasing power, is grounded
inacommunity’strustinitasastable
form of liquid value, a trust that, typ-
ically at least, is grounded in turn in
the trust-instilling capacity of money
backed up by the support of the state-
backed banking system.
4. This terminology is fine, as long as these terms are always taken to distinguish forms of money (rather
than debt).

13
D.the possibility of Forms
of Cryptocurrency as Money
It follows that there are two basic properties that must
be possessed by a form of cryptocurrency that is to
function successfully as a community’s money. First it
must be accepted throughout the community as being
a component of its system of value accounting and its
use is governed by rights and obligations that serve to
render it a general means of payment. Second, the mon-
ey so formed must be trusted as a stable store of liquid
value, grounding the property of it being a general form
of purchasing power. The basic question to pursue,
then, is whether systems based on forms of cryptocur-
rency can be devised wherein these two basic conditions
are met.
If the latter are identified as the essential features of a
successfully functioning money, the forgoing outline
does also point to additional factors to consider. For
example, all cases of money have been seen to take the
form of a component of a community’s system of value
accounting closely related to other components of the
same system. This being so, it may be the case that, in
order to replace one form of community money with
another, it is necessary to replace or transform other
internally related components of the system of value
accounting. For example, had the UK joined the Euro-
pean Monetary System, then not only would a different
form of central bank debt have been involved, but the
markers of money referred to as cash would have
changed, as indeed would the unit of account (from
pounds sterling to euros).
Forms of cryptocurrency do indeed come as (sub)
systems in themselves. To consider the most famil-
iar case, that of Bitcoin, it seems this label is indeed
best used for a whole subsystem rather than any one
component. In actual practice the term Bitcoin tends
to be used variously: for the proposed system as a
whole, a revised unit of account, and both a money
position and its occupant (to the extent that they are
distinguished).
An additional matter to consider is the nature of the
community for which the money is intended. For, with
all social phenomena being found to be community-rel-
ative, the possibilities of a form of cryptocurrency
being accepted as money will depend on the specific
community that is being considered. The central focus
here is a national community like the UK. But it may be
that forms of cryptocurrency can serve, and perhaps
have already served, as money in some relatively small
communities, especially illegal ones concerned with
activities like the buying and selling of illicit goods
online.
At present, general acceptance in modern national or
international communities requires authorisation by
central authorities. Fundamental to the monetary
workings of such communities at present are banking
systems that issue, seek to control/regulate, and en-
deavour to maintain a stable value of, money. Prima
facie, developments like Bitcoin not only do not make
any appeal to regulators and bankers, but the very
reason for their design is to bypass them, to leave these
institutional factors out of the value accounting system
entirely. At the heart of it all is a desire to create a
peer-to-peer electronic system of buying and selling
that does not require the necessary mediation or in-
tervention of any financial institution or other agency.
As Nakamoto (2008) indicates in the opening sentence
of the paper introducing bitcoin:

14
“A purely peer-to-peer version of
electronic cash would allow online
payments to be sent directly from
one party to another without going
through a financial institution
– Nakamoto, 2008, p.1
”

15
To gain general acceptance, then, any such proposed
cryptocurrency system must prove to be either 1) so
widely popular or backed by organisations so powerful
(as is presumably the intention, for example of Face-
book’s Libra, with the proposed launching of its own
global cryptocurrency backed by significant assets) that
the state or states involved is/are unable to resist it; or
2) adapted/oriented so as to work through existing fi-
nancial and government institutions, in which case its
use would not be, as originally intended, to displace
existing institutions and processes but to facilitate the
working of the existing systems in some way.
More can be said too on the task of achieving trust. As
noted, an essential challenge is to achieve a situation
wherein a form of cryptocurrency is trusted as a stable
store of liquidity. This is the central form of trust to be
achieved. However, other forms are essential too, al-
beit in ways, or for reasons, that depend on the partic-
ulars of the money form.
Certainly, all forms of money are open to abuse. Money
in the form of a positioned valuable commodity was
subject to clipping (the practice of cutting small pieces
from, especially, gold or silver coins, with cut-off piec-
es often used to make counterfeit coins; this being a
practice thought to be so undermining of the money
process of Britain in the seventeenth century that clip-
ping was deemed a matter of high treason, punishable
by death). And, there are continuous (more or less suc-
cessful) attempts to produce counterfeit versions of
modern cash. Further, with the rise of electronic records
of money, there are attempts to defraud through the
duplication of these records. Without institutional in-
tervention to prevent this under the current system, it
would be possible for one and the same electronic record
of money to be used to ground two or more expenditures
(the so-called double spending problem). Cryptocur-
rencies involve peer-to-peer verified blockchain tech-
nologies designed just to avoid this sort of fraud. Com-
munity participants must trust that such efforts are
usually successful.
But these context-specific and contingent technical
issues of trust generation aside, most significant of all
is whatever the form of money developed, there must
be a trust that the money so formed would prove to be
a stable form of liquid value. In the case of a form of
cryptocurrency, with no pre-existing record of attained
trust (prior to its being positioned as money, were this
to happen), and with potentially the displacement of
all (state or bank) administrators who under the current
system help stabilise a money’s value through regulat-
ing actual transactions, the task of attaining the req-
uisite sort and levels of trust would not be straightfor-
ward. Specifically, the task of creating a form of
cryptocurrency that could be, and prior to positioning
would be expected to be, a stable form of liquid value
is a significant challenge.
One final matter that might be raised here is the ques-
tion of whether more than one form, and if so, how
many forms, of cryptocurrency could simultaneously
be constituted as money. For, if one form managed to
overcome all the obstacles including acceptance by the
state (and so for example accepted by the state as a
means of discharging tax debts) then presumably many
forms could do so.

16
Money is commonly identified as that component of a
community’s system of value accounting that is accept-
ed throughout the community to serve as a general
means of payment and, when functioning successfully,
as a general form of purchasing power. Its property of
being a general means of payment is grounded in the
money being accepted as a component of the system,
governed by a specific set of rights and obligations that
work precisely to ensures that it serves this function.
Typically, this allocates to debtors the right to have
their debts settled by handing over money (of the ap-
propriate value) and to creditors the obligation to accept
it. Money’s property of possessing generalised pur-
chasing power is grounded in the community’s trust in
it as a stable form of liquid value. Such trust, in part,
has typically been achieved by positioning money a
specific kind of thing that has the capacity to instil this
trust. How this works in practice is contingent and
varies over time.
The challenge, then, for those seeking to render form(s)
of cryptocurrency as money lies both in getting it po-
sitioned as a legitimate general means of payment
(governed by relevant rights and obligations ensuring
this) and so also trusted in the sense that if positioned
as money it can serve as a store of liquid value.
e. conclusion
Click on the link below to get access to your future money via crypto

17
a brieF
history
oF Money
in the 20th
century
chapter
2

18
Source: steemit.com, 2017.
the
evolution
of money
to understand money in the 21st
century, it is helpful to understand its
recent history. the twentieth century was notable in that it witnessed the
collapse of two international monetary regimes. these are especially prev-
alent in the context of ‘cryptocurrencies’, which adopt aspects of the gold
standard and revive arguments from the Austrian School of economics,
notably Hayek’s currency competition and Fisher’s Chicago plan.

19
Money in the 20th
century can broadly be divided into
three parts: 1900–1933 when the international gold
standard ensured that money was backed by the pos-
session of physical gold, 1934-1971 when the dollar
devaluation and the Bretton Woods System emerged,
and 1972-1999 when fiat money was introduced and
adopted (Mundell, 2000).
tHe GoLD StANDArD erA (1900–1933)
–
Under the gold standard, money is backed by the value
of physical gold held by a country. Because a given
amount of paper money can be converted into a fixed
amount of an underlying physical asset, in this case
gold, countries on the gold standard are prevented from
increasing the supply of paper money in circulation
without also increasing their holdings of gold reserves.
This system was effective in preventing any irrespon-
sible governments from taking advantage of their mo-
nopoly on money by printing too much of it. This al-
lowed holders of that money to feel that the value of
their paper money was ‘insured’, or ‘collateralized’ by
the underlying gold that backed it.
While the gold standard was generally regarded as an
essential source of economic trust and prosperity in the
late 19th
and early 20th
century, deflation and depression
in the 1930s revealed some of the defects of the inflex-
ibilities in the gold standard. To understand why the
gold standard was abandoned, it is important to under-
stand the deflationary bias of the gold standard, which
triggered deflation and depression in the 1930s. During
the gold standard era, gold flowed across different coun-
tries. As a result, some countries possessed more gold
than necessary for conversion against its total money
supply, in accordance to the fixed conversion ratio (the
gold-surplus countries), while others possessed less
than required (the gold-deficit countries). Economic
historian Peter Temin pointed out an asymmetry be-
tween gold-surplus and gold-deficit countries in their
monetary response to gold flows (Temin, 1989).
Since gold-deficit countries had more money supply
than could be supported by their gold reserve, they were
forced to reduce their money supply and deflate; failing
to do so could trigger people to worry about the con-
vertibility of their domestic currency, scramble for gold,
and would eventually lead to a complete loss of gold
reserves in the country. Hence, gold-deficit countries
faced plenty of incentive to deflate their currency to
prevent devaluation. On the other hand, gold-surplus
countries had insufficient money supply for conversion
against their gold reserve. To prevent undervaluation
of their domestic currency given the fixed conversion
ratio, they were supposed to expand their money supply
and inflate. The asymmetry was that no sanctions pre-
vented gold-surplus countries from sterilizing gold
inflows and accumulating gold reserves indefinitely.
Such asymmetric dynamics led to a deflationary bias
in the gold standard. The bias was not obvious during
the pre-war periods, since the gold standard was cen-
tred around the operations of Bank of England, which
as a profit-making institution strived to avoid gold
accumulation as opposed to interest-paying assets.
However, WWI led to the decline of British economy.
Meanwhile, as economic historian Barry Eichengreen
showed, the two major gold-surplus countries of the
interwar periods, the United States and France, did
a.the Gold standard and the
Adoption of Fiat Money

20
little to avoid gold accumulation (Eichengreen, 1986).
As a result, the deflationary bias of gold standard
began to manifest itself by the end of 1920s.
tHe GreAt DepreSSIoN (1930S)
–
There exists a great deal of literature focusing on the
gold standard as a mechanism that “turned an ordinary
business downturn into the Great Depression.” (Eichen-
green and Temin, 1997, p.1) argue that “the most im-
portant barrier to actions that would have arrested or
reversed the decline was the mentality of the gold
standard” which “sharply restricted the range of ac-
tions they were willing to contemplate.” The result of
this cultural condition was “to transform a run-of-the-
mill economic contraction into a Great Depression that
changed the course of history” (Eichengreen and Te-
min, 2000, p.183). This was largely due to a reliance
on the tested usefulness of past money and risk aver-
sion when it came to new methods of creating and
managing money.
Former chair of the Federal Reserve Ben Bernanke and
economic historian Harold James proposed a financial
mechanism in which deflation can trigger economic
recession. For example, bank liabilities such as deposits
are fixed in nominal terms, whereas bank assets such
as debt instruments are fixed in real terms. In this case,
deflation reduces the value of bank assets dispropor-
tionally and heightens pressure on the bank capital. In
response, banks call in loans or refuse new ones, in turn
worsening the positions of borrowers. But borrowers
such as firms may lay off workers or curtail investments
to improve their financial positions, contributing to an
economic recession.5
Unfortunately, the United States
and other countries on the gold standard could not ex-
pand their money supplies to stimulate the economy.
Such unbearable inflexibility led Great Britain to drop
the gold standard in 1931, influencing many countries
to follow shortly thereafter.
tHe BrettoN WooDS erA (1934-1971)
–
Influenced by economist and presidential advisor George
Warren, the United States adopted a flexible exchange
rate in 1933 for one year and devalued the dollar. It was
expected that the lower exchange rate would boost the
competitiveness of US products in the world economy,
assisting economic recovery. The rise of the price of gold
was also expected to raise the import price and thus the
domestic price level, as a measure to counter the defla-
tion problem. As a result, the wholesale price level in
the United States did increase by almost 30 percent
between 1933 and 1937. With the official price of gold
raised by 69% to $35 an ounce, the United States restored
pegging its currency to gold in April 1934.
In 1936, the United States, Britain, and France signed
the Tripartite Accord establishing new rules for ex-
change rate management. These new arrangements
were eventually ratified at Bretton Woods in 1944. The
monetary system become a gold-dollar standard where-
by the United States pegged the price of gold, and the
rest of the world pegged their currencies to the dollar
(Bordo, 1995). Consequently, the US dollar emerged as
a key reserve currency for the rest of the world, substi-
Image Source: https://perspectivesofww2.weebly.com/before-wwii.html 5. See Bernanke and james 1990.

21
tuting for scarce gold as an international unit of account,
medium of exchange, and store of value.
For the system to operate smoothly it was crucial that
the United States maintain stable monetary and fiscal
policy, which occurred until the 1960s. Based on Keynes-
ian philosophy, the Kennedy and Johnson administrations
prioritized increasing US growth and reducing unem-
ployment below 4% using aggregate demand manage-
ment policies by expanding the fiscal deficits. Meanwhile,
the chairman of Federal Reserve William Martin, in the
1950s and 1960s prioritized cooperation with government
administration over central bank independence. In re-
sponse to the Kennedy tax cut, and the build-up of gov-
ernment expenditure for the Vietnam War and the John-
son’s Great Society programs, the Federal Reserve
deployed expansionary monetary policy to accommodate
one half of the increase in the fiscal deficit. This led to
the steady increase in US inflation rate in the 1960s.
Martin pursued a contractionary monetary policy right
before he left the Federal Reserve, which contributed
to a recession during the Nixon administration in 1970
and soaring unemployment. Economic historian Mi-
chael Bordo argued that Nixon’s perception of why he
lost the 1960 election to John Kennedy had triggered
his paranoia about the political consequences of rising
unemployment. This in turn led Nixon to apply im-
mense political pressure onto the new Chairman of
Federal Reserve Arthur Burns to reverse Martin’s pol-
icies and expand money growth in 1971 (Bordo, 2018).
The rekindled US inflation contributed to the under-
valuation of gold. Under the significant balance of
payment deficit of the United States since WWII, Nixon
feared that the British would convert their dollar hold-
ings into gold and threaten the US gold reserve. As a
result, Nixon announced his New Economic Policy on
15 August 1971, closing the US gold window and effec-
tively declaring the death of the Bretton Woods System.
tHe FIAt MoNey erA (1972-preSeNt)
–
Fiat money is a medium of exchange that is neither a
commercial commodity nor title to any such commod-
ity. It is “not convertible by law into anything other
than itself and has no fixed value in terms of an objec-
tive standard” (Keynes, 1930). The value of fiat money
is derived from a premium based on a collective trust
in the continued existence and stability of the entity
issuing it. In simple terms, the difference between the
cost of producing money and its value to people who
own it is the trust they place in it.
The fiat money era solved many of the problems of the
gold standard era by allowing policymakers greater
levels of flexibility to adapt to economic circumstances
and/or influence the economic decision making of
households and corporations. The adoption of fiat cur-
rencies effectively expanded the central banker’s tool-
box to allow adjustment of the supply of money through
interest rates and capital reserve requirements.
Nevertheless,thefiatmoneyeraalsoopenedopportunities
for abuse by irresponsible policymakers – under the gold
standard, policymakers were forced to demonstrate own-
ership of an underlying asset (gold) that could act as collat-
eral against the paper money they printed. Fiat money,
however, is uncollateralized and thus is only as valuable as
people believe it to be. This potential for abuse was recent-
ly summarized by the Governor of the Bank of England:
Image Source: http://content.time.com/time/business/article/0,8599,1852254,00.html

22
Episodesofextremeinflationcausedbyirresponsiblepolicymakersaredottedthroughouthistory,oftencausinglong-last-
ing economic hardships on a country’s population, due to the irresponsible printing of new money (often to finance gov-
ernment debt). A few well-documented cases are shown below (Zimbabwe) and to the right (Mexico, Brazil, Venezuela).
6. Speech given by mark Carney, governor of the Bank of england to the inaugural Scottish economics Conference, edinburgh university (2 march 2018).
“Most forms of money, past and present, have nominal values
that far exceed their intrinsic ones. And this gap has meant
that money has a long and sorry history of debasement. over
the centuries, forms of private money, such as the notes
issued by American banks during the free banking of the 19th
century, have inevitably succumbed to oversupply and
eventual collapse.
– Mark Carney, 2018 6
”
date
Month-over-month
inflation rate (%)
year-over-year
inflation rate (%)
march 2007
april 2007
may 2007
june 2007
july 2007
august 2007
September 2007
october 2007
november 2007
december 2007
january 2008
February 2008
march 2008
april 2008
may 2008
june 2008
july 2008
august 2008
September 2008
october 2008
november 2008
Notes: The Reserve Bank of Zimbabwe reported inflation rates for March2007–July 2008. The authors calculated rates
for August 2008–14 November 2008. Sources: Reserve Bank of Zimbabwe (2008a) and authors’ calculations.
50.54
100.7
55.40
86.20
31.60
11.80
38.70
135.62
131.42
240.06
120.83
125.86
281.29
212.54
433.40
839.30
2,600.24
3,190.00
12,400.00
690,000,000.00
79,600,000,000.00
2,200.20
03,713.90
4,530.00
7,251.10
7,634.80
6,592.80
7,982.10
14,840.65
26,470.78
66,212.30
100,580.16
164,900.29
417,823.13
650,599.00
2,233,713.43
11,268,758.90
231,150,888.87
9,690,000,000.00
471,000,000,000.00
3,840,000,000,000,000,000.0014
89,700,000,000,000,000,000,000.00
Source: Hanke and Kwok, 2009.
zIMBABWe’S HyperINFLAtIoN

23
7. rebased by author to reference
year.
INFLAtIoN IN BrAzIL (1981 – 1995)
year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
% change (inflation)
n/a
95.66
104.80
164.00
215.28
242.25
79.66
363.41
980.22
1972.91
1620.97
472.69
1119.09
2477.15
916.43
22.41
CpI (1980=100)
100
195.66
400.71
1057.87
3335.25
11414.84
20507.49
95034.50
1026582.74
21280159.75
366224414.23
2097313107.45
25568186003.62
658930002302.86
6697581091643.00
8198434012165.97
INFLAtIoN IN VeNezUeLA (2010 – 2024) 7
year
2010
2011
2012
2013
2014
2015
2016
2017
2018*
2019*
2020*
2021*
2022*
2023*
2024*
27.36
28.987
19.527
52.662
64.687
159.693
302.637
968.95
1,555,146*
10,000,000*
10,000,000*
10,000,000*
10,000,000*
10,000,000*
10,000,000*
CpI (2010=100)
100.00
128.99
154.17
235.37
387.62
1006.61
4053.00
43324.58
673803764
67381050226261
6738172403899950000
673823978584751000000000
67383071684689000000000000000
6738374551764070000000000000000000
673844193550962000000000000000000000000
TaBLe 1
Select episode of High Inflation
*Forecast Source: IMF World Economic Outlook, April, 2019.
INFLAtIoN IN MexICo (1981 – 1995)
year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
n/a
27.414
98.9
80.701
59.184
63.739
105.755
159.174
51.657
19.697
29.93
18.795
11.938
8.009
7.051
51.966
CpI (1980=100)
100
128.125
254.6875
459.375
731.25
1196.875
2464.063
6384.375
9682.813
11590.63
15059.38
17890.63
20026.56
21629.69
23154.69
35187.5
The global adoption of fiat
currency, together with
free capital mobility and
diminishing cross-border
information and transac-
tion costs, also paved the
way for the modern pro-
cess of currency competi-
tion anticipated by the
Nobel laureate economist
Friedrich Hayek.

24
b. currency competition and
the chicago plan
hayek and currency coMpetition
–
Throughout the 20th
century, money creation remained
a monopoly of government/central banks and commer-
cial banks. History has taught us that a monopoly on
money coupled with irresponsible policymakers and/or
commercial bankers under a fiat currency monetary
system can create dire consequences for the populations
they govern. Hayek argued that competition would
alleviate this problem by producing “good money”. This
was attributed to the idea that competition is a discov-
ery process with constant experimentation in which
various improvements are offered to users of money
(Hayek, 1978b). Of necessity, such improvements are
subjective and dependent on changeable market opin-
ions and demands. As a result, economist Anthony
Endres suggests that there may be no point in drawing
a sharp distinction between what is money and what is
not; competition over different forms of monies should
result in discoveries, modifications and service inno-
vations that no one currency producer anticipates or
intends (Endres, 2009). It would be unconvincing to
suppose that currency was invented in a manner that
determines its properties and use for all times and
places. This viewpoint led Hayek to question the use-
fulness of any international agreement to adopt a mon-
etary management system:
Why should we not let
people choose freely what
money they want to use? …
the best thing we could
wish governments to do is
for, say, all the governments
of the Atlantic Community,
to bind themselves
mutually not to place nay
restrictions on the free use
within their territories of an
another’s – or any other –
currencies, including the
purchase and sale at any
price the parties decide
upon, or on their use as
accounting units.
– Hayek, 1978a.
“
”

25
Since currencies issued by governments pursuing re-
sponsible monetary policy would tend to displace grad-
ually those of a less-reliable character, competition
would “impose the most effective discipline on govern-
ments” for the appropriate management of the quan-
tity of currency in circulation (Hayek, 1978a, p.21),
protecting money from political manipulations such as
those of Nixon and Burns. To avoid the inflationary bias
inherent in any international monetary policy coordi-
nation, Hayek suggested that national currencies should
be related by a system of flexible, market-determined
exchange rates, and individuals should be allowed to
substitute between various currencies without govern-
ment prohibition. As evidence, economist Benjamin
Craig showed that the Russian monetary authority in
the 1990s was induced to target a lower level of inflation
as dollars were increasingly held and used illegally by
residents (Craig, 1996).
As every currency is potentially capable of playing a
role as an international vehicle for quoting prices and
settling trades across national borders, Harvard polit-
ical economist Benjamin Friedman sees that the dimin-
ishing effectiveness of national monetary policies are
inevitable, if not desirable. Diminishing loyalty to any
single central-bank-issued money, the growth of non-
bank credit, and technological advances are weakening
the monetary control of central banks (Friedman, 1999).
In recent years we have already witnessed the emer-
gence of various global digital currencies, in line with
the claim of economic historian Charles Kindleberger
who argued that the market will create additional mon-
ey to suit it’s needs and where official sources limit it’s
supply, the market will react by producing more (Kind-
legerger, 1989).” It seems the discovery process of cur-
rency competition envisioned by Hayek has been in full
force, and we are to expect more discoveries from pri-
vate innovation in the dynamic process of opinion
formation in the market.
Critics of Hayek have argued that bad money will drive
out good money. This has become known as Gresham’s
Law, which argues that when two forms of commodity
monies are in circulation, and both are accepted as
legal tender with the same face value, the intrinsically
more valuable money will gradually disappear from
circulation as people hoard their ‘good money’ and
spend their ‘bad money’. The principle was demonstrat-
ed in the United States when older half dollar coins with
90% silver were hoarded and melted down by the pub-
lic after the government had introduced newer ones
with only 40% silver in 1965. These newer coins even-
tually also disappeared from circulation when the
government gave up including any silver in half dollar
coins in 1971. This shows that legal tender laws could
motivate buyers/debtors to offer only money with the
lowest commodity value (bad money), since sellers/
creditors are required by laws to accept such money at
face value.
In absence of effective legal tender laws, Gresham’s Law
could also work in reverse. This was demonstrated in
post-WW1 Germany when consumers fled from cash to
hard assets as circulating medium of exchange after
the hyper-inflation in 1922 (a similar trend was ob-
served during the hyper-inflation events in Zimbabwe).
Given the choice of what money to accept, sellers/cred-
itors can now demand only money with the highest
long-term value, further reducing the acceptability and
value of bad money. This coincides with Hayek’s insight

26
$ 900
$ 1,000 $ 900
$ 810
$ 810 $ 729
that when government does not intervene in people’s
choice of money in transaction, competition naturally
produces good money. Robert Mundell therefore propos-
es modifying Gresham’s Law into “bad money drives out
good if they exchange for the same price.” (Mundell, 1998)
the Fractional reserve systeM
–
As the international monetary system evolved in the
20th
century, fractional reserve banking has remained
widespread. In fact the practice dates as far back as the
1300s, 8
but is not well understood by the public or ac-
ademic textbooks.
The fractional reserve system is a banking system in
which all depository institutions-commercial banks,
credit unions and other banks—are required to main-
tain reserves against transaction deposits, which
include demand deposits, negotiable order of with-
drawal accounts, and other highly liquid funds. Re-
serves against these deposits can take the form either
of currency on hand (vault cash) or balances at the
Central Bank.
8. See Bardi and peruzzi, 1345; pisano and Tiepolo, 1584; Bank of amsterdam, 1791; goldsmiths, 1630.
1.
deposit
2.
loan
3.
spend
reserve
$ 100
reserve
$ 90
reserve
$ 81
at this point
tHere IS $1,900
in tye systeM.
the bank has
$100.
at this point
tHere IS $2,710
in tye systeM.
the bank has
$190.
at this point
tHere IS $3,439
in the systeM.
the bank has
271.
to loan
$ 900
to loan
$ 810
to loan
$ 729
bank
bank
bank
rinse & repeat FroM step 1...
rinse & repeat FroM step 1...
FIgure 1 the basic Fractional reserve banking cycle
Source: altexploit.wordpress.com, 2017.

27
Fractional reserve banking
can be simply explained using
the scenario to the left where
1,000 units of central bank
issued ‘base money’ is depos-
ited at a commercial bank.
Where the bank is required to
hold a percentage (10 in this
case) of their loan liabilities in
reserves, they can loan out
900 units backed by a 100-unit
deposit (first row). If we sup-
pose that the household tak-
ing the loan purchases a house
from another household, the
house seller will likely depos-
it those funds back in the
bank. In this case, the bank
can again lend out 90% of
those new deposits (second
row). As this cycle continues,
the amount of ‘broad money’
in the economy grows signifi-
cantly (second and third row).
In the last row, there is now
3,439 units of total money in
the economy from the initial
1,000 units in central bank-is-
sued money.
To give a practical example, in
the UK about 97% of the broad
money supply is made up of
uncollateralized loans, with
only about 3% supported by
actual cash. This system comes
with both advantages (more
liquidity for small businesses
and households) and disadvan-
tages (the moral hazard prob-
lem and boom-bust cycles).
Central banks still maintain
control over the supply of mon-
ey but this is through a combi-
nation of influencing interest
rates and setting capital re-
serve requirements and ade-
quacy ratios.
FIgure 2
Money creation by the aggregate banking sector
making additional loans (a)
Source: Mcleay et al., 2014.
Reserves
Currency
Reserves
Currency
deposits
Currency
deposits
Currency
before loans are made
Assets
Assets
Assets
Assets
Assets
Assets
Liabilities
Liabilities
Liabilities
Liabilities
Liabilities
Liabilities
central bank (b)
commercial banks (c)
consumers (d)
non-money
deposits
non-money non-money
deposits
non-money
Base
money
Broad
money
Broad
money
Base
money
Reserves Reserves
Currency Currency
new
loans
new
deposits
new
deposits
new
loans
after loans are made
(a) Balance sheets are highly stylised for ease of exposition: the quantities of each type of
money shown do not correspond to the quantities actually held on each sector’s balance
sheet.
(b) Central bank balance sheet only shows base money liabilities and the correspond-
ing assets. In practice the central bank holds other non-money liabilities. Its
non-monetary assets are mostly made up of government debt. Although that
government debt is actually held by the Bank of England Asset Purchase Facility, so
does not appear directly on the balance sheet.
(c) Commercial banks’ balance sheets only show money assets and liabilities before any
loans are made.

28
Much like the move from the gold standard to fiat mon-
ey, fractional reserve banking relies on an uncollater-
alized reliance on public trust – as long as there are no
runs on the bank, fractional reserve banking can func-
tion well, with commercial banks creating new money
through uncollateralized loans to finance innovative
new companies. The flexibility in creating loans and
money facilitates business borrowing and investment,
hence further expanding economic activities during
booms. However, fractional reserve banking is a dou-
ble-edged sword: the very same flexibility can also
aggravate economic contraction during busts.
To understand the mechanism, notice that money (de-
mand deposits) in a fractional reserve banking system
is either backed up by cash or created through bank
loans. Whenever a bank loan is repaid, the total amount
of cash remains unchanged. A reduction in bank loan
hence implies a reduction of money supply in the system.
In other words, bank loan reduction – either by repay-
ment or declaration as bad debt - destroys money.
The negative effect of such monetary contraction chan-
nels was demonstrated in the United States during the
Great Depression. As the stock market crash in October
1929 made it difficult for businesses to repay their loans,
the balance sheets of many US banks eroded. To satis-
fy the legal reserve requirement, these banks had to
call loans to reduce their demand deposits, which led
to even more bad debt, given many businesses were
already experiencing financial difficulty. As a result,
panics spread and generated the first wave of bank runs
in late 1930, with 352 banks failing in December 1930
alone.
the ultimate constraint on money creation is
monetary policy. By influencing the level of
interest rates in the economy, the Bank of
england’s monetary policy affects how much
households and companies want to borrow. this
occurs both directly, through influencing the loan
rates charged by banks, but also indirectly
through the overall effect of monetary policy on
economic activity in the economy. As a result, the
Bank of england is able to ensure that money
growth is consistent with its objective of low and
stable inflation.
– Mcleay et al., 2014.
“
”

29
Debt
Deflation
Through the mechanism explained above, money sup-
ply contracted substantially, leading to debt deflation
and further bad debt. The contagion of fear and prop-
agation of bank runs continued until Spring of 1933,
in total cutting the price level in the United States by
half and destroying eight billion dollars or one-third
of demand deposits in the United States. Having ob-
served this vicious cycle during the Great Depression,
Nobel laureate economist Irving Fisher proposed the
Chicago Plan as a way insure 100% of reserves.
the chicaGo plan
–
The origins of the Chicago Plan can be attributed
back to the United Kingdom where the 1921 Nobel
Prize winner in chemistry, Frederick Soddy shifted
his focus to the inefficiencies and unfairness inher-
ent in fractional reserve systems of ‘virtual wealth’
(Soddy, 1933). The ideas of Soddy were embraced by
Professor Frank Knight in 1927 at the University of
Panics
anD bank
runs
mass loan
Default
Chicago. In practice, however, the challenges of frac-
tional reserve banking are made clear only during
times of panic or financial crises. In the aftermath
of the Great Depression, a significant conglomerate
of University of Chicago economists, along with
prominent monetary economist Irvin Fisher at Yale,
supported Knight’s proposals to reform the financial
system and sent a detailed memorandum to President
Roosevelt in November 1933 (see Simons et al.,1933).
Following the Great Depression, Fisher envisioned
the Chicago Plan as “a way to use monetary policy
to affect debtor-creditor relations through reflation,
in an environment where, in his opinion, over-in-
debtedness had become a major source of crises for
the economy”. (Benes and Kumhof, 2012). Fisher was
a pioneer in advocating for the requirement of a 100%
cash reserve behind all demand deposits, a proposal
subsequently known as the Chicago Plan (Fisher,
1936; Simons, 1946). Fisher observed that the volume
of demand deposits was highly unstable because of
the fractional reserve banking system. By eliminat-
contraction
of money
suPPly
erosion
of bank
balance
sheet

30
ing the possibility of bank runs, he believed the
proposal would speedily and permanently prevent
an economic recession from spiralling into depres-
sion by i) increasing control of sudden increases and
contractions of bank credit and of the supply of
bank-created money, ii) eliminating the possibility
of bank runs, iii) dramatically reducing the net pub-
lic debt and iv) dramatically reducing private debt
(as money creation would no longer require simulta-
neous debt creation) (see Tobin, 1985; Minsky, 1992,
1994; Benes and Kumhof, 2012).
In simple terms, under the Chicago Plan, all demand
deposits held by commercial banks must be matched
by an underlying asset such as cash. This means that
these banks cannot lend out customers’ demand de-
posits as they do under the fractional reserve system,
which would significantly decrease liquidity in 100%-
backed reserve countries (for example 97% of money
in the UK would need to be replaced with central bank
base money). As banks can only lend against proven
reserves, the risk of bank runs would vanish, so that
banks need not call loans during economic downturn
to worsen the liquidity of businesses. On top of resolv-
ing the coordination failure of banks during bad times,
banks could also benefit from such arrangements, as
more savings and time deposits would be brought to
banks due to freedom of the economy from great booms
and depressions.
More importantly, the government could regain its
sovereign power over money under the Chicago Plan.
By prohibiting banks from manufacturing the money
they lend, but still allowing banks to lend money as
they please, the government could nationalize money
without nationalizing banking. With a 100% cash re-
serve requirement, all the money on deposits now
fully belong to the depositors, so that banks act mere-
ly as their trustees or custodians. The absence of lever-
age in the Chicago Plan, Fisher believed, could there-
fore prevent the freezing of loans during a depression,
and effectively eliminate the management and domi-
nation of industry by banks during bad times. In the
words of Martin Wolf, chief economics commentator
at the Finance Times, this will end the “too big to fail”
for banking (Wolf, 2014).

31
We can get a better idea of the role that trust has come to play in money by examining four simple scenarios from
a balance sheet perspective.
The first scenario involves a transaction between the central bank and household under the gold standard (or any
other asset-backed money such as stablecoins). Because paper money is backed by physical gold (or another
valuable asset), this scenario does not require households to have an implicit trust in the central bank, as each
unit they borrow is backed by a unit of physical gold of the same value.
1. central bank prints 100 units backed by 100 units
oF Gold reserves and provides a loan to household 1
–
C. How does this fit into the
era of digital currencies?
central bank
Financial balance sheet
Financial assets
goLd
Loan
liabilities
money
+200
+100
+100
+100
+100
‘collateralizeD’
money
household 1
Financial assets
money
liabilities
Loan
+100
+100
+100
+100
central bank
Financial assets
goLd
Loan
liabilities
money
+100
0
+100
+100
+100
‘uncollateralizeD’
money
household 1
Financial assets
money
liabilities
Loan
+100
+100
+100
+100
trust
The second scenario involves a sim-
ilar transaction between the central
bank and a household under fiat
money. Because paper money is not
backed by physical gold, there is now
a difference between the cost of pro-
ducing the paper money and the
value to its users. This creates a pre-
mium (seignorage) which requires a
relationship of trust and confidence
in the issuing authority.
2. central bank prints 100 units Fiat currency and
provides a loan to household 1
–
In the third more realistic scenario,
the central bank lends 100 in fiat
currency to a commercial bank who,
under fractional reserve banking,
can lend out more money than they
hold on deposits (say 90%). In this
case there now exists several rela-
tionships of trust between commer-
cial banks, depositors, borrowers,
and the central bank.

32
3. CoMMerCIAL BANk BorroWS 100 UNItS FroM CB AND LeNDS 900 to HoUSeHoLDS 2, 3, AND 4
–
central bank
Financial assets
goLd
LoanS
liabilities
money
+100
0
+100
+100
+100
money
coMMercial bank
Financial assets
money
LoanS
liabilities
demand depoSITS
LoanS
+1000
+100
+900
+1000
+900
+100
money
household 2
Financial assets
money
liabilities
Loan
+300
+300
+300
+300
household 3
Financial assets
money
liabilities
Loan
+300
+300
+300
+300
household 4
Financial assets
money
liabilities
Loan
+300
+300
+300
+300
trust
trust
trust
trust
trust
At this point, there exists 100 units
in central bank (narrow/outer)
money, which requires a relation-
ship of trust between the central
bank and households, and 900 in
commercial bank (inner) money
which requires a relationship of
trust between households and com-
mercial banks. As noted above, the
only time where the vulnerabilities
are exposed in the fiat currency
fractional reserve system is when
trust in these institutions erodes.
Lastly, in scenario 4 we can impose
the Chicago Plan restrictions on
scenario 3, which now requires com-
mercial banks to hold an equivalent
value of assets to their liabilities
(demand deposits). In this case,
commercial banks would need to
borrow at least 900 units from the
central banks in order to fulfil the
100% reserve requirement.

33
5. bitcoin Miner 1 receives 100 units For solvinG a block
–
Comparing this with a peer-to-peer issued cryptocurrency, like Bitcoin, in scenario 5 no liability is created when
a bitcoin is mined. For example, the supply of bitcoin is increased by rewarding those who successfully validate
transactions making it a transaction and not a financial contract (as was the case with bank money). The issuer
is not an institution or entity and the currency is not backed by any authority. This creates a challenge when
accounting for Bitcoin. One option is to treat it like monetary gold, which is the only existing financial asset with
no liability. But as noted by the BOE,9
gold is a tangible asset that you can physically store.
central bank
Financial assets
money
LoanS
liabilities
money
+1000
0
+1000
+1000
+1000
money
coMMercial bank
Financial assets
money
LoanS
liabilities
demand depoSITS
LoanS
+1900
+1000
+900
+1900
+900
+1000
money
household 2
Financial assets
money
liabilities
Loan
+300
+300
+300
+300
household 3
Financial assets
money
liabilities
Loan
+300
+300
+300
+300
household 4
Financial assets
money
liabilities
Loan
+300
+300
+300
+300
trust
trust
trust
4. coMMercial bank borrows 1000 units FroM cb and lends 900 units to households
2, 3, AND 4 UNDer CHICAGo pLAN
–
Miner 1
Financial assets
money (BITCoIn)
liabilities
Loan
+100
+1000
0
0
creation oF bitcoin
reward alGorithM
with FiXed supply
(No FINANCIAL CLAIM
or LIABILIty)
money
trust
9. See the economics of digital Currencies – Boe Quarterly Bulletin 2014 Q3.
A second option, shown in scenario
6, used by stablecoins (i.e. Libra), is
to fully collateralize all digital mon-
ey with other liquid assets such as
high quality government and corpo-
rate bonds, in which case the scenar-
io is similar to that under the gold
standard from scenario 1, where
there is no need for a relationship of
trust to be created given the backing
of that digital currency by other high
quality financial assets.
Click on this link to get access to your future money via crypto

34
6. stablecoin cryptocurrency issuer creates 100
units backed by 100 units oF underlyinG assets and
sells to household 1
–
7. cryptocurrency owner 1 Makes transaction oF 100
with other network MeMber 2
–
Once cryptocurrencies have been acquired, users do not need rely on
trust between themselves or any institution to ensure its value because
of the collective security embedded in the blockchain technology. This
means that miner 1 can make transactions with miner 2 without any
requirement that they trust each other. (see scenario 7 below) Again,
this is similar to trading with physical gold (or under the gold standard)
but does not require a physical validation of the legitimacy of the gold.
Note that cryptocurrencies in this example are limited to transactions and not financial contracts. This means
that no financial relationships are created and no liabilities will exist on anyone’s balance sheet. In the case of
Bitcoin, these tokens are created by a mining reward algorithm and backed by the collective pool of people who
own it. If that collective pool loses trust in bitcoin, its value diminishes. In the case of stablecoins, the collective
pool is assured of the value of their currency by the holding of high-quality assets of equivalent value.
In summary the leveraged way in which money is currently being created has the potential to (again) destabilize
financial systems only when trust in those institutions erodes. These destabilizations often lead to short revivals
of Austrian school ideas regarding the role of money and banking in society (for example, Fishers seminal paper
following the Great Depression). It is likely no coincidence that the Nakamoto (2008) paper emerged at the same
time as the most recent financial crisis was occurring. In fact, one of the core motivations of Bitcoin’s creators
was the eradication of middlemen and/or money creators who profit from these activities.
diGital currency issuer
Financial assets
underLyIng aSSeTS
Loan
liabilities
money
+200
+100
+100
+100
+100
money
household 1
Financial assets
money
liabilities
Loan
+100
+100
+100
+100
diGital currency issuer
Financial assets
underLyIng aSSeTS
Loan
liabilities
money
+200
+100
+100
+100
+100
money
household 1
Financial assets
money
liabilities
Loan
+100
+100
+100
+100

35
Money
in the
21st
century
chapter
3

36
In its simplest form, “money is identified by what it
does”. Whatever form it takes, a traditional consensus
amoungst those who study the functions of money is
that it is must serve as unit of account, a means of
payment, and a store of value. From the opening
discussion, in order to fulfil these criteria, a successful
form of money must also be universally trusted by
buyers and sellers. In the context of digital currencies,
modern discussions and debates often confuse ‘money’
with ‘systems of payments’ or, the mechanism by which
transactions are processed and settled. In the context of
modern debates and confusion about digital vs. physical
money, it is important to distinguish between types of
money and systems of payments.

37
According to modern international standards, “broad
money” is defined as “all liquid financial instruments held
by money-holding sectors that are widely accepted in an
economy as a medium of exchange, plus those that can be
converted into a medium of exchange at short notice at,
or close to, their full nominal value.” 10
(IMF, 2016, p.180)
In a 21st
century context, these would include, fiat curren-
cies issued by central banks, short-term digital credit fa-
cilities (swaps, credit cards, paypal, googlepay, payday
loans, WePay, AliPay, M-Pesa, etc.), digital currencies is-
suedbyprivatesector/nonprofitsorcentralbanks(Bitcoin,
Libra, etc). From the discussion in Chapters 1 and 2, we
can begin by distinguishing currency types across five
attributes, including: i) who issues and backs the currency,
ii) how acceptable is the currency, iii) are there transaction
costs, iv) how stable is the value over time (inflation/de-
flation), and, v) is it digital/electronic or physical.
Each type of money has both benefits and drawbacks
in terms of its usefulness. For example, a credit card
(digital) is widely accepted but may come with trans-
action costs and is backed by a private sector corpora-
tion, while cash (physical) may be less widely accepted
but has no transaction costs and is backed by the central
bank. This is why many forms of money coexist. In fact,
it is not uncommon for people to use more than one
form of money in a given day/week, making some pay-
ments with cash (a central bank liability) and some
others with transfers or credit cards (which are private
sector forms of money). To get a better understanding
of current usage of types of money, we asked 1,000
respondents across eight countries (Argentina, Brazil,
France, Germany, Mexico, Spain, UK, USA) what types
of money they most commonly use. The results are
shown below.
A. types of Money
9. ImF monetary and Finance Statistics manual 2016.

38
Existing research has focused on the degree of centralization (issuer/backer), accessibility, and digital/physical
nature of money. For example, Berentsen & Schar (2018b) studied the different types of currencies and systems
of payments and their properties. In their research, they argue that Bitcoin specifically, but other decentralized
cryptocurrencies in general, use blockchain technology to present a unique type of currency. Each “coin” (unit
of money) is issued in a competitive setting and has both a virtual representation and a decentralized transac-
tion process. Because of these properties, decentralized cryptocurrencies like Bitcoin can be considered a fun-
damentally different type of money when compared to the traditional forms we are used to (commodity money,
cash, and others).
In their study of the different types of currencies, Berentsen & Schar (2018b) propose a control structure to vi-
sually represent these different types according to three dimensions. Figure 4 presents this control structure and
where in this visual classification different types of currencies are located.
Source: CGC, Cryptocurrencies and The Future of Money: International Survey.
FIgure 3
Use of Money types across Countries
use oF credit cards
use oF cash
use oF debit cards
use oF cryptocurrencies

39
FIgure 4
Control Structure of Currencies
As demonstrated in Chapter 2, it is important here to distinguish between narrow money that is created by
central banks from broad money created by commercial bank deposits and central bank cash. Both of these
centralized institutions make up almost all of money we currently use and act as clearing houses for almost all
of our money transactions (system of payments). A recent IMF report has argued that these “two most common
forms of money today will face tough competition and could even be surpassed. Cash and bank deposits will
battle with e-money, electronically stored monetary value denominated in, and pegged to, a common unit of
account such as the euro, dollar, or renminbi, or a basket thereof” (Adrian and Mancini-Griffoli, 2019, p.1).
Building on this and the work of other academics/institutions, the IMF has recently provided a further dissection
of money according to its ‘type’ (is it a claim on another entity or an object), ‘value’ (fixed, variable or a unit of
account), ‘backstopper’ (government, private sector), and, degree of centralization (‘technology’). From Figure
5 below, we can see that several types of digital money have already been widely adopted (AliPay, WeChat Pay,
M-Pesa), while others probably do not qualify as money based on our definition of broad money above.
Cash
Bitcoin
Commodity Money
Central Bank
electronic Money
Commercial Bank
Deposits
Central Bank
Cryptocurrency
Money
Creation
representation
physical
Centralized
decentralized
Virtual
transaction
Handing
monopoly
Competitive
hayek Money
gold, Silver, etc.
Central Bank money
MonopoliZed Money
Source: adapted from Bernsten and Schar, 2018a.

40
FIgure 5
types of Money in the Digital era
Thinking about this in the context of cryptocurrencies, these are interesting because they bring a combination
of new and old ideas about money. Firstly, ownership rights are managed in a decentralized network as argued by
Hayek using a distributed ledger (no backstop). Because of this, there is no central authority responsible for
managing currency ownership rights, ensuring price stability, and regulating illicit transactions. Blockchain
technology also has a decentralized accounting system where “miners” are the book keepers and no debtor/
creditor relationship (i.e. cryptocurrencies are not a liability on anyone’s balance sheet). This decentralized
management of ownership of digital assets is a fundamental innovation of Nakamoto (2008). More importantly,
the system of payments infrastructure envisioned by Nakamoto (2008) was created with the intention to disrupt
the current financial system, by affecting all business and government agencies that have monopolized the
creation of money in the 20th
century. With these new innovations in the early 21st
century, some writers have
argued that this will mark the death of cash.
Source: Adrian and Mancini-Griffoli, 2019.
decentralized (de)centralized decentralized
Type object
government private
Fixed Value
redemptions
unit of
account
Variable Value
redemptions
other
Value
Backstop
debit card
Cheque
wire
b-money e-money i-money central bank money cryptocurrency
alipay
wechat pay
M-pesa
none
prominent
paxos
usd-coin
trueusd
Gold-coins
libra?
cash cbdc public coins
(bitcoin)
Managed coins
(basis)
Technology
Types of
money
examples
Centralized decentralized Centralized decentralized decentralized
Claim

41
why replace cash?
–
In order to change a system, it helps to have a problem
with the existing one. This is a view shared by many
economists and policymakers who see physical cash
and existing digital money created by the central bank
and commercial banks as doing a pretty good job,
meaning there is no need to take unnecessary risks by
adopting an entirely new, and potentially risky, form
of money. So why has there been such a large push for
the adoption of digital currencies?
Some of the well-known downfalls of physical money
are the need for the buyer and the seller to be physical-
ly present at the same location, or have a geographical
connection to deliver the cash, which makes its use time
consuming and impracticable for online commerce.
Studies have also found
that physical cash is a
public health concern,
finding traces of faecal
matter, cocaine, heroine,
and bacteria (among
others) on dollar bills,
making it a good candi-
date for spreading dis-
ease across large popu-
lations, leading experts
to conclude that “if the
question of a cashless
society is approached
purely from a public
health standpoint, the answer seems clear” (Maron,
2017). 10
This would be especially important in low in-
come countries who are more vulnerable to epidemics.
Another drawback of cash relates to tax evasion and
the financial operations of illegal activities, which
have become increasingly salient since the publica-
tion of Panama Papers in 2015 and Paradise Papers
in 2017. Money laundering, financing of illegal ac-
tivities and tax evasion all pose a pervasive challenge
to society in both developing and developed coun-
tries. In his study of how physical cash is related to
the daily financing of these illegal activities, Sands
(2016) suggests an interesting approach in order to
fight these financial crimes. His proposal is to elim-
inate high denomination notes (he gives as examples
the €500 note, the $100 bill, the CHF1,000 note and
the £50 note). According to the author, these notes
are preferred in illegal activities, given the anonym-
ity and lack of transaction record in cash payment
system. Moreover, because they are of high value, it
is easier to transport and execute payments of large
value. By eliminating high denomination notes, it is
argued that we would make life a lot harder for those
perusing tax evasion, financial crime, terrorist fi-
nance and corruption. Without being able to use high
denomination notes, those engaged in illicit activi-
ties would face higher costs and greater risk of de-
tection. The author concludes that the benefits from
the elimination of such high denomination notes far
outperform the drawbacks. Given the availability
and effectiveness of electronic payment alternatives,
these high denomination notes play little role in the
B. the end of Cash?
“the money in
your wallet
might be
covereD with
PooP, molD,
anD cocaine”
– Tuttle, 2017.
10. See: maron, d. (2017). dirty money, Scientific american. https://www.scientificamerican.com/article/dirty-money/

42
functioning of the legitimate
economy, yet a crucial role in the
underground economy.
In “The Curse of Cash”, Rogoff
(2017) goes one step further.
While Sands (2016) advocates for
the eradication of high denomina-
tion notes, Rogoff (2017) advo-
cates getting rid of cash once and
for all. He extends the argument
of Sands (2016) by linking the in-
creasing amount of money in cir-
culation to the volume of cash be-
ing used for ta x evasion,
corruption, terrorism, the drug
trade, human traffic; in summary,
by all sorts of illegal activities.
Nevertheless, he expands the
benefits of eliminating cash to
monetary policy. If policy makers
not only eradicated high denomi-
nations, but all notes (except very
small denomination ones and
coins), Rogoff (2017) argues that
this would in fact increase the ef-
fectiveness of monetary policy by,
for example, allowing for negative
interest rates. The idea of Sands
(2016) and Rogoff (2017) that
physical cash makes the financing
of illegal activities significantly
easier cannot be ignored. In fact,
Brazil’s Car Wash operation, the
biggest corruption scandal ever
uncovered in history, showed that
companies involved in illegal do-
nations to parties developed very
sophisticated methods to raise
physical cash. They collected cash
from different small business,
sometimes even paying a premi-
um in order to hold cash, so that
they could use this cash to per-
form their illegal activities.
Cash, however, still maintains
some unique advantages in com-
parison to other existing types of
currencies discussed above. Users
of cash can remain anonymous, in
the case of stable advanced econ-
omies it is widely accepted/trust-
ed by sellers, and there is free ac-
cess to cash payment systems (no
transaction costs). Users of cash
also do not need to open bank ac-
counts or create a digital wallet to
use physical cash. Transactions
are final and people can engage in
trade even if they do not know or
trust each other. The electronic
money that we currently hold in
commercial banks, on the other
hand, involves counterparty risk,
requires the use of a bank account
and often has charges relating to
transactions (for example, trans-
fers to other accounts). 11
Berentsen and Schar (2018a)
believe that there is a great de-
mand for currencies issued by a
trusted party to save outside
the financial system. To prove
their point, they present the
number of Swiss Francs in cir-
culation as a fraction of GDP
from 1980 to 2017 (see Figure 6
below). We can see that after
the crisis the demand for Swiss
Francs increased significantly.
11. When we make a payment with a debit card, for example, we are exchanging a good or service by a claim from a private bank. This means that bank deposits are
a liability of the issuer and holders of bank deposits (current and savings accounts) are providing credit to their bank.
Source: Swiss National Bank and Organisation for Economic Co-operation and Development.
FIgure 6
Cash in Switzerland as fraction of GDp
swiss Francs in circulation as a Fraction oF swiss Gdp

43
This shift is explained as a move to
safety - the financial crisis and the
subsequent euro crisis have in-
creased the demand for cash exact-
ly because it is the most liquid asset
for savings outside of the private
financial system. In other words,
cash has been used as an insurance
against the insolvency of financial
institutions.
Further evidence of the growing de-
mand for physical cash issued by a
trusted backer was shown by a 2019
IMF Finance and Development arti-
cle (‘Boom in the Benjamins’) which
attributed a rise in $100 bills to an
increased global demand for the US
dollars as a safe haven, as well as its
ideal anonymous role in illicit trans-
actionsintheundergroundeconomy.
High denomination notes also offer
higher seignorage returns for the
Federal Reserve, making the $100 bill
the most profitable to print. This
combination of factors lead the au-
thors to conclude that American
dollar bills are not likely to dissipate
any time soon (Weir, 2019).
The extent that fiat money will be
used as an insurance mechanism
depends on the degree of trust that
holders of that money have in its
issuer. In this sense, Switzerland
and the US would be exceptional
cases where a run to safety resulted
in an increase in the demand for
cash in stable economies. Bech et al.
(2018) show that the amount of cash
in circulation has increased or re-
mained stable in a large number of
stable advanced economies (see
Figure 8). Although the value of card
payments has increase significantly,
Sweden is the only country where
the cash in circulation has actually
decreased between 2007 and 2016.
Source: Weir, 2019.
FIgure 7. Figure 7: us currency in circulation by bill type
(BNS oF NoteS)

44
what could replace cash?
–
As noted above, several centralized digital alternatives to physical cash have already become successful systems
of payments. For example, M-Pesa in Kenya (see Jack and Suri, 2014; Kaminska, 2015), AliPay in China, and
PayPal in the US (among many others). Cryptocurrency enthusiasts, central banks, and entrepreneurs are also
continually improving the design of blockchain-based digital currencies to rectify some of the practical defects
in previous designs. For example, Facebooks Libra will be backed by a portfolio of underlying assets and will be
managed to maintain price stability (a ‘stablecoin’) which was a key fault in Bitcoin’s ability to function as a true
currency. While these ‘updated’ cryptocurrencies still have practical drawbacks such as high fees, scaling issues,
and a lack of widespread trust, these problems could be improved upon over time with the emergence of large-scale
off-chain payment networks and transparent management. It is also important to remember that digital curren-
cies are still fiat money which relies on a relationship of trust between the issuer and the user.
Source: Bech et al., 2018.
FIgure 8
Card payments and Cash Demand, Change 2007-2016 (%GDp)
As a percentage of GDp
Value of card payments
cash
in
circulation
CArD pAyMeNtS AND CASH DeMAND, CHANGe 2007-16 *
* The start of an arrow represents 2007 data while the end represent 2016
10
Jp
ch
ea
se
us
au ca
Gb
20 30 40
0
5
10
15
20

45
what
are
Crypto-
currencies?
chapter
4

46
to understand cryptocurrencies,
we need to distinguish between
what they were envisioned to be
and what they currently are. the
ambition in Nakamoto (2008) was
to create a fair, borderless, and
secure currency that can be trans-
acted in a secure way across a net-
work of anonymous participants.
this stood on the shoulders of de-
cades of innovation in databases,
cryptography and network proto-
cols, which all combined to give the
innovation of blockchain technolo-
gy. From a technical perspective, the
real achievement of Bitcoin relies on
the coordination of the underlying
features of blockchain technology,
embedded with a pre-programmed
economic incentive scheme (akin to
a monetary policy).
Blockchain technology enables an exchange of trust via
a tamperproof, publicly auditable record of transactions
between parties with no requirement of a pre-existing
trust in each other or need for a central authority to
govern and manage the network. The initial underlying
philosophy behind the Bitcoin system (or broadly any
‘decentralised’ network) was to ensure that no one
entity can act to censor transactions or prevent per-
son(s) from joining the network. Rather, each partici-
pant in the network has a ‘voting’ right given they have
computational processing power. In the context of this
chapter, cryptocurrencies are any form of currency that
only exists digitally as part of a payment system that
has no central issuing or regulating authority and uses
a decentralised system to record transactions and man-
age the issuance of new units/tokens, and that relies
on cryptography to prevent counterfeiting and fraud-
ulent transactions. This definition excludes ‘Central
Bank Digital Currencies’ (CBDCs), which will be dis-
cussed in Chapter 5.

47
Cryptocurrencies are built on the principles of block-
chain technology or what is more accurately known as
distributed ledger technologies (DLTs). There are the-
oretically two types of DLTs, open and closed, more
formally, ‘permission-less (open)’ and ‘permissioned
(closed)’ blockchain.
perMissionless and perMissioned
blockchains
–
To understand the difference between permission-less
and permissioned blockchains, it is important to un-
derstand how the source code of the software applica-
tions is managed (that is to view code, copy it, learn
from it, alter it, or share it). Most cryptocurrencies are
based on decentralized permission-less blockchains,
including Bitcoin and Ethereum, whose transparency
is built on open-source code (accessible to everyone on
the network). Permission-less blockchain-based cryp-
tocurrencies allow anyone to access the Bitcoin code,
inspect it, copy it and improve it. (For example, click
here to see bitcoin source code).
Permissioned blockchains on the other hand are typi-
cally more centralized, closed systems, whereby there
is a known custodian of the blockchain network who
qualifies participants based on certain pre-defined
criteria in order to access and use the blockchain data.
Permissioned blockchains are typically used by large,
private groups of enterprise organisations who require
a great deal of trust, as they are likely to be using the
blockchain for its technological efficiency gains in spe-
cific use cases, as opposed to its economic digital cur-
rency features and capabilities.
A. principles of
cryptocurrencies
Source: Coindesk, 2019.
FIgure 9
permissionless and
permissioned Network
perMissionless
Anyone can join the
network, no need of
authorization
perMissioned
Need permission to join
the network
public
anyone
can apply
to join
private
open only to
some
o
P
e
n
c
l
o
s
e
D

48
ledGers
–
Ledgers have existed and evolved as a form of account-
ing for over a millennium. For example, ledgers were
found to be used by Mesopotamian’s (modern day Iraq)
as far back as 3200 BC to record expenditures, traded
goods and record accounts payable on Clay Tablets (kept
safe in temples, considered banks of the time). Then
ledgers were used in 633 BC by Persian civilisations as
an auditing tool to regulate the collection of alms
(wealth tax). During the Middle Ages, there was a scar-
city in gold across Britain, which caused a decline in
circulation of coins; as a result the Exchequer introduced
tally sticks as a physical proof of payment, whereby the
stick would be split in half. One half was kept as stock
by the payer (contract), and the other half as debt re-
tained by the Exchequer. Hence, when accounts were
audited, the pieces were fitted together to check they
‘tallied’. 12
By the 14th century, tally sticks had spread
across Europe, fundamentally acknowledging the emer-
gence of debt and contracts, which were used to pay
wages to workers and taxes to the state, and also traded
to buy and sell items, similar to coins. They were differ-
ent in that they also acted as an ‘IOU’ pledge, whereby
whoever issued the stock was liable to pay in gold who-
ever owned the other half of the stick. Thus, the stock
had a value in gold, and could be spent accordingly to
the same value of actual gold. Thus far, a ‘ledger’ is
defined as an information store that keeps a final and
definitive records of transactions, and a ‘transaction’ is
defined as a smallest unit of work process resulting in a
state change (ISO, 2008, definition 3.5).
By 1497 Merchants in Venice had advanced accounting
systems to create a new financial services industry. This
was captured by the Italian church father and mathema-
tician Luca Bartolomes Pacioli, who published the first
book on double entry system of accounting, highlighting
that any given new transaction fundamentally changes
either the debit or credit position of the account, to give
an actual value of a business. Other than advancements
in technology and general digitalisation, accounting and
bookkeeping have not really progressed beyond Excel
spreadsheets and have become more complex, which re-
quires qualified professionals to maintain accounting re-
cords across multiple accounts (ledgers).
From an accounting perspective, key advancements in
blockchain technology are the abilities for participants
to share one single synchronised, distributed ledger of
transactions, and for the underlying consensus protocol
(a set of rules) to successfully ensure each node on a
network agrees on the data being shared on the ledger.
networks
–
Blockchains, or DLTs, consist of a network of nodes, where
anetworkisdefinedasaninterconnectedsystemofthings.
The best way to understand the relationship between
nodesandnetworksisavisualrepresentationseeninFigure
11 where decentralized networks have multiple sources of
control and distributed networks distribute control equal-
ly across all participants in that network, whereas cen-
tralised networks have one central source of control.
12. See: Smithin, j. ed. (2000). What is money?
FIgure 10
historical evolution
of Ledgers
Source: Coindesk, 2019.
clay tablets
double entry
book keeping
spreadsheets distributed
ledger
papyrus tally sticks

49
In practice, most popular cryptocurrencies were designed to be payment
tokens which is the type that we will consider in the next sections.
The Rand Corporation described
these networks back in the 1960s
(Barand, 1964), describing the type
of interconnection between the
nodes and the type of information
flow between them for transaction
and/or the purpose of validation.
For efficiency reasons, systems have
historically been designed in a cen-
tralised manner. This centralisation
dramatically lowers the costs for
system configuration, maintenance,
adjustment (and the costs of arbi-
tration in case of conflict) as this
work must be performed only once
in a central place. While highly ef-
ficient in many situations, this kind
of systems induce a single (or very
limited set of) point(s) of failure and
suffers from scalability issues (Tas-
ca and Tessone, 2018).
In a highly centralised system, all
the nodes (and all the users on a
node) are connected to the central
node (a ‘dictator’ model). Most social
and monetary networks are cen-
tralised systems, where all partici-
pants have relationships with cen-
tralised hubs (i.e. a central bank).
However, the Internet was not real-
ly designed to be like that (i.e. for
centralised business models), rather,
for information to be decentralised
and accessible and not controlled by
one central hub. The distributed
network on the other hand, main-
token cateGories
payMent token
are synonymous with
cryptocurrencies
are intended to be used, now
or in the future, as a means of
payment for acquiring goods or
services or as a means of
money or value transfer
give rise to no claims on their
issuer
utility token
are intended to
provide access
digitally to an
application or
service by
means of a
blockchain-
based
infrastructure
asset token
asset tokens represent
assets such as a debt
or equity claim on the
issuer
Tokens which enable
physical assets to be
traded on the
blockchain also fall
into this category
token can change their qualifications over time (e.g. utility token can
become a payment token
tokens that fall within more than one category are qualified as a hybrid token
and need to comply with the requirements for all the involved categories
FIgure 11
Centralized,
Decentralized
and distributed
ledger
technology
FIgure 12
cryptocurrency token categories
tains a strong sense of locality with
no tiered hierarchy, critically mean-
ing if one node falters, the whole
network will not be taken out.
Both have advantages and disad-
vantages, making it hard to pre-
scribe a relative value to each ex-
treme end. The centralised system
is very efficient but more susceptible
to single-point failure (discussed
below) whereas a distributed system
is robust with no reliance on a cen-
tral authority, however it could take
a long time for data to pass across
the network. The main reference is
to understand some of the risks of
centralisation when applied to busi-
ness models, which give rise to the
motivation behind the creation of
crypto currencies.
We can think broadly about crypto-
currencies based on the economic
goals of the network (or protocals).
As will be shown in section C, there
are many types of blockchain based
tokens backed by different consen-
sus protocols, most of which fall
into one of three main categories:
Image Source: Baran, 1964.
Centralized Decentralized distributed

50
The motivation behind Bitcoin and other DLT appara-
tuses involves the application of cryptography to mon-
etary networks in order to eliminate trusted third
parties across messaging systems. Most people already
use cryptography when using internet applications, in
sending or signing off on packets of data or messages
(e.g. the https protocol for internet browsing or
Whatsapp for secure peer-to-peer messaging). Encrypt-
ed messages prevent observations from an intermedi-
ary, and signing preventing tampering of data have
eliminated the need to trust a third party to carry the
message, for example SMSs where data packets go
through centralised data exchanges usually adminis-
tered by Telcom service providers. When considering
the innovation of blockchain, it allows the same, the
elimination of third parties in financial transactions
through the use of payment tokens.
Some of the benefits of blockchain technology applied
to monetary systems are:
▷ Decentralisation – no single point of trust,
no single point of control (no central author-
ity), no single point of failure
▷ Security and Anonymity – non-repudiation
and irreversibility of records with pseu-
do-anonymous transactions.
▷ Transparency, Auditability, and Gover-
nance – anyone can join participants can
verify the veracity of records directly, without
external querying.
a decentraliZed Monetary systeM
–
In the original Bitcoin whitepaper, the author envi-
sioned Bitcoin becoming a digital payment system with
emphasis on a key innovation called ‘decentralisation’:
removing the need for a trusted third-party institution
in processing transactions, whose rules are enforced
by consensus, with anyone being able to participate.
Nakamoto frames the discussion around the trusted
third-party issue in economic terms, arguing that:
B. What were
cryptocurrencies
meant to be?
completely non-reversible
transactions are not really
possible, since financial
institutions cannot avoid
mediating disputes. the
cost of mediation increases
transaction costs, limiting
the minimum practical
transaction size and cutting
off the possibility for small
casual transactions, and
there is a broader cost in
the loss of ability to make
non-reversible payments
for nonreversible services.
“
”
Click on this link to get access to your future money via crypto https://www.digistore24.com/redir/325658/Mindy18/

51
The focal point here is not money itself, but the way
money is used and managed (system of payments),
specifically with no intermediation. In fact, cryptocur-
rencies have several similar characteristics to cash (low
transaction cost, quasi-anonymity). The key difference
envisioned by Nakamoto was the stripping out of a
centralized authority and clearing house for money,
instead having transactions verified by a global group
of participants using blockchain technology (similar
to Figure 11).
FIgure 13
centralised and distributed ledger
Monetary systems
Source: Ward, 2019.
centralized ledger
distributed ledger

52
As noted above, this change to the system of payments is the true innovation of Nakamoto, not money itself. This
was highlighted in a 2016 speech by the deputy governor of the Bank of England:
the main point here is that the important innovation in Bitcoin isn’t
the alternative unit of account – it seems very unlikely that, to any
significant extent, we’ll ever be paying for things in Bitcoins, rather
than pounds, dollars or euros – but its settlement technology, the
so-called “distributed ledger”. this allows transfers to be verifiably
recorded without the need for a trusted third party. It is potentially
valuable when there is no such institution and when verifying such
information on a multilateral basis is costly.
– Ben Broadbent, 2016.
“
”

53
Why Decentralize?
–
When considering existing (digital)
business models, which are all pre-
dominantly centralised, there are
certain risks involved to network
users. 13
Some of these risks include:
▷ Single-point failure
▷ Exclusion, abuse, and
mistrust
▷ Low Transparency and
high transaction fees
Single Points of Failure
–
Looking back at previous figures on
pages 51 and 53, Figure 11 and Fig-
ure 13, it should be clear that a
peer-to-peer decentralized pay-
ment system is inherently more
robust than a payment system re-
quiring an intermediary or clearing
house. Bitcoin achieves this by
using a blockchain-based consen-
sus mechanism to manage an
agreement on the state of a distrib-
uted database. While the network
relies on the underlying Internet
connectivity (which is itself decen-
tralised), there is no single entity
whose failure would disrupt the
network. Centralised payment sys-
tems are exposed to failures of
hardware and breaches of security
procedures which, in the worst
cases, can bring the whole payment
network down (as was the case for
Visa in Europe on 1 June 2018).
Having a decentralised network
ensures that the failure or break-
13. See: Siliski, m. (2018). Blockchain alternatives,
medium.com. https://medium.com/swlh/block-
chain-alternatives-b21184ccc345
Data Source: World Bank, 2019.
FIgure 14
world internet users and secure internet servers
down of any node cannot disrupt the entire system. For example, if a
central clearing house (say the central bank) was to suffer an attack, this
would prevent the entire monetary system from functioning in a cen-
tralised system; whereas, an attack on a server in the Bitcoin network
would have no effect on the functioning of the system (i.e. users could
still make transactions using Bitcoin).
Exclusion, abuse and mistrust
–
Blockchain-based permissionless cryptocurrencies have, by design, a
uniquely low barrier for entry – any individual can participate in the
payment system as long as they have access to an Internet connection.
This makes it possible for anyone to actively participate in the system and
ensure the accountability of others in the network. With 1.7bn people in
the world without access to a bank account, regular payment providers
have often failed to provide access to an effective payments system. This
is especially true in the midst of a worldwide surge in access to the Inter-
net and secure internet servers as can be seen in the Figure 14 below.

54
The decentralized network also prevents a centralized au-
thority from excluding members participation or abusing
theiruniquepositionastheonlygroupwithaccesstoaprivate
ledger.Thislackoftransparencyinacentralizedsystemcan
lead to popular mistrust, which is remedied by allowing all
participants access to a common decentralized ledger.
High Transaction Fees
–
With the invention of electronic transfers (credit cards,
debit cards, etc.), financial transactions have become con-
siderably cheaper and more efficient over the past thirty
years. There do remain some types of transactions which
require significant third-party fees to complete.
The most prevalent of these would be transactions involv-
ingmultiplecurrencies(i.e.remittances,tourism,imports/
exportsofgoodsandservices).Forexample,lookingatdata
fromtheWorldBankforremittancefeesoverthe2011–2017
period, we can see that remittance fees to some countries
are still close to 20%, and still range around 10% in strong
emerging economies like China and Thailand.
Amoreextreme,andpersistent,exampleofhighthird-par-
ty fees is the exchange of currencies at international air-
Sources: Calder, S. (2019). pound worth just 85 euro cents at uk airports as sterling sinks, Independent. https://www.independent.co.uk/travel/news-and-advice/pound-
euro-exchange-rate-brexit-gatwick-heathrow-gbp-eur-a9026226.html
Hamilton, S (2019). “‘my €200 cost me £245!’: Last-minute cash machine currency cost this traveller an eye-watering £68 extra”, This is money. https://www.thisismoney.
co.uk/money/holidays/article-7119311/The-minute-aTm -currency-deal-cost-traveller-eye-watering-68.html
Coffey, H. (2018) “‘rip off’ airport currency exchange rates hit new lows against the euro and dollar”, Independent. https://www.independent.co.uk/travel/news-and-advice/
airport-currency-exchange-rate-pound-euro-dollar-holiday-money-stansted-moneycorp-a8506296.html
knapman,H.(2019).“Holidaymakersbeingofferedlessthan€1for£1atairportmoneyexchanges”,TheSun.https://www.thesun.co.uk/money/9784341/holidaymakers-airport-money-exchanges/
murray, a. (2019). “airport currency exchanges are accused of exploiting the slump in sterling to charge passengers rip-off rates”, mail online. https://www.dailymail.co.uk/
news/article-7303667/airport-currency-exchanges-accused-ripping-passengers.html
andrews,a.(2019).“Holidaymakers‘rippedoffwithextortionaterates’atairports”,mirror.https://www.mirror.co.uk/money/holidaymakers-ripped-extortionate-rates-airports-14432363
Coffey, H (2019). “pound hits parity with the dollar for tourists exchanging currency at uk airports”, Independent. https://www.independent.co.uk/travel/news-and-advice/
pound-dollar-exchange-rate-airports-uk-parity-currency-euros-brexit-a8683156.html
Clatworthy, B (2019). “Currency exchange rate rip-off — why you shouldn’t get your money at the airport”, The Times. https://www.thetimes.co.uk/article/currency-exchange-
rate-rip-off-why-you-shouldnt-get-your-money-at-the-airport-jklh278hb
o’Carroll,L.(2016).“Travellershitby‘abominable’exchangeratesatukairports”,Theguardian.https://www.theguardian.com/business/2016/oct/12/travellers-hit-by-abominable-exchange-rates-airports
plush, H (2016). “airport currency exchanges accused of ‘taking advantage’ of holidaymakers with ‘shocking’ rates”, Telegraph. https://www.telegraph.co.uk/travel/news/
currency-exchange-companies-taking-advantage-of-holidaymakers-airports-million-profit
Source: World Bank World Development Indicators
TaBLe 2
Foreign exchange Fees in uk airports (Media articles)
FIgure 15
average remittance Fees to select countries
ports. While these companies pay high rents for real air-
port estate, the fees charged by monopolistic money
exchange facilities in many UK airports have remained
disproportionate for several years without much change.
The persistence of this problem has been well document-
ed in the press over several years in the UK. Table 2 below
provides select articles with a comparison of the rates
charged at airports with spot exchange rates.
The Sun 23 august, 2019 1 gBp = 0.9885 uSd 1 gBp = 1.23 uSd
daily mail 31 july, 2019 1 gBp = 0.78 eur 1 gBp = 1.10 eur
Independent 30 july, 2019 1 gBp = 1 uSd 1 gBp = 1.22 uSd
Thisismoney 8 june, 2019 245 gBp = 200 eur 245gBp=276.8eur
The Times 20 april, 2019 1 gBp = 0.77 eur 1 gBp = 1.16 eur
The mirror 19 april, 2019 1 gBp = 0.78 eur 1 gBp = 1.16 eur
The Independent 14 december, 2018 1 gBp = 1 uSd 1 gBp = 1.26 uSd
The guardian 12 oct, 2016 1 gBp = 1 uSd 1 gBp = 1.54 uSd
Article Source Date Fx (airport) Fx (spot rate)

55
security and anonyMity oF participants
–
While blockchain-based transactions are public by the na-
tureofthepaymentprotocol,blockchain-basedcryptocur-
rencies are ‘pseudonymous’. Transactions can be linked to
the public keys they originated from and were sent to, but
it is much harder to establish a link between a public key
and the identity of the person making the transaction. No-
tably, the transaction is ‘pseudonymous’ not only from the
broader public, but also from the other counterparty – not
unlike a cash transaction between two strangers. This se-
curity and anonymity removes the risk of a financial inter-
mediarymisusingclientdetails,havingthemunintention-
ally stolen or legally sharing them with third parties (e.g. a
suppressivegovernment)withouttheexplicitconsentofthe
client.Thispseudo-anonymityalsohelpstoovercomesome
of the problems with purely anonymous cash identified by
SandsandRogofffromChapter3.Forexample,largemove-
ment of funds could be followed as they move through the
network,allowingforlawenforcementtotrackconspicuous
transactions across the globe.
trANSpAreNCy, AUDItABILIty AND GoVer-
nance
–
Similar to banks, blockchain-based cryptocurrencies
record all transactions in a secure and immutable ledger.
The blockchain is a transactions ledger of tokens where
the entire history of transactions is recorded. One block
contains a group of transactions and has a unique point-
er that refers to previous blocks in the chain. In contrast
to centralized systems or banks, in the case of Bitcoin,
the ledger is not stored in one ‘safe’ place. Instead, ev-
eryone using Bitcoin (i.e. who has the core software) is
connected through a peer-to-peer network and saves a
replica of the Bitcoin’s blockchain (ledger). There are
many replicas of the same ledger existing on multiple
machines, guaranteeing its safety against system fail-
ures or attacks and full transparency for all users on the
network. Effectively, this means that anyone can access
and audit records of all pseudo-anonymous transactions
and does not require intervention or permission from a
third party (i.e. a central bank).
As depicted in Figure 16, this system allows buyers and
sellers of goods and services to interact in a transparent
manner with each other without needing a central bank
or commercial bank to act as an intermediary, or back-
er of the currency used to make the transaction. For
example, with Bitcoin, everyone can download the soft-
ware, transfer fee-free money, store the ledger and even
maintain it, democratizing the control over the system.
Transparency is a key component for trust to be estab-
lished. As modern commercial banks have scaled up
FIgure 16
blockchain transactions
Source: Nakamoto, 2008.
Transaction Transaction Transaction
owner 1’s
public key
owner 2’s
public key
owner 3’s
public key
owner 0’s
Signature
owner 1’s
private key
owner 2’s
private key
owner 3’s
private key
owner 1’s
Signature
s
i
g
n
s
i
g
n
v
e
r
i
f
y
v
e
r
i
f
y
owner 2’s
Signature
Hash Hash Hash

56
Source: Botsman, 2016.
FIgure 17
evolution of trust
14. See: Botsman, 2016.
operations from knowing their users personally to cross
border business models, participants have become
identified as a ‘number’ and see the running of opera-
tions inside the banks as ‘black box systems of author-
ity’. This has led to less direct means of interaction,
transparency, and understanding of what banks actu-
ally do (this will be explored further in Chapter 6).14
The advantages in building trust through increased
transparency and auditability of blockchain-based
crytpocurrencies has led some experts to conclude that
distributed ledgers will overtake the centralized insti-
tutional framework as seen in Figure 17.
For any new technological innovations to be adopted
and scaled, there is a trust barrier that needs to be
overcome which, as will be shown in Chapter 6, is cer-
tainly the case with cryptocurrencies. Technological
innovations can arise from a lack of trust in existing
systems (for example, lower levels of trust in tradition-
al authorities during periods of hyperinflation). To
overcome the trust barrier in cryptocurrencies, it is
helpful to review the governance frameworks, or, con-
sensus protocols.
Governance in DLT frameworks is inherently more
democratic than the traditional centralised clearing
house frameworks. The degree of democratization
depends partly on the decision algorithm adopted
(consensus protocol). Consensus protocols allow a
decentralised network to arrive at an agreement about
the state of the blockchain. There are different proto-
cols for different types of blockchains and each has its
pros and cons. In general, a DLT participant must val-
idate transactions (either individually or in a set or
block) before they can be added to the distributed
ledger. This means that general DLT consists of a net-
work of nodes - called ‘validators’, because nodes are
completing validation function. In a permission-less
DLT (i.e. for most cryptocurrencies), the set of nodes
that can validate transactions are generally not known,
so we need a way to ensure that the behaviour of the
system matches the expectations of its users.
local institutional distributed

57
In the case of most cryptocurren-
cies, these are a subset of partici-
pants depending on the consensus
protocol, which can be broadly
classified as:
▷ Proof of Work - Mining
pools
▷ Proof of Stake - Endoge-
nously wealthy token
holders
▷ Exogenously wealthy actors
who pay-to-play, in some
other cases
Proof of Work
–
In the proof of work governance
model, prospective validators (‘min-
ers’) solve a puzzle that is easy to
verify but hard to guess without a
time-consuming brute-force ap-
proach. Some examples would in-
clude Bitcoin, Ethereum, Litecoin,
Dogecoin, ZCash, Monero (and many
more). In terms of advantages, cheat-
ing is difficult, given the large vol-
ume of participants, and taking over
the network is expensive. In terms of
disadvantages, the network is run by
those who have access to cheap elec-
tricity, whose interests may not
match those of users in general.
Countless computations are spent in
a zero-sum arms race with negative
externalities such as pollution and
depletion of natural resources.
Proof of Stake
–
In the proof of stake governance
model Prospective validators de-
posit tokens in exchange for the
chance (proportional to the size of
the deposit) to be selected for
block creation. If a validator pro-

58
duces (or votes on, depending upon implementation)
a block that is added to the chain, then it receives a
reward. Otherwise, it loses the security deposit. Some
examples would include Ethereum (Serenity), Tender-
mint, and NXT. In terms of advantages, the Proof of
Stake consensus protocol replaces mining with a bet-
ting system that is more energy efficient and shifts
verification to those with a stake in the success of the
network. In terms of disadvantages, control resides in
the hands of those with the most tokens, whose in-
terests may not match those of users in general. A
broader breakdown of consensus protocols is shown
below in terms of their level of centralisation/decen-
tralisation.
In summary, Cryptocurrencies propose to remedy three
issues that exist in the current system of payments,
mainly, the single point of failure that naturally emerg-
es from centralised/monopolised money, the anonym-
ity of participants, and the exclusion, abuse and trust
of users in a system where money is monopolised by
potentially irresponsible policymakers (as discussed in
Chapter 1). Blockchain-based cryptocurrencies also
provide a secure environment to transact with no need
for expensive third parties and full transparency to all
members of the network using a common distributed
ledger. Lastly, the rules governing these currencies are
democratised to allow for members to participate based
on publicly available consensus protocols.
FIgure 18
Centralization of Consensus protocols
perMISSIoN-LeSS
distributed ledgers
(anyone can run one or more validating nodes)
proof of work
(i.e. computational power)
proof of stake
(minters bet on validity of blocks)
delegated proof of stake
proof of capacity
proof of elapsed time
perMissioned
distributed ledgers
(nodes are explicitly authorised to validate transactions)
byzantine fault tolerance
(and derivatives)
federated byzantine agreement
(distributed voting)
byzantine fault
tolerance
perMissionless
Anyone can join the
network, no need of
authorization
perMissioned
Need permission to join
the network
public
anyone
can apply
to join
private
open only to
some
– consensus mechanism –
proof of work
proof of stake
federated byzantine
agreement
derogated proof of stake. proof of
capacity. proof of elapsed time...
oPen closeD

59
In practice, cryptocurrencies (including Bitcoin) have
become something different than what was envisioned
by Nakamoto (2008). While there is a great deal of
competition (Hayek money) in the cryptocurrency
market, Bitcoin and other high-profile cryptocurrencies
have failed to stabilize their value and subsequently
increase their level of trust and acceptability (see Chap-
ter 6). There are also challenges when comparing spe-
cific features of cryptocurrencies discussed in theory
(Section B) with cryptocurrencies in practice.
From 2013, the growth in the number of cryptocurren-
cies has been impressive. A 2019 Institute and Faculty
of Actuaries paper reported that there were 66 varieties
of crypto-assets in 2013, 644 in 2016, 1,335 at the end
of 2017, and 2,116 in January of 2019. (Rochemont and
Ward, 2019) The same trend has occurred in terms of
market capitalization, where crypto-assets have grown
exponentially from around USD 10 billion at end-2013
to USD 572.9 billion at end-2017. In terms of trading
platforms for crypto assets, as of April 2018, the num-
ber had exceeded 10,000. (Rochemont and Ward, 2019)
Among the over 2,000 cryptocurrencies in existence,
the market share distribution is relatively congested.
Figure 19 shows a comparison between 18 cryptocur-
rencies. Using data collected from coinmetrics we show
on the next page for the 18 cryptocurrencies the aver-
age daily active unique addresses (19A), the average
number of blocks generated daily (19B), the average
daily adjusted transaction volume (19C) and finally the
average daily fees paid to miners (19D). Averages are
c. cryptocurrencies in
practice

60
calculated over the entire period of data which varies
from 438 days (for Tezos) to 3903 days (for Bitcoin). The
figure shows that although Bitcoin is the most widely
known cryptocurrencies, in terms of the average daily
transactions volume relatively new cryptocurrencies
such as NEO are more used.
In terms of usage, it is difficult to measure active par-
ticipants. The largest and most widely used cryptocur-
rency is Bitcoin, which, as of July 2014, had almost 41
million addresses listed on the Bitcoin block chain, but
only 1.6 million that contained a balance of more than
0.001 bitcoins (roughly £0.35).
This much smaller figure still overstates the number of
users, however, as each user may possess any number of
wallets and each wallet may hold any number of address-
es. In a 2018 survey of over 200 cryptocurrency owners,
the Foundation for Interwallet Operability (FIO) found
that only 30% of users sent any coins to a third party or
alternative account at least once a month. A total of 43%
of respondents sent coins to another party or made a
purchase with cryptocurrencies only a few times during
the entire year, and 27% sent no coins at all. From this,
we could conclude that 70% of cryptocurrency holders
either never or rarely used cryptocurrency for making
any type of payments.Another way to estimate Bitcoin
usage is through the number of venues that accept Bit-
coin. According to coinmap.org more the 15,000 venues
accept Bitcoin. Leading software companies such as
Microsoft accepts payment in Bitcoins. Expedia, the
travel fares and hotel aggregator website, also accepts
Bitcoin. Most importantly, digital banks such as Revolut
allow their users to open accounts in Bitcoins and use it
for payments.
Cryptocurrencies are purchased with an underlying unit
of account (central bank-issued money). This allows us
to see what currencies are being converted into crypto-
currencies, similar to looking at debt or equity by cur-
rency type to get an idea of who is holding that debt or
equity. In August of 2014, a Bank of England Report
estimated that almost 60% of Bitcoin trading was against
the Chinese renminbi, 32% traded against the US dollar,
3% against the euro and 1.2% of trading was against the
British pound (Ali et al, 2014). Since the publication of
these figures, there have been significant changes in
this composition.
After a 2017 Chinese government ban on trading bitcoin
using renminbi, this composition looks dramatically
different as of August of 2019. In the 30 day period
leading up to August 24th, the US dollar made up around
43% (up from 32%), euro made up around 21% (up from
3%), yen made up around 14% and British pound made
With the exponential growth in cryptocurrency ‘issuers’
comes a great deal of failed or fraudulent attempts to prof-
it from the hype. This can be best characterised in a 2018
article highlighting that “the cryptocurrency landscape is
already littered with the ghosts of hundreds of dead coins
that were too niche, too dumb, or blatant scams.” (Marvin,
2018) Of the 2,000+ surviving cryptocurrencies, Bitcoin
remains, by far, the most dominant in terms of market
capitalisation.
FIgure 19
Characteristics of most popular
cryptocurrencies
Bitcoin
ethereum
Stellar
neo
Bitcoin cash
Cardano
Litecoin
ethereum Classic
Zcash
omisego
nem
dash
Bitcoin gold
Verge
Waves
dogecoin
XRP
Tezos
Name Symbol price rank (market
capitalization)
Btc
eth
Xlm
neo
Bch
ada
Ltc
etc
Zec
omg
Xem
dash
Btg
Xvg
Waves
doge
Xrp
Xtz
8,466.67
170
0.06
7.49
227.23
0.0397
57.20
4.84
37.82
0.8361
0.043
73.36
7.84
0,0034
0.87
0.002216
0.247
0.91
1
2
10
21
5
12
5
20
28
43
25
17
40
73
54
29
3
19
Source: Coinmetrics, 2019.

61
up around 13% (up from 1.2%).
Given the current state of cryptocurrencies in practice,
there remain several barriers to overcome when com-
paring these with the objectives from Nakamoto (2008)
discussed above in Section B. We can classify some of
these challenges as relating to:
▷ Token Supply
▷ Decentralization
▷ Security and Anonymity
▷ Transparency and Governance
token supply
–
The supply of many cryptocurrencies increases at a fixed
‘controlled’ rate every year and is not actively managed
by any centralized authority, which has led to wide
swings in their value – for example, the value of 1 Bit-
coin climbed to almost 20,000 USD to fall back to around
3,000 USD before slightly rebounding and fluctuating
around 10,000 USD over a short two-year period.
In practice, the supply of Bitcoin is increased at a fixed
rate by rewarding miners who are incentivized through
award determined by a fixed schedule pre-programmed
in the Bitcoin source code. As of 2019, the reward
amounted to 12.5 BTC; however, every 210,000 blocks
Bitcoin halves this reward to regulate the total supply
of Bitcoin. Miners also can be rewarded by fees attached
to the transactions they help record in a decentralized
FIgure 20
trading volume by currency
Data Source: Bitcoinchart, 2019.
ledger. This ability to increase the supply of Bitcoin
through mining is similar to the supply of money under
the gold standard, where it cannot be adjusted to meet
economic circumstances. Recalling from Chapter 1, this
was a significant contributor to the gold standard work-
ing “as the mechanism that turned an ordinary business
downturn into the Great Depression” (Eichengreen and
Temin, 1997, p.1).

62
Because the supply of money can-
not be actively adjusted to meet
demand dramatic fluctuations in
value of the most popular crypto-
currencies have occurred since
their inceptions. This has led many
observers, based on the three basic
characteristics of money (unit of
account, store of value, means of
exchange) to rightly conclude that
most cryptocurrencies are, in fact,
not money.
In response to the large fluctuations
in value, a second generation of
cryptocurrency has been designed
that pegs a token’s value to an ex-
isting currency or basket of curren-
cies. ‘Stablecoins’ are currently
being used primarily as a tool for
exchanges to trade between fiat and
cryptocurrencies, and privately be-
tween large enterprises to settle
trades. While stablecoins are very
new at the time of writing this re-
port, the future looks optimistic as
evidenced by some high-profile
projects listed below in Table 3.
decentralisation
–
In Section B, several advantages of
blockchain-based cryptocurren-
cies were identified, over other
forms of money, mainly, overcom-
ing the risks associated with single
TaBLe 3
Stablecoin projects (Inception date and capitalization)
Tether (2015) $4.1B
uSd Coin (2018) $477m
paxos Standard (2018) $260m
TrueuSd (2018) $195m
daI (2017) $82m
Stasis eurs (2018) $35m
gemini dollar (2017) $10m
Token X (2019) $5m
digital garage jpy-Token (2019)
Cryptocurrency Stablecoins by inception date
Fnality (aka utility Settlement Coin, 14 Banks – 5 Fiat Currencies)
jpm Coin (jp morgan)
IBm Blockchain World Wire (47 currencies, 44 banking endpoints
plus 6 stable value coins)
permissioned Stable tokens (enterprise)
Click on this link to get access to your future money via crypto https://www.digistore24.com/redir

63
point failures preventing exclu-
sion, abuse and mistrust, and re-
ducing unreasonably high fees. In
practice, these still have barriers
to overcome.
Single Point of Failure
While the mining activity is, in
principle, decentralised and has
very low barriers to entry (a comput-
er with Internet access), over time
there are incentives for a degree of
centralisation in the activity. With
centralisation of mining activity,
the issue of Single Point of Failure
is no longer resolved through a de-
centralized network, since a large
mining pool could compromise the
integrity of the whole network. For
example, a dishonest miner who has
more than 50% of the total ability of
the network to generate blocks may
be able to successfully confirm
fraudulent transactions.
Another factor which would lead
to further centralisation is the
very low expected payoff to indi-
vidual miners – a single miner has
an extremely low chance of finding
a solution to the block. In order to
smooth the cashflow from newly
minted Bitcoins and transaction
fees, miners have an incentive to
coordinate and work in large min-
ing pools instead, to ensure regu-
lar cashflow.
Source: bitcoin.stackexchange.com, 2019.
FIgure 21
Mining pools with highest hash rate
BTC.com: 26.4%
antpool: 13.8%
Slushpool: 10.7%
ViaBTC: 10%
F2pool: 8.9%
BTC.Top: 8.7%
unknown: 5.2%
dpooL: 4%
Bixin: 3%
BTCC pool: 2.3%
BitFury: 1.9%
BW.Com: 1.4%
Bitcoin.com: 1%
BitClub network: 1%
kanopool: 0.9% Bitcoinrussia: 0.2%
Ckpool: 0.2%
ConnectBTC: 0.2%
58CoIn: 0.2%

64
Lastly, there are economies of scale to mining – com-
panies specialising in mining can negotiate better rates
with mining equipment producers and local electrici-
ty providers and can further benefit from locating and
moving their activity depending on the current elec-
tricity market conditions. In this case, unregulated
mining pools would grow to become fewer and fewer
in number – as seen in Figure 21, there is already sig-
nificant degree of centralisation in mining.
The environment for natural monopolies to flourish has
led the Bank of England to concluded as far back as 2014
that, “a significant risk to digital currencies’ sustained
use as payment systems is therefore that they will not
be able to compete on cost without degenerating — in
the limiting case — to a monopoly miner, thereby de-
feating their original design goals and exposing them
to risk of system-wide fraud.” (Ali, Barrdear, Clews and
Southgate, 2014) (Ali et al, 2014, p.6).
Exclusion, abuse and mistrust
As discussed above, the centralisation of mining could
lead to a situation where a few cooperating pools have
more than 50% of a network’s hash-rate, in which case

65
In July 2014 the mining pool Ghash.io exceeded 50%
of Bitcoin computational power. This is not the only
option to break the honest mining assumption; an-
other possibility is collision between miners. In fact,
there are different possible attack strategies, incen-
tives and condition in which the stability of the con-
sensus mechanism is in threat (Bahack, 2013; Garay,
2014; Sirer, 2014).
This possibility of miners, along with influential
players altering and forcing specific rules on the Bit-
coin network challenges the assumptions of decen-
tralisation. Recently, the Bitcoin community wit-
nessed a panic by a suggestion of Binance CEO of
“reorganizing the chain” after the exchange was
hacked and lost $40 million in Bitcoin.
Fortunately, influential actors advised not to go
through with the idea in fear of losing trust in Bitcoin.
This conclusion was the main argument of Nakamoto
against the majority miner attack, where he argued
that “in the long term, it is better to play by the rules”
(Nakamoto, 2008).
Lower Fees
Despite not being classified as money, Bitcoin has
succeeded in providing a cheap way of transferring
large amounts of capital. While the transaction fees
have changed significantly over time, on average it
cost less than $1 to have a transaction settle on
blockchain with an expected time of 10 minutes (one
block). The challenge comes when we consider a net-
work for micropayments, as the blockchain fee is (ap-
proximately) fixed regardless of the value of the
transaction. This makes day to day transactions us-
ing Bitcoin no cheaper than using a debt, a credit
card or other third-party payment systems. There are
plans to ramp up the speed and efficiency of Bitcoin
transactions, which could help to bring down costs in
the future.
There also exist significant, and well-documented,
electricity costs associated with Proof of Work frame-
works, requiring huge amounts computational power
for a vast network of users, the scale of which was per-
haps not envisioned by Nakamoto in 2008. The electric-
ity requirements for solving blocks makes this a popular
activity in countries with subsidized electricity such as
they could, as is the case with any centralised system,
accept a double-spent transaction or abuse their power
to censor certain transactions. Arguably, neither would
be in their long-term interest, as in the end miners’ prof-
itability depends on the value of the network itself, espe-
cially in the case of Proof of Stake models, and their sunk
costs (mining equipment and infrastructure) are heavily
specialised and of little use for other tasks. However, this
could work as a short term ‘get rich quick’ scheme where
a conglomerate of miners could defraud the system and
quickly sell all of their cryptocurrency gains for a more
reliable type of money (or other financial asset).

66
Mongolia. This creates additional issues regarding the
degree of centralised control for consortiums in a sup-
posedly decentralised network.
security and anonyMity
–
For all practical purposes, Bitcoin provides ‘pseudo-an-
onymity’ only. As the history of all transactions is
openly available, with sufficient investigative resourc-
es one can often statistically infer the identity of a
person behind a public key.15
There exist useful advan-
tages of cryptocurrencies in sending international
transfers to countries where they would otherwise be
seized by the banking system, as well as a store of
value in countries with rampant inflation rates [see
examples in Chapter 2]. There has been little evidence
of governments in countries expending significant
effort in curbing this activity.
Another important drawback of currencies that are
anonymous and fully independent of state control
relates back to the same arguments made by Sands
(2016) and Rogoff (2017). If a given type of currency
offers anonymity and the guarantee that nobody, in-
cluding law enforcement, would be able to access the
record of transactions, it is very likely that criminals
would use this for their financial transactions. In fact,
from the perspective of those who wish to perform
illegal activities, fully anonymous digital currencies
are even better than cash. At least cash has a serial
number in most countries, which helps to trace its path.
Moreover, because of its physical nature, transferring
large amounts of cash is a cumbersome activity that
requires a lot of effort from criminals. With a non-track-
able digital form of money, illegal financial transac-
tions could be done instantly and on a global scale.
A good example of how financial innovations in the
field of currency can quickly become a tool for the
daily financial routine of illegal activities is Liberty
Reserves. Liberty Reserve was a company based in
Costa Rica that allowed people to send and receive
secure payments without revealing account numbers
or real identities. This was done via the company’s
private money, Liberty Reserves, which could be con-
verted into Euros and Dollars. The company started
to operate in 2006 and, a few years later, in 2013 it
was closed by the US government for being charged
for money laundering and other financial crimes. In
2016, the founder of Liberty Reserve, Arthur Budovsky,
pleaded guilty to conspiring to commit money laun-
dering and was sentenced to 20 years in jail. Examples
like Liberty Reserves show us that the use of private-
ly issued currencies, with no state backing, will re-
quire some form of regulatory and law enforcement
authority to ensure the legitimacy of its use.
The good news is that cryptocurrencies in practice are
not anonymous (as discussed in section B). The pseu-
do-anonymity of cryptocurrencies allows for easier
tracking of transactions than is the case with cash.
There exist costs to tracking transactions which means
transactions, however, of average people will remain
anonymous but law enforcement agencies can trace
illegal activities.
An excellent example come from Chainanalysis who
enabled law enforcement in thirty-eight countries to
make over 330 arrests of alleged pedophiles and rescue
23 children from abusive situations.
Governance and consensus protocols
–
While the intention of Proof of Work consensus pro-
tocols like Bitcoin was to create a democratic decen-
tralised system where all participants have some
ability to contribute, it has been found that “the
distribution of computing power in Bitcoin reveals
that the power of dedicated ‘miners’ far exceeds the
power that individual users dedicate to mining, al-
lowing few parties to effectively control the currency”
(Gervais, Karame, Capkun, and Capkun, 2014). At the
time the cited article was published, the top-three
(centrally managed) mining pools controlled more
than 50% of the computing power in Bitcoin. Further-
more, Bitcoin users do not have any direct influence
over the appointment of the administrators making
governance frameworks, which is not very dissimilar
15. Source: Bohannon, j. (2016). Why criminals can’t hide behind Bitcoin, Science mag.
https://www.sciencemag.org/news/2016/03/why-criminals-cant-hide-behind-bitcoin

67
16. See gervais, a.; karame, g. o.; Capkun, S.; Capkun, V., 2014
from those found on Monetary Policy Committees in
Central Banks. 16
With Proof of Stake, consensus protocol control re-
sides in the hands of those with the most tokens,
whose interests may not match those of users in gen-
eral. The quasi-anonymity of these users also allows
them to make decision without a very high degrees of
transparency. While Proof of Stake ensures that all
participants gain or lose from the network’s success
or failure, there is opportunity for short-term gains
with less transparency than is currently provided
from traditional money managers like Central Banks
and commercial banks. From a governance perspec-
tive, this could potentially be a step in the wrong
direction when it comes to the democratization of
money management.
Because of the challenges for cryptocurrencies, as they
currently exist to become viable widely used forms of
money, it has been argued that “digital currencies do
not currently serve a substantial role as money in so-

68
ciety and,… face significant challenges to their wide-
spread use over the long run” (Ali et al, 2014, p.281).
Given that consumers and businesses “already make
retail payments electronically using debit and credit
cards, payment applications, and the automated clear-
inghouse network” and “are finding easy ways to
make digital payments directly to other people
through a variety of mobile apps” (Brainard, 2018).
In summary, cryptocurrencies are struggling uphold
their creator’s objectives. To date, no existing cryp-
tocurrency has been universally successful in fulfill-
ing the role of ‘money’. This is partly due to the
technical issues raised throughout this chapter, and
partly due to the fact that policymakers, academics
and the general public have all held generally negative
attitudes about the prospects of money being issued
and managed in a decentralized framework and/or by
private sector actors. From this perspective, central
banks in most advanced economies have built a trust
premium compared to private sector companies,
which should make them better candidates for issuing
money and managing/regulating financial transac-
tions. We will look at this more closely in Chapter 6
for the US, UK, Germany, France, Brazil, Argentina,
Mexico and Spain.

69
central
bank
diGital
currencies
chapter
5

70
As emphasized throughout the
previous chapter and by other
contributors,
the key innovation of digital
currencies is the ‘distributed
ledger’ which allows a
payment system to operate in
an entirely decentralised way,
without intermediaries such
as banks. this innovation
draws on advances from a
range of disciplines including
cryptography (secure
communication), game theory
(strategic decision-making)
and peer-to-peer networking
(networks of connections
formed without central co-
ordination).
– Ali et al, 2014.
“
”
The technical evidence from the previous chapter
suggests that a Hayek-type digital currency has so
far been unsuccessful in achieving achieve its cre-
ators’ intended purpose. The technology introduced
by Nakamoto (2008), however, is still extremely
valuable when it comes to improving money and,
more importantly, its payment systems. This can be
achieved by incorporating blockchain technology
into existing institutions, mainly central banks.

71
Central bank digital currency (CBDC) can be broadly
defined as “any electronic, fiat liability of a central bank
that can be used to settle payments, or as a store of
value” (Barker et al, 2018, p.2). Note that, unlike the
case of cryptocurrencies, CBDCs are considered a lia-
bility on the central bank’s balance sheet (see last part
of Chapter 2) As will be demonstrated in the next sec-
tion, established central bank currencies have a signif-
icant advantage as a trusted form of money rather than
an entirely new, and not well understood, option.
Lagarde (2018) also argues that monetary authorities
will continue to remain a pillar of trust given the
breadth of work they do, not only issuing stable money
but also regulating the financial and payment system.
While providing greater access to digital forms of cur-
rency is not a new idea, 17
it has recently gained traction
given the debate about the role of monetary authorities
in future currency and systems of payment. Even though
it is issued by the same monetary authority, CBDC can
be considered as a disruptive change to the existing sys-
tem of payments, which can be slow and tedious. For
example, some international transactions can take sev-
eral days to pass through regulatory checks and clearing
houses. The potential use of blockchain technology for
improving the efficiency of money raises many questions
about the role of central bank money, direct access to
central bank liabilities and the structure of financial
intermediation.
Some of the characteristics and advantages of a
well-designed CBDC would include a practically cost-
less medium of exchange where individuals could hold
accounts directly with the central bank. This would
allow the central bank to have an additional tool for
conducting monetary policy, better information on
potentially fraudulent activities and avoid intermedi-
ary costs associated with commercial bank lending,
especially for lower-income households. CBDCs could
also act as an interest-bearing risk-free store of value,
with a rate of return in line with other risk-free assets
such as short-term government securities. 18
A well-de-
signed CBDC would also overcome the price stability
issue that exists with most privately issued cryptocur-
rencies (with the exception of stablecoins) by actively
managing the supply in line with an underlying basket
of goods and services.
The Bank for International Settlements (BIS), which
works as central bank ‘hub’ for central banks, has spent
a considerable amount of resources trying to under-
stand how monetary authorities across the globe are
tackling this issue of cryptoassets. According to
Carstens (2019), central banking committees based at
the BIS identified two main varieties of CBDCs:
▷ A wholesale CBDC that would be restricted to
a limited group of users and used for in-
ter-bank payments and other settlement
transactions;
▷ A retail CBDC that would be widely accessible
to everyone. This could be based either on
digital tokens or on accounts.
A. principles of CBDCs
17. See: Tobin, 2018; Brunner and meltzer, 1971.
18. See Bordo and Levin, 2018.

72
As noted above, an account-based CBDC could be implemented via accounts held directly at the central bank.
Such an approach “would be reminiscent of the early years of central banking, when individuals and nonfinan-
cial firms held accounts at the Bank of England and the Sveriges Riksbank” (Bordo and Levin, 2018, p.7). The
reason that these individual accounts were discontinued was largely due to the impractical technicalities involved
with maintaining such a large volume of accounts. Given the new technology available to central banks, this
barrier should no longer exist with the use of an integrated accounting system into the CBDC framework.
There are clear differences between these types of CBDCs and cash. A CBDC in these forms would not necessar-
ily be anonymous. Moreover, unlike cash, it could pay or charge interest. Figure 22 presents the attributes of
these of CBDCs and how they compare to the current forms of central bank money.
FIgure 22. Design Features of Central Bank Money
Source: Bank for International Settlements
key desiGn Features oF central bank Money
existing central bank money
cash
reserves and
settlement
balances token accounts
retail
central bank digital currencies
anonymity
24/7 availability
interest-bearing
existing or likely feature possible feature untypical or impossible feature

73
In terms of active and evolving re-
search agendas, the Bank of En-
gland was one of the precursors on
studies regarding cryptocurrencies
and CBDCs (Kumhof and Noone
2018; Barker et al., 2018; Barrdear
and Kumhof, 2016; Ali et al., 2014).
The UK’s monetary authority first
raised the possibility of a central
bank-issued digital currency in
their research agenda in 2015. Since
then, the most complete work done
by the Bank of England regarding
CBDCs and their implications has
been Kumhof and Noone (2018).
The Sveriges Riksbank is also inves-
tigating whether an e-krona would
provide the general public with
continued access to central bank
money and increase the resilience
of the payment system (see Sking-
sley, 2016; Riksbank, 2017). Other
than the British and Swedish mon-
etary authorities, several central
banks are also developing new re-
search agendas for CBDCs. These
include the National Bank of Den-
mark (Gurtler et al., 2017, the Re-
serve Bank of Australia (Lowe
(2017), the Bank of Canada (Engert
et al., 2017) and many others. The
Committee on Payments and Mar-
kets Infrastructures (CPMI) at the
BIS did a survey in 2018 with central
banks to understand the current
B. Current State of
cbdcs
stage of their work on CBDCs and what were their conclusions regarding
this topic. More than 60 central bankers participated, representing coun-
tries that count for 80% of the world population.
Figure 23 presents the results of this survey. Seventy percent of central
banks are working on some sort of CBDC. Nevertheless, only about half
of the central banks doing work on CBDCs have actually moved toward
testing this idea. According to BIS CPMI’s report, this means that central
banks are examining the benefits, risks and challenges of potential issu-
ance from a conceptual perspective. Only approximately a tenth of the
central banks engaged with CBDCs have moved into the phase of exper-
imenting with the different types of possible technologies, by developing
pilot arrangements.

74
Figure 24 shows the answers of cen-
tral bankers when asked if they plan
to issue a CBDC in the short or me-
dium term. Only a very small amount
of these think they are likely to issue
a CBDC in the short to medium term.
The results are basically the same for
retail and wholesale CBDC.
But why have central banks chosen
not to provide these digital services?
The reason for this lies in probably
the most important question regard-
ing the discussion of CBDCs, the
impact that the implementation of
such currency would have in the
financial and monetary systems.
Many studies have been made by
academics, monetary institutions,
and even practitioners in trying to
analyse these possible effects. In
fact, most of the literature regarding
CBDCs has focused on this topic.
FIgure 23
CpMI CBDC work in Central Banks
FIgure 24
Likelihood of Issuing a CBDC in Short/Medium term1
1. Share of respondents conducting work on CBDCs.
Source: Bank for International Settlements, 2018.
1. Short term: one to three years; medium term: one to six years.
Central Bank CDBC work
Share of respondents
engagement in CBDC work
Share of respondents
type of CDBC work
Share of respondents conducting work on CdBCs
2o17
2o18
0 20 40 60 80 100
Focus of work1
100
80
60
40
20
0
research/study experiments/
proofs of concept
Development/
pilot arrangement
retail cbdc
short term
Medium term
0 20 40 60 80 100
wholesale cbdc
short term
Medium term
0 20 40 60 80 100
experiments/
proofs of concept

75
In the current fractional reserve system, only commer-
cial banks have access to digital account-based central
bank money. By contrast, physical central bank money
(i.e. cash) is widely accessible to the general public. As
discussed in the previously section, the use of cash will
likely diminish as businesses adopt more hygienic and
efficient forms of payment. With this possibility, the
public would no longer have wide access to central bank
money (bank notes), which would need to be replaced
with a digital alternative.
If household and business deposits are concentrated
in the central bank, CBDC schemes would implicitly
end the practice of, and risks associated with, fraction-
al reserve banking. This ‘narrowing’ of the banking
system (depositors deal directly with the central bank)
is effectively a revival of the ‘Chicago Plan’ as discussed
in Chapter 2. 19
In addition to more efficient and safer payments and
settlement systems, a CBDC could come with addi-
tional benefits. Given that CBDC can allow for digi-
tal records and tracing, it could improve the appli-
cation of rules aimed at anti-money laundering and
countering financial terrorism. Moreover, it would
also possibly help to reduce informal economic ac-
tivities. Finally, Lagarde (2018), Coeur and Loh
(2018), Broadbent (2016) and many others defend
CBDCs as an important tool for financial inclusion,
particularly in developing countries, where a signifi-
cant part of the population is still not included in
formal financial systems.
C. Impact of CBDCs
19. See: raskin and yermac, 2016.
If all it did was to reduce
the demand for physical
cash, it’s not clear the
macroeconomic effects of
a CBDC would be that
significant. It’s possible
the retail payments system
might become more
efficient. It’s also true that,
were a CBDC fully to
displace paper currency,
that would open the door
to the possibility of
materially negative
interest rates.
– Ben Broadbent, Deputy Governor
for Monetary Policy, Bank of England,
2016.
“
”

76
From a central banker perspective, a CBDC could allow
for real-time data on economic activity. Mersch (2017)
argues that another benefit from establishing such a
CBDC would be to create a direct link between the pop-
ulation and the central bank, hence developing a better
understanding of the role of a central bank and the need
for such an institution to be independent.
Monetary policy
–
The consequences of CBDC issuance for the implemen-
tation and transmission of monetary policy depend on
how wide access to CBDC is and whether it is attrac-
tively remunerated. Monetary policy arguments for
issuing CBDC include strengthening of the pass-
through mechanism of the policy rate to money mar-
kets and deposit rates, potentially making negative
rates a more effective tool in boosting economic activ-
ity. Such a change, however, could also bring new risks
to monetary policy.
Monetary policy implications are likely to be more pro-
nounced if a CBDC emerges as an attractive asset to
hold. According to Coeur and Loh (2018), if a CBDC is
set as a new and liquid central bank liability, it is likely
to have an impact in the channels of transmission of
policy rates to money markets and beyond. Given the
high demand for low-risk government-issued assets
over the last decade, a CBDC would be likely to affect
holdings by investors, particularly in markets for liquid,
low-risk instruments (such as government bonds). If
institutional investors could hold CBDCs without lim-
its, the interest rate on these would help to establish a
hard floor under money market rates, as this financial
instrument would be the government bond with short-
est (instant) duration.
Regarding households, if a CBDC is implemented in
such a way that it becomes a viable alternative to com-
mercial bank deposits, it would be able to make the rates
on these deposits more linked to what the central bank
would pay on its digital currency. As a result, this is
likely to strength the pass-through mechanism of the
policy rate to the general public.
Since the 2008 crisis, developed markets have dived
into negative rate territories. As we currently stand in
2019, it does not seem like we are surfacing anytime
soon. In fact, more recently, interest rates in emerging
economies are also converting to historical lows. With
even the monetary authorities of emerging markets
starting to discuss the possibility of negative interest
rates for government bonds, a tool to pass these rates
to money markets and deposit rates would be welcomed
by central banks.
In the fractional reserve banking system that we have,
monetary authorities are able to charge negative rates on
bonds and deposits that financial institutions hold at the
central banks. Nevertheless, the effectiveness of the
monetary stimulus of setting negative rates is limited.
Financial institutions cannot pass these rates to client’s
deposits, since they always have the option of holding
cash, which yields a non-negative rate. If monetary au-
thorities were to replace cash by an interest-bearing
CBDC, this would open the possibility of expanding
negative yields to accounts of households and firms in
the real economy, hence increasing the effectiveness of
negative interest rates. In fact, Goodfriend (2016) and
It is difficult to draw
definitive or quantitatively-
robust conclusions about
the impact of CBDC on the
monetary transmission
mechanism, due to the
large degree of
uncertainty around the
ultimate design of CBDC,
the economic environment
it will be introduced into,
and the structural changes
that may accompany it.
– Barker et al., 2018.
“
”

77
Dyson and Hodgson (2016) argue that the issuance of
CBDCs could alleviate the pressure on the zero lower
bound even if physical cash was not extinct, as long as it
came along with a reduced desire for cash holding.
As it currently stands, however, the dependence of key
market rates on the policy rate seems to be satisfactory to
most central bankers (Coeur and Loh, 2018). Even though
these are not perfectly correlated, this does not represent
a challenge as long as central banks have enough control
over the financial system and its institutions.
Regarding the effectiveness of CBDC as a tool to impose
negative interest rates on the general public, it is un-
certain how this would work in practice. General equi-
librium effects may make the implementation of such
strategy unfeasible even with digital currencies. There
is no guarantee that society would accept a negative
yielding currency to be “imposed” by central banks. By
trying to set negative interest rates more broadly, mon-
etary authorities could in fact cause the demise of na-
tional fiat money, as people could escape to non-nega-
tive yielding competitors, like commodity money or
even cryptocurrency alternatives.
The overall effects of CBDC on the term structure of
interest rates are very hard to predict and will depend
on many factors. More generally, the implications of a
CBDC relative to other instruments are likely to depend
on each jurisdiction’s specific operating environment.
Also, since operating environments may change in the
future, monetary policy cost-benefit analyses related
to CBDCs may need to be revisited periodically.
Finally, weaker demand for cash does not imply the need
for CBDCs. In fact, monetary policy can remain effective
even without cash. 20
On balance, the study from Coeur
and Loh (2018) argues that it is not clear that there is a
strong basis at this time to issue a CBDC for the purpose
of enhancing the efficacy of monetary policy.
20. See Woodford, 2000.

78
Financial stability
–
Implementing a CBDC would almost certainly imply in
a more active role for central banks in financial inter-
mediation. This would not, however, necessarily mean
more financial stability. One example is that by having
to passively accommodate the demand for CBDC, the
central bank could potentially introduce a high level of
volatility in the demand for government debt.
A general purpose CBDC could have a large impact on
the structure of financial intermediation and the activ-
ity of traditional banks. If this digital currency is attrac-
tive to individuals and firms, it could result in a with-
drawal of funding to commercial banks. This could lead
some banks to raise spreads and increase transaction
fees in order to maintain profitability. Depending on
how the financial system is organized, banks might have
to shrink their balance sheets, with possible adverse
economic consequences.
Arguably, the most significant and plausible financial
stability risk of a general purpose CBDC is that it can
facilitate a flight away from private financial institu-
tions and markets towards the central bank. Faced with
systemic financial stress, households and other agents
in both advanced and emerging market economies tend
to suddenly shift their deposits towards financial in-
stitutions perceived to be safer and/or into government
securities. Of course, agents can already shift funds
towards the central bank by holding more cash. But a
CBDC could allow for digital runs towards the central
bank with unprecedented speed and scale. Even in the
presence of deposit insurance, the stability of retail
funding could weaken because a risk-free CBDC pro-
vides a very safe alternative.
The central bank could try to manage the interest rate
on this CBDC in order to control such runs. Neverthe-
less, changes on this rate, even towards a negative
territory, may be unsuccessful in periods of economic
turmoil when agents seek safety at almost any price.
Another solution could be to impose quantitative limits
on the amount of CBDC that each individual or firm
could hold. But this would most likely result in price
differences between different types of money, in con-
tradiction to the principle of money being exchangeable
at par and hampering the conduct of monetary policy.
Overall, one can notice that a lot of the questions
raised by the issuance of CBDC are very similar to
the points once discussed by those who advocated
for full-reserve banking. Back then, those who de-
fended a narrower banking system - famously Fish-
er (1936) in what became known as the “Chicago
Plan” - advocated that such a setting could make the
overall financial system safer because it would lim-
it the ability of the private banks to create money
and exacerbate business cycles.
Although narrow banking raises many questions in
its own right, the introduction of a CBDC does not
necessarily entail the same restrictions of a full-re-
serve banking system. In fact, the term is used in a
general way, but each monetary authority could issue
a digital currency and model payment systems tai-
lored to the necessities and idiosyncrasies of the
local economy, while considering the cross-border
and global dimension of this CBDC.

79
perceptions
oF Money
and the
Future oF
Crypto-
currencies
chapter
6

80
Despite the key role that trust plays in maintaining/
preserving the value of fiat currencies, there is surpris-
ingly little empirical work surveying the general public,
especially across a diverse sample of countries. In order
to help rectify this gap, we designed a two-stage survey
across eight countries (US, UK, Germany, France, Spain,
Argentina, Brazil, Mexico). The first stage asks respon-
dents about their opinions regarding different types of
money (cash, credit cards, digital payment companies
(PayPal, AliPay, AmazonPay, etc.) and cryptocurrencies
(Bitcoin, Libra)) and their understanding of how money
is created and managed. In the second stage, we de-
signed a conjoint survey experiment where respondents
were provided with a range of hypothetical currency
choices based on five underlying attributes in order to
estimate comparable magnitudes for people’s willing-
ness to own that type of money. We will provide a
demonstration and discuss the results in the second
part of this chapter.
it can be plausibly argued
that much of the economic
backwardness in the world
can be explained by the lack
of mutual confidence.
– Arrow, 1972.
A key theme throughout this report is the importance of
trust in maintaining a successful fiat currency. This trust
has traditionally been vested in public institutions (cen-
tral bank), but digital methods of payment performed by
private companies have successfully existed for many
years (credit cards, debit cards, etc.). A more recent ex-
ample can be found in Kenya where a recent study by
Kaminska found that M-Pesa “appears to have succeeded
because Safaricom, which is 40% owned by the multina-
tional giant Vodaphone, is trusted by the public more
than the Kenyan banking system” (Kaminska, 2015). She
notes, however, that that “M-Pesa really resembles a
money transmission service more than a standalone
currency, since its sponsor collateralizes units of M-Pesa
with Kenyan hard currency deposits in escrow accounts”
(Kaminska, 2015). In this case, central banks remain
responsible for the creation and management of narrow
money, but the private sector takes over when it comes
to system of payments (transacting with money).
”
“

81
At present, there is limited general public understand-
ing of how money is created:
New results from the IE Survey on ‘The Future of Mon-
ey’ suggest, unsurprisingly, that the majority of respon-
dents are either, not familiar with fractional reserve
banking (between 44 and 75%), or, are familiar with it
but not sure what it means (between 17 and 43%). In-
terestingly, the US and UK rank amongst the lowest in
terms of understanding fractional reserve banking with
around half of the degree of understanding in Germany.
In a 2012 UK Government Office for Science research
paper, Dr Y.V. Reddy, (former Governor of the Reserve
Bank of India) was quoted saying that: “Trust is difficult
to measure, but on the basis of surveys conducted and
anecdotes reported in the media, there appears to be an
erosion of trust in the financial sector as a whole, and
banking in particular, in advanced economies”. 21
There
A. Current Understanding of,
trust in, and preferences for,
Money
the public has almost
never really understood
what the Fed is or what it
does…What’s different
today is that there is a
combination of confusion
and strong opinions:
people don’t quite know
what the Fed does, but
public trust in the Fed is at
a historic low. It’s that
combination that is
dangerous.
– Conti-Brown, 2017.
“
”
21. See: Vanston, 2012.
Source: CGC, Cryptocurrencies and The Future of Money:
International Survey.
Are you familiar with
‘fractional reserve banking’?
FIgure 25
Understanding of
Fractional reserve banking
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82
is continued evidence of this erosion of trust over ten
years after the financial crisis. For example a 2018 You-
Gov poll of 2,250 adults on behalf of campaign group
Positive Money found 66% of adults in Britain do not
trust commercial banks to work in the best interests of
society, with only 20% stating that they do trust banks
to work in the best interest of society (White, 2018).
Part of this lack of trust may come from people’s
attitudes toward the government’s regulatory re-
sponse to the financial crisis. From Figure 26, we
can see that many respondents in our survey felt that
government has not taken meaningful steps in reg-
ulating the banking sector since 2008. From the
above figure we can see that there is considerable
amount of variation with the majority of respon-
dents in Argentina, Spain, Germany, Mexico and
France believing that government has not taken
meaningful steps in regulating the banking sector
since 2008. In Brazil and the UK, a slight majority
believe that government has taken meaningful steps,
while Americans were split 35%–35%.
FIgure 26
Government response
to Financial crisis
FIgure 27
explaining Government response
to Financial crisis
Given the high levels of dissatisfaction with govern-
ment response to the financial crisis, we asked those
respondents who answered ‘no’ to the previous ques-
tion to identify why they feel that government has not
taken meaningful steps. From Figure 27, it appears that
the majority of respondents in almost all countries in
our sample felt that it is an important issue for voters
in their countries, but lobbying exerts too much influ-
ence on government for any meaningful changes to
take place’. Interestingly, the two financial centres of
the world (along with Spain) had the highest levels of
agreement that government was overly influenced by
lobbying efforts.
This continued erosion of trust and lack of effective
government response may contribute to an increasing
willingness for people to adopt alternative ways to store
money. For example, a 2018 Bain survey of 151,894
consumers in 29 countries found that 29% of respon-
dents trust at least one tech company more than their
primary bank and 54% of respondents trust at least one
tech company more than banks in general (Bradley et
al., 2018).
Government has taken meaningful steps by
regulating the banking sector since 2008 to
prevent another financial crisis
Why no meaningful steps have been taken

83
FIgure 28
Distrust of Banks and use of third-party payment Apps
Despite people’s movement towards private third-party payment systems, our survey results suggest that they
still prefer that central banks create and manage money. From Figure 29 we can see that the majority of respon-
dents (between 65% and 89%) in all of the countries in our sample trust central banks and commercial banks to
create and manage money (as their first/second choice). Specifically, central banks are the most trusted across all
countries and commercial banks, with the exception of Germany, which prefers the central government to com-
mercial banks, are the second choice for respondents. In the case of Mexico, the central bank and commercial
banks have fairly equal levels of trust, while the government has incredibly low levels of trust.
Source: du Toit, G., Bradley, K., Swinton, S., Burns, M., De Gooyer, C. (2018), “In Search of Customers Who Love Their Bank”, Bain & Company.
percentage of respondents using bank or third-party payment apps for purchases
Third party only
Both
Bank app only
note: Consists of purchases made online or at point of sale in the prior three months.
Source: Bain/research now SSI retail Banking npS Survey, 2018.

84
FIgure 29
trust in Institutions for Creating and Managing Money

85
These results do not show very optimistic prospects for the successful launch of Hayek-type currencies with very
limited support for private companies (i.e. Facebook) or peer-to-peer networks to create and manage money.
Putting this together we can see from Figure 30 below that central banks are the most preferred institution for
creating and managing money.
FIgure 30
who should
create and
Manage Money
in your country?

87
In a June 2018 ING survey on cryptocurrencies, 8% of Americans, 6% of
UK residents, 8% of German residents, 6% France residents and, 10% Spain
residents reported owning cryptocurrencies.22
FIgure 31
ownership of Cryptocurrencies
In the 2019 IE survey, there has been an increase in all countries with the
exception of Germany, which remained unchanged. Specifically, there was
a 3% increase in American ownership of cryptocurrencies, a 2% increase
in UK ownership, a 1% increase in French ownership and a 3% increase in
Spanish ownership.
Among owners of cryptocurrencies, these are predominantly held as in-
vestments, especially in countries where the ownership levels are highest.
In almost all countries, only about 2% or owners claim to use these specif-
ically for purchases.
B. ownership of
cryptocurrency
22. See: exton, 2018.

88
FIgure 32
reason for ownership of
cryptocurrencies
For those who don’t own cryptocurrencies, we found
that, in the case of Mexico, Argentina and Brazil, the
reason for not owning cryptocurrency was not due to
a lack of interest, but not knowing how to buy them. In
the case of Mexico, 55% of respondents said they did
not own cryptocurrencies because they didn’t know
how to buy them with 53% and 47% in Argentina and
Brazil, respectively.
FIgure 33
reason for not owning of
cryptocurrencies
For the US, UK, Spain, France and Germany, the majority
of respondent did not own cryptocurrencies because they
felt they were too risky. There was also a higher emphasis
on cryptocurrencies not having ant advantage over the
currencies which were currently being used. In general,
these results suggest that countries with a less stable his-
tory of monetary stability are more open to new types of
money. This brings us to the future of cryptocurrencies.
Source: CGC, Cryptocurrencies and The Future of Money: International Survey. Source: CGC, Cryptocurrencies and The Future of Money: International Survey.
Do you own cryptocurrency as
an investment or for purchases?
Why do you not own
cryptocurrencies

89
As discussed in the previous section, cryptocurrencies
have not yet manifested themselves as intended by their
creators, mainly, as useful form of money, relative to
other already established options (physical and digital).
This does not mean that cryptocurrenices will not be-
come slowly integrated into societies as their infrastruc-
ture improves. For example, Facebook’s Libra aims to
widen access to financial services and lower transaction
costs while ensuring the value of the coin by being ful-
ly backed by ‘low-volatility assets, including bank de-
posits and government securities in currencies from
stable and reputable central banks’. Holders of Libra will
not be paid interest that the underlying assets generate
– the cashflow will be used for the Foundation. The
presence of negative interest rates on some of the un-
derlying assets may force the foundation to rebalance
their holdings to avoid passing a loss on to their cus-
tomers or to pass on these costs to owners of that cur-
rency. Banking system may well ride on the back of it
– not unlike the existent repo-based shadow-banking
system in Bitcoin. The blockchain starts as permis-
sioned, with a prospect of being permissionless – again,
it is unclear why the founding partners (i.e. the ‘permis-
sioned’ parties) would choose to give up this privilege
in the future.
To get an idea of willingness to use an effective crypto-
currency (one that fulfils all of the requirements of a
successul form of money), we asked respondents about
their willingness to use this type of money if issued by
a private company.
FIgure 34
Willingness to use of a New effective
cryptocurrency
Suppose that a new cryptocurrency was designed by a
private company (or group of companies) that could be
used to make all of your day-to-day transactions (it is
accepted by all sellers) and has a stable value over time
(low inflation/deflation). This currency could also be con-
verted to other currencies at a very small cost. Would you
prefer to use this currency over your current method of
payment?
For those who answered ‘no’ to the above proposition,
our survey followed up by asking respondents why they
would not prefer an effective privately issued crypto-
currency to their existing currency options.
C. Future of Cryptocurrencies
Use of an effective private cryptocurrency

90
FIgure 35
reasons for Not
Supporting a New
effective
cryptocurrency
uk
% of respondents
no, I wouldn’t
trust Facebook
at all
50
40
30
20
10
0
no, I wouldn’t
use Libra for any
payments
yes, I’d be willing
to try Libra for
payments
yes, I trust
Facebook to
protect my info
I don’t know if I
would trust
Facebook
49.4
16.6
28.9
1.4
4.1
usa
% of respondents
no, I wouldn’t
trust Facebook
at all
50
40
30
20
10
0
no, I wouldn’t
use Libra for any
payments
yes, I’d be willing
to try Libra for
payments
yes, I trust
Facebook to
protect my info
I don’t know if I
would trust
Facebook
49.4
13.9
31.8
2.5 2.4
FIgure 36 trust in Facebook in the us and uk
Would you trust Facebook to keep your information secure when using its new crypto payment service, Libra?
As can bee seen from Figure 35, in all but two countries (US and UK), the most likely reason to not support this
hypothetical cryptocurrency was a lack of trust in new currencies. In the case of the US and UK, respondents felt
that cryptocurrencies do not offer any advantages over the money they already use.
The recent high profile announcement of Facebook’s Libra has led to a variety of surveys and articles written on
its viability in terms of consumers’ willingness to trust it. The results have not been overly positive. For example,
a June 2019 Viber survey of 1,000 US and 1,000 UK residents found that nearly half of respondents in both countries
(49%) say they would not trust Facebook at all, and less that 3% and 2% of US and UK respondents, respectively,
said they would be willing to try Libra for payments (Viber, 2018).
Source: CGC, Cryptocurrencies and The
Future of Money: International Survey.
Source: Vibe, 2018.

91
Another July, 2019 CivicScience survey of 1,799 American adults found that 40% of respondents claimed that they
trusted Libra less (35% much less) than Bitcoin and other cryptocurrencies. Only around 2% of all respondents
claimed that they trusted Libra more than other more established cryptocurrencies.
This sentiment is similar in Germany where a July 2019 German citizen’s movement survey of 2,093 adult residents
found that 71% of respondents were sceptical about Libra with only 12% claiming they would welcome it (Fi-
nanzwende, 2019).
To gain a broader understanding of people’s trust in the Libra across a wider range of countries, we asked 1,000
respondents in each of the eight countries in our sample whether they would trust Facebook to issue and man-
age a new cryptocurrency. The results widely vary across countries.
In Mexico, Argentina, and Brazil, there is a much higher willingness to trust a new Facebook issued currency with over
40% of Mexico residents saying they would trust the Libra. In contrast to these three countries, residents of Germany, the
UK,US,andFranceweremuchlesswillingtotrusttheLibrawithonlybetween3and6%sayingtheywouldtrusttheLibra.
Compared to Bitcoin and similar cryptocurrencies, how much do you trust
Facebook’s new “Libra” currency and digital wallet?
much more
Somewhat more
about the same
Somewhat less
much less
I’m not sure
39%
1% 1%
19%
5%
35%
1,770 responses, weighted by u.S. Census 18+
© CivicScience 2019
2% oF amerICanS TruST FaCeBook’S LIBra more THan BITCoIn: reSearCH
Source: CGC, Cryptocurrencies and The
Future of Money: International Survey.
FIgure 37
trust in Facebook to
issue and Manage a
New Currency across
eight countries

92
conJoint analysis
–
To gain a deeper understanding of what people want in an ideal currency, we provided 1,000 survey respondents
in each of the eight countries in our sample, with ten frames, each of which provided them with a choice between
three hypothetical currencies with varying attributes. For the purpose of this exercise, we characterized ‘money’
as having five underlying attributes:
Issuer/backer refers to who issues and/or backs that currency. This could be a central bank, a commer-
cial bank (private sector company), or a peer-to-peer nonprofit like Bitcoin (private sector peer to peer).
Acceptability refers to where are able you use the currency. Is your currency accepted by all sellers of
goods/services or only some sellers of goods/services (within the area in which you buy/sell goods and
services)?
Transaction costs are there costs involved in making the transaction (these are commonly known as
‘fees’, ‘premiums’ or ‘spreads’).
Price Stability refers to the expected change in the amount of goods and/or services you can buy over
the course of a month with the same amount of currency (i.e. x$ in October will be worth y$ in Novem-
ber)
Digital/physical. All currency that is stored outside of your personal physical possession can be con-
sidered as digital.
5.
4.
3.
2.
1.

93
Each of these attributes was assigned between two and four options shown in the table below.
MonopoliZed Money
attribute
Issuer/Backer
acceptability
transaction cost
price stability
Digital/physical
options
Central bank
private sector commercial bank
private Sector peer-to-peer network
all sellers accept the currency
80% of sellers accept the currency
40% of sellers accept the currency
Zero
0.1-1% of the transaction value
1-10% of the transaction value
max monthly inflation/deflation of 0 % (100=100)
max monthly inflation/deflation of 0 - 1% (100 = 99, or 100=101)
max monthly inflation/deflation of 1 - 10% (100 = 90, or 100=110)
max monthly inflation/deflation of 10 - 50% (100 = 50 or 100 = 150)
digital
physical
TaBLe 4
Attributes and Attribute options for types of Money
This produced 80,000 observations reflecting the pref-
erences of residents in Argentina, Brazil, France, Ger-
many, Mexico, Spain, the US and UK, for money across
our five attributes. The most straightforward way to
interpret the results is by examining the average mar-
ginal effects of each attribute choice. Effectively, these
can be viewed as premiums/discounts placed on spe-
cific characteristics of money that are comparable with
each other in magnitudes. The results are shown in
Figure 38 for each country separately. The general
results are consistent with the findings throughout
this report.
Mainly, respondents place a significant premium on
money created by central banks, with the least pre-
ferred option being peer-to-peer. The magnitudes
vary quite a bit across countries with Germany plac-
ing a very large premium on central bank money (0.18)
and Mexico placing a lower premium on central bank
money (0.04). Acceptability had a relatively consistent
impact across all countries with American respon-
dents placing the largest discount on low-acceptabil-
ity types of money. Transaction cost effects were also
fairly consistent across countries with significant
aversions when moving from 0% to between 0.1 and
1%, but only slightly higher aversion rates when mov-
ing from 0.1 and 1% to between 1 and 10% of the
transaction costs. With respect to inflation, it appears
that while respondents certainly prefer no inflation/
deflation, they are much more comfortable in the 0.1-
10% range that beyond that. This is especially true in
the case of Argentina (-.023 compared with no infla-
tion). Interestingly, the results for digital vs. physical
money were mixed across countries. In Argentina,
Brazil and Mexico, respondents preferred digital mon-
ey to physical money. While the magnitudes were not
large (between 0.02 and 0.04) there were statistical-
ly significant. In Spain, France, Germany, the UK, and
US, respondents still marginally preferred to own
physical cash over digital money. Again, the magni-
tudes here were not large compared with other attri-
butes but were statistically significant.

FIgure 38. Attributes of Money Conjoint Analysis results

95
Thinking about these results in the context of current
types of money, cash, credit cards, and debit cards,
all have very high levels of acceptability and relative-
ly low transaction costs in most advanced economies.
Central banks with a history of stable inflation and/
or a reputation as trustworthy creators and managers
of money lead to the expectation of low levels of in-
flation with cash, credit cards and debit cards. Over-
all, these three highly used types of money score quite
highly in the context of our conjoint analysis. Exist-
ing cryptocurrencies, however have low levels of ac-
ceptability and large price fluctuations, which are two
of the least-desired characteristics of money. As
noted above, these is also a trust premium enjoyed by
central banks, creating an additional trust barrier for
the much less preferred alternatives, including Face-
book. In general, the results suggest that cryptocur-
rencies, especially those which are privately issued,
have a long way to go before they might be able to
compete with or overtake traditional forms of money
like cash, credit cards and debit cards backed by cen-
tral and commercial banks.

96
conclusion
Over the past ten years, attention to money and the fi-
nancial systems has come under greater scrutiny by a
wider public concerned with current levels of transpar-
ency, management, accountability and fairness. Accom-
panying this scrutiny is an era of unprecedented techno-
logical innovations that open up the range of possibilities
for how money works, some of which were proposed by
Austrian School economists in the early 20th century.
Destabilisations in financial markets often lead to short
revivals of these Austrian school ideas regarding the role
of money and banking in society making it no coincidence
that the Nakamoto (2008) paper emerged in the after-
math of the 2007/08 financial crisis.
The widespread distrust arising from the financial crisis
and greater public scrutiny led to the seminal contribu-
tion from Nakamoto (2008) and subsequent invention
of Bitcoin. The decentralized nature and democratic
consensus protocol of Bitcoin was envisioned to become
a digital payment system with emphasis on removing
the need for a trusted third-party institution in process-
ing transactions, whose rules are enforced by consensus,
with anyone being able to participate. There are other
good reasons to move from cash to blockchains based
electronic payment systems including the elimination
of a sourse of illicit financial activity, public health ben-
efits and overall efficiency of not having to be physical-
ly present to make very fast transactions with strangers.
In fact, digital payment systems have been slowly re-
placing physical cash for many years with the majority
of respondents to the IE Survey on the Future of Money
using credit cards and debit cards as frequently as cash.
Several other digital alternatives to physical cash have
already become successful systems of payments (M-Pe-
sa, AliPay, Paypal, etc.).

97
Unfortunately, in practice, cryptocurrencies are strug-
gling to uphold their creator’s objectives, given that no
existing cryptocurrency has been universally success-
ful in fulfilling the role of ‘money’. This is partly due
to the failure in practice for a decentralized system to
work in the presence of large mining consortiums, a
lack of price stability, high transaction costs with large
electricity consumption (with Proof of Work consensus
protocols) and, potentially lower degrees of transparent
governance. There also exists a general distrust of new
currencies issued by new institutions. While central
banks are not perfect, in most advanced economies they
have built a trust premium compared to private sector
companies, which makes them better candidates in the
opinion of most citizens for issuing money and man-
aging/regulating financial transactions.
These trust premiums and low levels of trust and under-
standing of cryptocurrencies are confirmed by the unique
results from the IE Survey on the Future of Money. Specifi-
cally, residents of Argentina, Brazil, Mexico, France, Ger-
many, Spain, the UK and USA all i) place significant premi-
ums on money which is issued by a traditional authority
(preferably central banks), ii) place a heavy discount on
currencies which lack price stability, and, iii) place a high
premium on money that is highly accepted. Based on these
results and the technical challenges listed in Chapter 4,
cryptocurrencies have a considerable amount of obstacles
toovercomebeforegainingwidespreadacceptancebygen-
eralpublic.Thegoodnewsisthatcentralbanksarecurrent-
ly working diligently to investigate/establish Central Bank
DigitalCurrencies(CBDCs)whichwouldovercomesomeof
the challenges associated with cash while still being man-
aged by a trustworthy central authority in the case of ad-
vanced economies. Where central banks have poor records
of money issuance and management or high degrees of
exclusion abuse and mistrust, such countries could benefit
intheshorttermfromtheintroductionofaprivatelyissued
cryptocurrency, especially with the vast increase in world-
wide Internet users and availability of secure servers.
In short, we can return to the conclusion from Lawson in
Chapter 1: “The challenge, then, for those seeking to ren-
der a form(s) of cryptocurrency as money lies both in
getting it positioned as a legitimate general means of
payment (governed by relevant rights and obligations to
ensure this) and so also trusted in the sense that if posi-
tioned as money it would serve as a store of liquid value.”

List of Figures
1. The Basic Fractional
Reserve Banking Cycle
2. Money Creation by the
aggregate banking sector
making additional loans.
3. Use of Money types across
Countries
4. Control Structure of
Currencies
5. Types of Money in the
Digital Era
6. Cash in Switzerland as
fraction of GDP
7. US Currency in circulation
by bill type
8. Card Payments and Cash
Demand
9. Permissionless and
Permissioned Network
10. Historical Evolution of Ledgers
11. Centralized, Decentralized
and Distributed DLT
12. Cryptocurrency Token
Categories
13. Centralized and
Distributed Ledger Monetary
Systems
14. World Internet Users and
Secure Internet Servers
15. Average Remittance Fees
to Select Countries
16. Blockchain Transactions
17. Evolution of trust
18. Centralization of
Consensus Protocols
19. Characteristics of most
popular Cryptocurrencies
20. Trading Volume by
Currency
21. Mining Pools with Highest
Hash Rate
22. Design Features of Central
Bank Money
23. CPMI CBDC work in
Central Banks
24. Likelihood of Issuing a
CBDC in Short/Medium Term
25. Understanding of
Fractional Reserve Banking
26. Government response to
Financial Crisis
27. Explaining Government
Response to Financial Crisis
28. Distrust of Banks and use
of Third-Party Payment Apps
29. Trust in Institutions for
Creating and Managing Money
30. Who Should Create
and Manage Money in your
Country?
31. Ownership of
Cryptocurrencies
32. Reason for Ownership of
Cryptocurrencies
33. Reason for not Owning of
Cryptocurrencies
34. Willingness to use of a
New Effective Cryptocurrency
35. Reasons for Not
Supporting a New Effective
Cryptocurrency
36. Trust in Facebook in the
US and UK
37. Trust in Facebook to Issue
a New Currency
38. Attributes of Money
Conjoint Analysis Results

List of tables
table 1. Select Episode of High Inflation
table 2. Foreign Exchange Fees in UK Airports (Media Articles)
table 3. Stablecoin Projects (Inception date and capitalization)
table 4. Attributes and Attribute Options for types of Money
Click on this link to get access to your future money via crypto https://www.digistore24.com/red

100
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105
anneX
Money and trust:
Country profiles
The Survey on Cryptocurrencies and the Future of money
conducted by the Center for the governance of Change of Ie
university asked a representative sample of 8,000 citizens
of the uS, uk, germany, France, Spain, argentina, Brazil and
mexico about their use of different types of money, trust in
institutions to create and manage money and their attitudes
towards digital currencies, including Facebook’s Libra.
a summary of the results is shown in this annex.
To get a better idea of citizens attitudes toward different
types of money, the survey also presented each of the 1000
respondents with a variety of different hypothetical types
of money (Conjoint analysis of preferences for money).
This gives a good measure of to what extent a premium or
discount is placed on different attributes of money.

106
0.00
0.07
0.02
0.00
-0.07
-0.16
0.00
-0.08
-0.10
-0.07
-0.10
-0.23
0.00
-0.02
Issuer: Peer to Peer
Issuer: Central Bank
Issuer: Commercial Bank
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Transaction Costs: zero
Transaction Costs: 0.1 - 1.0%
Transaction Costs: 1.0 - 10%
Inflation/Deflation: 0%
Inflation/Deflation: 0.1 - 1%
Inflation/Deflation: 1 - 10%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
Argentinians appear to place a premium on central bank
issued money and very high discount on money with
high price volatility (inflation/deflation).
Money and trust in argentina
Conjoint Analysis of preferences for Money in Argentina
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
trust in institutions to create & Manage Money Attitudes towards Digital Currencies
Use of Money in Argentina (Daily & Weekly)
36.3%
36.9%
15.8%
17.7%
33.8%
25.6%
5.9%
9.1%
8.2%
10.7%
First choice
second choice
daily
weekly
Heard of cryptocurrencies
willingness to use an
efficient Digital currency
issue a digital currency
ownership of cryptocurrencies
81.1%
78.9%
38.2%
24.7%
54.3% Credit Card
65.8%
debit card
21.7% third party service
4.6% Cryptocurrency
82.3% Cash

107
Brazilians appear to place a premium on central bank
issued money and high discount on money with low
levels of acceptability (40%).
Money and trust in B razil
Conjoint Analysis of preferences for Money in Brazil
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
trust in institutions to create & Manage Money
Use of Money in Brazil (Daily & Weekly)
31.4%
33.4%
22.0%
21.0%
32.8%
27.3%
9.8%
10.4%
4.0%
8.0%
First choice
second choice
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
0.00
0.00
0.00
0.00
0.00
0.06
0.02
-0.10
-0.16
-0.06
-0.10
-0.03
-0.05
-0.12
-0.03
Attitudes towards Digital Currencies
86.9%
74.5%
36.8%
30.8%
73.9% Credit Card
66.9%
debit card
10.5% Cryptocurrency
72.4%
cash
daily
weekly

108
French citizens appear to place a high premium on
central bank issued money and high discount on money
with high price volatility (inflation/deflation).
Money and trust in France
Conjoint Analysis of preferences for Money in France
Use of Money in France (Daily & Weekly)
84.7% Credit Card
63.1%
debit card
4.6% Cryptocurrency
70.5%
cash
daily
weekly
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
60.2%
28.6%
17.6%
25.2%
15.7%
33.1%
4.3%
8.1%
2.2%
5.1%
First choice
second choice
Heard of
cryptocurrencies
51.4%
35.8%
6.0%
14.3%
trust in Facebook to issue a digital currency
0.16
0.07
0.00
0.00
-0.05
-0.13
0.00
-0.08
-0.12
0.00
-0.06
-0.08
0.00
0.04
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20

109
Germans appear to place a high premium on central
bank issued money and high discount on money with
high price volatility (inflation/deflation).
Money and trust in Germany
Conjoint Analysis of preferences for Money in Germany
Use of Money in Germany (Daily & Weekly)
46.7% Credit Card
41.0% Debit Card
2.8% Cryptocurrency
86.8% Cash
daily
weekly
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
trust in institutions to create & Manage
Money
57.5%
28.5%
15.2%
34.0%
20.9%
26.9%
3.7%
6.5%
4.2%
First choice
second choice
79.5%
28.6%
3.5%
9.5%
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
0.00
0.18
0.10
0.00
-0.15
0.00
-0.07
-0.07
-0.11
0.00
-0.05
-0.06
-0.17 0.00
0.02
2.7%

110
Mexicans appear to place a slight premium on central
bank and commercial bank issued money and high
discount on money with low levels of acceptability high
price volatility (inflation/deflation).
Money and trust in Mexico
Conjoint Analysis of preferences for Money in Mexico
Use of Money in Mexico (Daily & Weekly)
62.0%
credit card
70.0% Debit Card
6.0% Cryptocurrency
86.3% Cash
daily
weekly
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
37.8%
7.4%
12.7%
47.0%
30.5%
3.6%
7.9%
7.2%
First choice
second choice Heard of cryptocurrencies
79.6%
77.8%
41.2%
23.0%
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
0.00
0.04
0.03
0.00
-0.07
-0.17
0.00
-0.08
-0.11
0.00
-0.04
-0.06
-0.16
0.00
-0.04
41.7%
4.2%

111
Spanish citizens appear to place a high premium on
central bank issued money and high discount on money
with high price volatility (inflation/deflation).
Money and trust in spain
Conjoint Analysis of preferences for Money in Spain
Use of Money in Spain (Daily & Weekly)
74.0% Credit Card
65.7%
debit card
3.7% Cryptocurrency
85.0% Cash
daily
weekly
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
32.2%
39.3%
25.4%
21.9%
33.3%
22.0%
4.7%
8.5%
4.3%
8.3%
First choice
second choice
81.7%
49.0%
13.0%
16.0%
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
0.00
0.12
0.04
0.00
-0.07
-0.14
0.00
-0.07
-0.10
0.00
-0.07
-0.09
-0.19
0.03
0.00

112
UK citizens appear to place a high premium on central
bank issued money and high discount on money with
low levels of acceptability high price volatility (inflation/
deflation).
Money and trust in uk
Conjoint Analysis of preferences for Money in Uk
Use of Money in Uk (Daily & Weekly)
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
27.5%
10.5%
27.0%
23.6%
37.3%
4.8%
3.4%
First choice
second choice Heard of cryptocurrencies
70.8%
32.3%
4.2%
11.3%
0.00
0.15
0.06
0.00
-0.08
-0.17
0.00
-0.08
-0.13
0.00
-0.04
-0.05
-0.14
0.00
-0.04
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
60.8%
credit card
70.3% Debit Card
3.7% Cryptocurrency
76.9% Cash
daily
weekly
60.9%
3.5%
1.5%

113
Americans appear to place a high premium on central
bank issued money and very high discount on money
with low levels of acceptability (40%).
Money and trust in usa
Conjoint Analysis of preferences for Money in USA
Use of Money in USA (Daily & Weekly)
68.1% Credit Card
59.3%
debit card
5.3% Cryptocurrency
62.6% Cash
daily
weekly
central
bank
commercial
bank
central
Government
peer to peer
Network
private sector
nonbank
45.4%
27.8%
11.7%
32.7%
31.4%
22.3%
6.7%
9.1%
4.8%
8.1%
First choice
second choice
69.2%
32.6%
4.8%
15.8%
Acceptability: 100%
Acceptability: 80%
Acceptability: 40%
Digital
Physical
-0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20
0.00
0.08
0.04
0.00
-0.10
-0.19
0.00
-0.08
-0.12
0.00
-0.03
-0.04
-0.12
0.00
0.03

115
direc tor:
Dr. Mike Seiferling, UCL
rese archers:
Mr. Thamin Ahmed, UCL Centre for Blockchain Technologies
Dr. Abeer Yehia ElBahrawy, City, University of London
Mr. Keith Chan, University of Cambridge
Mr. Tales Padilha, Oxford University
recoMMended citation:
CGC, Cryptocurrencies and the Future of Money.
Madrid: Center for the Governance of Change,
IE University, 2019.
© 2020 CgC madrid, Spain
team of researchers

116
www.cgc.ie.edu

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