Author(s): Andrei Kirilenko
Date published: Oct 2019
SUERF Policy Note, Issue No 104
by Andrei Kirilenko, Imperial College London
JEL-codes: E02, E42, E50.
Keywords: Money, monetary theory, currency competition.
As an asset class, crypto assets are probably closest to commodities. The most important financial attributes of a physical commodity are (i) its storability over time and (ii) ease of its delivery in different locations and under different circumstances. Digital records are extremely highly storable and can be delivered over digital communication networks anywhere in the world at extremely low cost. Blockchain technology uses cryptography and encryption to create and transmit an immutable database of digital records. As a result, it becomes possible to use blockchain to create scarcity of digital objects, and, thus, create an entirely new class of digitally native financial assets – crypto currencies, tokens and coins. On the supply side, crypto assets differ from each other by two essential features: security and stability. Security of a crypto asset reflects its technological vulnerability to cyber fraud, manipulation, abuse, and attack. Stability of a crypto asset reflects its potentially faulty governance. We model the adoption of a crypto asset as a choice between security, stability, and the risk/return tradeoff for given investor preferences. By plotting the expected return of crypto assets against the risk of their not being adopted, we’re able to organise them into four large groups: central bank issued digital currencies (CBDCs), stable coins, cryptocurrencies, and crypto tokens. Regulation of crypto assets has proven to be a non-trivial challenge to regulators around the world. Regulators need to establish under which regulatory mandate is the plan to regulate crypto assets? Do they plan to regulate them under the monetary policy mandate, financial stability mandate, payments mandate, consumer protection, or fair and orderly markets mandate? Regulators ideally should try not to regulate a specific asset, crypto or otherwise. Rather, after defining broad attributes of an asset class, regulators should aim to regulate principled activity – issuance, brokerage, custody, etc.
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