The Potential of Digital Currency and Blockchains.

• Author: Yermack, David

Digital currencies such as bitcoin and the underlying blockchain technology are among the most exciting recent innovations in finance. During 2017, surging interest in cryptocurrencies drove their total market value above $600 billion, an increase of more than 700 percent for the year, and major corporations and governments launched blockchain projects in diverse areas such as shipping and logistics, electric power distribution, and real estate title registration. Blockchain refers to a series of records, typically holding data such as financial transactions, protected by cryptographic tools and arranged sequentially, such that any attempt to change a prior entry throws off all entries after that point in the chain. This property makes blockchain ledgers resistant to tampering and provides much greater security than conventional double-entry bookkeeping.

In a series of papers, I have explored both the potential and the limitations of this emerging technology. Due to the libertarian free-market philosophy inherent in the stateless design of digital currencies, the topic evokes neoclassical ideas from the institutional economics of the 19th and 20th centuries, reviving ideas behind such movements as the Jacksonian era of Free Banking, in which private currencies played a much larger role in the economy than government fiat currencies, and the 1930s Chicago Plan for a narrow banking system with a 100 percent reserve requirement.

This article summarizes my digital currency work in three areas: the suitability of bitcoin as a currency, how blockchain technology may impact central banking, and the potential for blockchain technology to disrupt the equity markets and the dynamics of corporate governance. This work draws upon finance and banking as well as law and economics, cryptography, macroeconomics, and other fields.

Bitcoin as a Currency

Bitcoin is described by its anonymous creator as "a peer-to-peer electronic cash system," a stateless payment system that does not rely upon a trusted intermediary such as a central bank or a mint. (1) Its money supply is regulated by transparent, open source computer code, and transactions are validated by a system of double-key cryptography and are entered into a decentralized, widely distributed ledger through a periodic competition known as mining. Since the first use of bitcoin to pay for two pizzas in May 2011, a gradually increasing network of merchants has begun accepting bitcoin as payment for goods and services in the real economy.

While its design is indisputably novel and clever, a natural question to investigate is how well bitcoin fulfills the classical roles of money. I began to explore that question in late 2013, when the value of a bitcoin soared above $1,000 during an episode of feverish investor speculation (2) and concluded that bitcoin does not behave much like a currency, according to the criteria widely used by economists. Instead, bitcoin resembles a speculative investment similar to the internet stocks of the late 1990s.

Money is typically defined by economists as having three attributes: It serves as a medium of exchange, a unit of account, and a store of value. Bitcoin somewhat meets the first of these criteria, because a growing number of merchants, especially in online markets, appear willing to accept it as a form of payment. However, the worldwide...