Bitcoin – The Promise and Limits of Private Innovation in Monetary and Payment Systems

Monetary Policy and the Economy. Q4/2014, 53-66

14 Pages Posted: 29 Jan 2015

See all articles by Christian Beer

Christian Beer

Vienna University of Economics and Business

Beat Weber

Oesterreichische Nationalbank (OeNB)

Date Written: January 25, 2015

Abstract

A private initiative that has created a virtual currency and a payment system based on cryptography and decentralized management, Bitcoin is considered not only an interesting, but also a disruptive technical innovation by many observers. A number of regulatory and supervisory bodies have issued assessments of the phenomenon, contributing to an emerging international discussion. Does Bitcoin’s claim to provide useful monetary and payment services hold up when checked against principles of monetary theory and the economics of payment systems? We find that while Bitcoin does not rival the established money and payment systems in their traditional domains, a complementary function is conceivable in niches. Using the Bitcoin network poses several risks to customers, however. Since this network and financial services related to bitcoins are not regulated, costumers must take appropriate technical measures to protect their bitcoin holdings. In case of error and fraud, payments are difficult to reverse. Furthermore, the significant exchange rate fluctuations could pose a grave risk to bitcoin owners’ wealth and discourage widespread use for monetary purposes. In a nutshell, at present, bitcoins can be regarded as speculative assets, and the Bitcoin network might inspire further innovation in payment systems and other applications.

Keywords: Bitcoin, Monetary reform, monetary policy, monetary systems, payment systems, innovation

JEL Classification: E42, E52, E58

Suggested Citation

Beer, Christian and Weber, Beat, Bitcoin – The Promise and Limits of Private Innovation in Monetary and Payment Systems (January 25, 2015). Monetary Policy and the Economy. Q4/2014, 53-66. Available at SSRN: https://ssrn.com/abstract=2556800

Christian Beer

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Beat Weber (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

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