Cryptocurrencies: Economic Benefits and Risks

Abstract

Since the emergence of Bitcoin in 2009, the number of cryptocurrencies, their applications and market value grew significantly. There is a surge in the number of businesses, financial institutions and authorities, investors and governments interested in the adaptation of the cryptocurrencies and/or blockchain technology. In this report, we aim to provide an overview of the economic benefits and risks of cryptocurrencies for researchers and students in economics, finance, mathematics and computer science. The report offers the summary of the academic and non-academic literature concerning this topic published to this day as well as the list of future research perspectives, review of Bank of England research on cryptocurrencies, and contributions from University of Manchester researchers specialising in various academic fields.

Among the economic benefits, we discuss the defining characteristics of cryptocurrency users and the potential benefits for small and large businesses and the society as a whole. We also focus on the new, low-cost and unregulated form of early-stage company financing which was propagated by some of the blockchain start-ups, the Initial Coin Offerings (ICOs). Subsequently, we acknowledge the risks posed by the adaptation of cryptocurrencies, analyse their efficiency and stability issues. We also address the problem of illegal activities benefiting from the anonymity offered by the system, focusing predominantly on tax evasion, money laundering, the economy of dark markets and terrorism financing. The report also covers the responses of governments and central banks to this phenomenon and the current state of legal definitions of cryptocurrencies in chosen countries.

Keywords: Cryptocurrencies, blockchain, ICO, Bitcoin, altcoin, decentralisation, market efficiency, financial stability

JEL Classification: Y20