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Cryptocurrencies: Economic Benefits and Risks

University of Manchester, FinTech working paper no. 2, October 2017

56 Pages Posted: 27 Oct 2017 Last revised: 15 Nov 2017

Octavian Nica

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students

Karolina Piotrowska

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: October 26, 2017

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

Suggested Citation

Nica, Octavian and Piotrowska, Karolina and Schenk-Hoppé, Klaus Reiner, Cryptocurrencies: Economic Benefits and Risks (October 26, 2017). University of Manchester, FinTech working paper no. 2, October 2017. Available at SSRN: https://ssrn.com/abstract=3059856

Octavian Nica

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Karolina Piotrowska

University of Manchester, Faculty of Humanities, School of Social Sciences, Department of Economics, Students ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Klaus Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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