Ignorance, Debt and Cryptocurrencies: The Old and the New in the Law and Economics of Concurrent Currencies
35 Pages Posted: 21 Feb 2018 Last revised: 28 Feb 2018
Date Written: February 11, 2018
Cryptocurrencies can potentially unleash a sea change in banking, finance, and monetary systems. Given that issuing (central bank) money constitutes one of the prerogatives of modern states, it was expected that governments would actively engage in regulating cryptocurrencies. However, as of this writing, due to the uncertainty as to the possible future trajectories of evolving cryptocurrency ecosystems, governments have taken a relatively hands-off and wait-and-see approach to regulating such currencies. This approach may be justified within the theoretical information-economics framework of this paper, which compares the information economics of money and quasi-money creation within the current central banking, commercial banking and shadow banking system with that of money creation within the cryptocurrency ecosystem. Although this paper focuses on Bitcoin (BTC), the main points of this paper would equally apply to other decentralized cryptoassets that share similar properties with Bitcoin.
The main contribution of this paper lies in the synthesis of information economics in finance - as related to the mechanisms of money and quasi-money creation in the banking and shadow banking sector - and the mechanism of money creation in cryptocurrency ecosystem. In particular, drawing lessons from the literature on ‘safe assets’ and building on Holmstrom's seminal work (2015), this paper highlights striking differences in the basic information economics of cryptocurrencies as opposed to fiat currencies (including the monetary aggregates). The main finding of this paper is that, Bitcoin trumps central bank money and private and quasi-private money – created by the banking and shadow banking system – on account of its informational foundations. The superior information economics of Bitcoin, which is built on symmetric (common) knowledge as to the inner workings of Bitcoin Blockchain, as opposed to that of fiat currencies, which is built on symmetric ignorance as to the underlying collateral, would make Bitcoin a new ‘safe’ asset holding the promise of maturing into a viable store of value, a potential medium of exchange, and a unit of account. By comparing the information economics of central, commercial and shadow bank money with that of Bitcoin, we highlight important aspects of information economics of Bitcoin that would inform any pending regulatory intervention in the cryptocurrency ecosystem.
Keywords: Cryptocurrencies, Bitcoin, Blockchain, Information asymmetry, Safe assets, Money, Debt
JEL Classification: E42, E51, E58, G01; G23; G28; K22; K23, K24
Suggested Citation: Suggested Citation