Eggs in One Basket: Security and Convenience of Digital Currencies

47 Pages Posted: 23 Sep 2020

See all articles by Charles M. Kahn

Charles M. Kahn

University of Illinois, Urbana-Champaign; Bank of Canada; Feseral Reserve Bank of Saint Louis

Francisco Rivadeneyra

Bank of Canada

Tsz-Nga Wong

Washington University in St Louis

Date Written: September, 2020

Abstract

Digital currencies store balances in anonymous electronic addresses. We analyze the trade-offs between safety and convenience of aggregating balances in addresses, electronic wallets and banks. In our model agents balance the risk of theft of a large account with the cost to safeguarding a large number of passwords of many small accounts. Account custodians (banks, wallets and other payment service providers) have different objectives and tradeoffs on these dimensions; we analyze the welfare effects of differing industry structures and interdependencies, and in particular the consequences of "password aggregation" programs which in effect consolidate risks across accounts.

Keywords: digital currencies, wallets, hacking, theft, welfare

JEL Classification: E42, E51, E58

Suggested Citation

Kahn, Charles M. and Rivadeneyra, Francisco and Wong, Tsz-Nga, Eggs in One Basket: Security and Convenience of Digital Currencies (September, 2020). FRB St. Louis Working Paper No. 2020-032, Available at SSRN: https://ssrn.com/abstract=3696734 or http://dx.doi.org/10.20955/wp.2020.032

Charles M. Kahn (Contact Author)

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Feseral Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

Francisco Rivadeneyra

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

HOME PAGE: http://sites.google.com/site/rivadeneyr/research

Tsz-Nga Wong

Washington University in St Louis ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://sites.google.com/site/tszngawong/

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