Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210780
Authors: 
Chiu, Jonathan
Koeppl, Thorsten V.
Year of Publication: 
2019
Series/Report no.: 
Bank of Canada Staff Working Paper 2019-40
Abstract: 
How well can a cryptocurrency serve as a means of payment? Cryptocurrencies need to overcome double spending by using costly mining and by delaying settlement. We formalize this insight through an incentive constraint that rules out double spending and pins down the welfare costs of a cryptocurrency. We find that it is optimal to use seignorage rather than transaction fees to finance costly mining. We estimate that Bitcoin generates a large welfare loss that is about 500 times as large as a monetary economy with 2% inflation. This welfare loss can be lowered in an optimal design to the equivalent of a monetary economy with moderate inflation of about 45%.
Subjects: 
Digital currencies and fintech
Monetary policy
Payment clearing andsettlement systems
JEL: 
E4
E5
L5
Document Type: 
Working Paper

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