Cryptocurrencies

Threats and Applications from a Monetary Economic Perspective

Abstract

Over the last years, cryptocurrencies gained attention from all over the world. However, one of the main reasons for their popularity, namely their independence from central banks and politics, might similarly impose severe threats to the financial system. The aim of this paper is to consider cryptocurrencies from a monetary economic standpoint by assessing what sets them apart from fiat money and why they might impose risks on existing financial systems and players. Based on that, we assess their current and potential application in practice by observing their traits as investment object, their ability to act as a safe haven and as a medium of exchange in cross-border trade from a traditional monetary economic point of view. Finally, this paper analyzes whether cryptocurrencies could serve as money in a traditional sense, hurdles they needed to take and potential implications of their implementation. Based on our assessment, their current functioning as currency in a traditional sense is still very limited so far, whereas regulatory forces will closely monitor and attempt to prevent unwanted developments. Consequently, their most promising field of application rather lies in other areas of application, especially in cross-border trade, as their unique characteristic bringing considerable potentials for saving intermediary and exchange costs. However, if States and Central Banks are capable of maintaining and improving all functionalities of fiat money, to keep it transparent, stable and technically up-to-date and to meet the demand of publicity, the desire to hold cryptocurrencies as alternative currencies might become obsolete.