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Crypto Currencies and the Blockchain Technology: An Evolutionary Review of Money and the Payment Systems

Author

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  • Jalali-Naini, Seyed Ahmad Reza

    (Institute for Management and Planning Studies)

  • Rabie Hamedani, Hasti

    (Monetary and Banking Research Institute)

Abstract

In this paper we utilize the main findings from the recent literature to set the economic foundation for the existence of money, its modern interpretation as "memory" (Chokerlakota 1998) and how the Blockchain technology has empowered crypto currencies to perform this role in the information age. To locate the issue in a historical perspective and in line with this strand of thought, we consider direct and indirect exchange and the Wicksell triangle and discuss the frictions under which the need for fiat money arises. More specifically, it will be argued when "reputation" (trust) is imperfect, high cost of enforcing contracts undermines the case for pure private money (credit). The corner stones of the present system, a remnant of 20th century central banks' fiat money and "private money" issued by the banking system and the current payment system relies primarily on the technologies and centralized "trust" protocols developed before the early 1990s. The internet and the digital technology have greatly reduced the costs of gathering and storing information and thus is able to compete with the traditional payment system in the future in the niche markets. In this connection, how the Blockchain technology can complement internet technology for creation of crypto currency for payments, money transfers and asset purchases will be discussed. Finally, the paper examines whether crypto currencies can replace money in its current form. It will be shown that in the case of crypto currencies, high price volatility undermines the store of value function of money and this factor plus issues pertaining to money laundering and taxation prevents them to become a widespread form of money, though they will be used as a medium of exchange in the niche markets.

Suggested Citation

  • Jalali-Naini, Seyed Ahmad Reza & Rabie Hamedani, Hasti, 2016. "Crypto Currencies and the Blockchain Technology: An Evolutionary Review of Money and the Payment Systems," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 11(3), pages 245-265, July.
  • Handle: RePEc:mbr:jmonec:v:11:y:2016:i:3:p:245-265
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    References listed on IDEAS

    as
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    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    5. Gabriele Camera & Marco Casari, 2014. "The Coordination Value of Monetary Exchange: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 290-314, February.
    6. David Andolfatto, 2018. "Blockchain: What It Is, What It Does, and Why You Probably Don’t Need One," Review, Federal Reserve Bank of St. Louis, vol. 100(2).
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    More about this item

    Keywords

    Cryptocurrency; Money; Payment Systems; Blockchain; Return volatility;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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