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Bitcoin – The Promise and Limits of Private Innovation in Monetary and Payment Systems

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  • Beat Weber

    () (Oesterreichische Nationalbank)

Abstract

A private initiative that has created a virtual currency and a payment system based on cryptography and decentralized management, Bitcoin is considered not only an interesting, but also a disruptive technical innovation by many observers. A number of regulatory and supervisory bodies have issued assessments of the phenomenon, contributing to an emerging international discussion. Does Bitcoin’s claim to provide useful monetary and payment services hold up when checked against principles of monetary theory and the economics of payment systems? We find that while Bitcoin does not rival the established money and payment systems in their traditional domains, a complementary function is conceivable in niches. Using the Bitcoin network poses several risks to customers, however. Since this network and financial services related to bitcoins are not regulated, costumers must take appropriate technical measures to protect their bitcoin holdings. In case of error and fraud, payments are difficult to reverse. Furthermore, the significant exchange rate fluctuations could pose a grave risk to bitcoin owners’ wealth and discourage widespread use for monetary purposes. In a nutshell, at present, bitcoins can be regarded as speculative assets, and the Bitcoin network might inspire further innovation in payment systems and other applications.

Suggested Citation

  • Beat Weber, 2014. "Bitcoin – The Promise and Limits of Private Innovation in Monetary and Payment Systems," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 53-66.
  • Handle: RePEc:onb:oenbmp:y:2014:i:4:b:3
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    File URL: https://www.oenb.at/dam/jcr:69d918db-d468-46f9-b358-3b5dd84677f6/mop_2014_q4_analyses_3.pdf
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    References listed on IDEAS

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    1. Schmiedel, Heiko & Kostova, Gergana & Ruttenberg, Wiebe, 2012. "The social and private costs of retail payment instruments: a European perspective," Occasional Paper Series 137, European Central Bank.
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    7. Beat Weber, 2013. "Ordoliberale Geldreform als Antwort auf die Krise?: Bitcoin und Vollgeld im Vergleich," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 82(4), pages 73-88.
    8. Beat Weber, 2016. "Bitcoin and the legitimacy crisis of money," Cambridge Journal of Economics, Oxford University Press, vol. 40(1), pages 17-41.
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    Cited by:

    1. repec:spt:apfiba:v:7:y:2017:i:3:f:7_3_4 is not listed on IDEAS
    2. Ahmed, Ovais, 2017. "Block chain Technology:Concept of Digital Economics," MPRA Paper 80967, University Library of Munich, Germany.
    3. Wilko Bolt & Maarten van Oordt, 2016. "On the Value of Virtual Currencies," Staff Working Papers 16-42, Bank of Canada.
    4. Beate Sauer, 2016. "Virtual Currencies, the Money Market, and Monetary Policy," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(2), pages 117-130, May.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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