Conjoncture

The cryptocurrency economy

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Depending on the source, estimates of the number of ‘cryptocurrencies’ vary between 1,600 and 3,000. These crypto-assets struggle to  
fulfil the three economic functions of money, and so cannot be considered as such. Although their fairly modest uptake currently limits  
their economic impact, increased use could create risks in the transmission of monetary policy, money creation and financial stability.  
Several central banks are looking at the introduction of a ‘central bank digital currency’ (CBDC) in response to these challenges.  
However, far from being simply a substitute for private cryptocurrencies, these CBDCs would carry specific risks in terms of financial  
stability, most notably that of a ‘digital bank run’. We believe that their possible introduction, and the associated details, will require  
meticulous analysis.  
‘Cryptocurrencies’ or, less commonly but more accurately, crypto-assets  
are, for the time being at least, not as widely used as their media  
coverage might suggest. As a result, for most of us our view of them is  
dominated by a perception of their high level of technological  
sophistication and remains fairly vague. Although some professionals  
and fans of new technologies are very enthusiastic, an economist  
examining the topic might be more circumspect.  
The origins of ‘cryptocurrencies’ date back to the aftermath of the  
financial crisis of 2008 . They were initially supported by an upswelling  
of libertarian current, in turn underpinned by a desire to enable the  
settlement of transactions in a way that avoided commercial, and to a  
lesser extent, central banks. They were also encouraged by a desire to  
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These contrasting positions led us to draw up an initial taxonomy in an avoid major established currencies like the dollar and euro. In such  
attempt to define what they are and, more importantly, what they are not circumstances, it is natural that the main innovation of the original  
(
genuine currencies). This economic definition serves as a preamble to ‘cryptocurrencies lies in the removal of the trusted third party, a role  
a section on the state of the science. This is still relatively sketchy, but hitherto played by commercial banks for transactions denominated in  
pathways can be drawn with the debate opened up by Friedrich August official currencies, and the option of conducting direct ‘peer-to-peer’  
von Hayek’s arguments for competing currencies at the end of the transactions.  
1970s.  
Our thought process then leads us naturally on towards ‘central bank  
digital currencies’. Often presented by central banks themselves as  
substitutes for private ‘cryptocurrencies’, in reality there are significant  
differences in terms of the consequences they could have for the  
financing of the economy and for financial stability. By virtue of their  
similarities with ‘narrow banking’ or the Swiss ‘sovereign money’  
proposals (convincingly rejected by Swiss voters in 2018), ‘central bank  
digital currencies’ could change the money creation process as we  
know it today and affect the cost and volume of financing. They would  
also create the risk of a run on ‘digital’ banks. Their possible adoption,  
and their characteristics when adopted, will need to be carefully  
considered in order to reduce these risks.  
Cryptocurrencies are first and foremost virtual, with no material reality.  
Unlike other forms of digital money (electronic money in digital wallets,  
script money in bank accounts), they are not regulated.  
Decentralisation is a common, but not systematic, feature of  
‘cryptocurrencies. Whilst real currencies are managed centrally by a  
central bank, each participant (associated to a ‘node’, in reference,  
among other things, to a computer on a network) can offer or approve  
transactions in a distributed ledger (see Diagram 1). In the absence of a  
trusted third party (financial intermediary or bank), the security of  
transactions is provided by cryptography, that is to say by encryption  
algorithms.  
Three shared characteristics allow us to define ‘cryptocurrencies’. Two  
criteria are universal, the virtual nature and the cryptographic technique For example, the Bitcoin cryptocurrency, which has been in existence  
of these assets, whilst one  decentralisation  is common but optional. since 2009, has so far proved itself extremely resistant to attacks and  
The first stage is to develop a taxonomy of ‘private’ crypto-assets, falsification. The whole community of developers has succeeded,  
according to their main characteristics, and consider the extent to which thanks to the blockchain, in collectively ensuring the security of  
they are currencies.  
transactions. The procedure of validating and authenticating  
transactions is known as ‘mining’. This involves making computer  
1
Nakamoto S. (2008), Bitcoin: A Peer-to-Peer Electronic Cash System,  
st  
November 1 .  
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processing power available to the network to solve complex Some networks are known as ‘permissioned’ which is to say that access  
mathematical problems. Blocks of transactions are recorded in a public to networks is limited to authorised members, who have been pre-  
distributed ledger (which can be read by all members of the network) designated or who meet certain criteria. Almost all ‘cryptocurrencies’ are  
listing all Bitcoin transactions since this digital currency was launched.  
based on blockchain technology (see Box).  
The use of cryptography seeks to secure transactions made over the The dynamic of the amount of currency issued is determined by  
internet by allowing access to information only to members of the protocols that vary from one cryptocurrency to another. Thus, in the  
distributed ledger (including new entrants). In most cases case of Bitcoin, the flow of new issuance (through mining) is halved  
‘cryptocurrencies’ operate as a distributed register from which all the every four years, with a ceiling on issuance capped at 21 million units, a  
information is simultaneously accessible to all the participants. limit that is set to be reached in 2140.  
Transactions are thus validated by ‘consensus’.  
The blockchain  
Blockchain is a secure information storage and transmission technology that operates without any central control structure. It is secured by encryption. It also  
refers to a database containing the complete history of all transactions conducted by users since its creation. This database is secured and distributed: it is shared  
between users, without intermediary, which allows each user to assess the validity of the chain.  
Some blockchains are public, open to all, whilst others are private or ‘permissioned’ with access limited to a certain number of users.  
Imagine a community each of whose members owns a magic notebook. As soon as anyone writes in one notebook, the writing will appear immediately in all the  
others. Moreover, the ink used is indelible. As a result, all the magic notebooks will contain exactly identical texts. Any individual attempt to change an entry in the  
notebook will be detected immediately, making it impossible to achieve.  
The first blockchain emerged in 2008. It represents the underlying architecture of the Bitcoin crypto-asset. Its inventor has not revealed his or her identity, going by  
the pseudonym Satoshi Nakamoto.  
The operation of the blockchain  
Any public blockchain operates by definition through the use of coins or programmable tokens.  
Transactions between users of the network are grouped into blocks. Each block is validated by nodes on the network, known as ‘miners’, using techniques that  
vary from one blockchain to the next. In the bitcoin blockchain, the technique used is known as ‘Proof-of-Work’, and requires complex algorithmic problems to be  
solved. Payment for this service (in the form of Bitcoins) provides an incentive for miners to compete to solve the algorithmic problems. Only the first to solve the  
problem receives payment, and the simultaneous deployment of computing resources by competing miners is energy-intensive.  
Once a block has been validated it is time stamped and added to the blockchain.  
As the software is open source, many crypto-assets are based on the blockchain model. The blockchain may however be used for a much wider range of  
applications than ‘currencies’, as it is a protocol that allows secure direct transfer of information (for instance traceability of food, gemstones or luxury goods (to  
protect against counterfeiting), or energy trading networks involving producers and consumers).  
The blockchain  
Example of a payment transaction in the blockchain  
The operation is added to the  
block currently being created  
1
2
A initiates a transaction with B  
A
Block n-1  
Transaction (i-7)  
Transaction (i-6)  
Transaction (i-5)  
Transaction (i-4)  
Block 1  
Block n-1  
Block n  
Transaction (i-7)  
Transaction (i-6)  
Transaction (i-5)  
Transaction (i-4)  
Transaction (i-3)  
Transaction (i-2)  
Transaction (i-1)  
Transaction (i)  
Transaction 1  
Transaction 2  
Transaction 3  
Transaction 4  
The block is valited by network nodes  
The block is added to  
the blockchains"  
3
4
B
B receives  
payment  
5
Diagram 1  
Source: BNP Paribas  
Diagram 2  
Source: BNP Paribas  
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Distributed and centralised registers  
bank, assets are, on average, significantly less liquid than bank  
deposits are for their holders. Prudential regulations require banks to  
create reserves at the central bank equivalent to a certain percentage of  
customer deposits (1% in the euro zone since 2012).  
Conversely first-generation ‘cryptocurrencies’ have no intrinsic value  
and thus nothing, other than the trust their users placed in them, serves  
to guarantee their value over time. Their relative scarcity is not a  
sufficient condition to ensure that their value remains within an  
acceptably narrow range to ensure a relative stability of their price. Thus,  
the fall in demand for Bitcoin in 2018 resulted in a brutal collapse in its  
price.  
Centralised  
Distributed  
Source: Landau J.-P. (2018) Cryptocurrencies  
Ministry of Economics and Finance Report, 4July  
Diagram 3  
Stablecoins, issued by entities which back them with stable assets in  
one way or another, were looked on more favourably by central banks.  
For example, the JPM Coin, from US bank JP Morgan, which  
completed its test phase in February 2020, falls into this category. This  
is a ‘wholesale’ crypto-asset (for use by financial institutions wishing to  
make use of a dedicated blockchain) which is tradeable at parity with  
the dollar and backed by the issuer’s guarantee. Facebook’s Libra  
project seems, however, to have dented the central banks’ more  
positive view of stablecoins. Like official currencies stablecoins  
represent a claim on their issuers, the quality of whose balance sheet is,  
more or less, that of a basket of more or less stable assets. They are  
thus similar to units in a fund. In any monetary analysis, it should be  
stressed that units issued by money multual funds in the eurozone are  
included in the M3 broad money aggregate. Their issuers are part of the  
Monetary Financial Institution (MFI) sector alongside credit institutions.  
Stablecoins differ in at least two respects. First, their issuers are not  
necessarily money market funds and are therefore not subject to the  
same regulations as the latter. Secondly, stablecoins are designed to be  
used (at least for those who accept them) as a means of settlement of a  
transaction or to extinguish a debt; to be used for these purposes,  
money market fund units need to be sold or redeemed for cash in the  
narrower definition (M1, consisting of sight deposits, notes and coins).  
As demonstrated by the collapse in the value of Bitcoin after the peak  
reached in December 2017 (see Chart 1), the highly volatile nature of  
the early crypto-assets crystallised the criticisms that crypto-assets are  
unable to function as a ‘store of value’ and to offer a low-risk asset to its  
users. The puzzlement of authorities and central banks led to the  
development of characteristics of a new generation of crypto-assets,  
which have received a somewhat warmer welcome: stablecoins. These  
digital assets are typically backed by a basket of stable assets (Libra) or  
a guarantee of convertibility (JPM coin), giving them an intrinsic value.  
Prices of top 6 crypto-assets  
USD  
Ethereum  
Bitcoin sv  
Bitcoin (rhs)  
Ripple (XRP)  
Litecoin  
Bitcoin cash (rhs)  
USD  
20 000  
3000  
2500  
2000  
1500  
1000  
18 000  
16 000  
14 000  
12 000  
10 000  
Facebook’s Libra project is perhaps the best known of these stablecoins.  
This is intended, over time, to become a virtual means of payment  
backed by a basket of stable assets denominated in the main global  
currencies. The ‘exchange rate’ with the basket will be, by construction,  
maintained. The issuance of any additional quantity of Libra will require  
the purchase of the same combination of stable assets in an amount  
determined by the exchange rate. This represents an initial limit for  
Libra: sellers of stable assets may accept Libra in settlement. But under  
such circumstances, all newly issued Libra would be issued to these  
sellers. This would not allow demand for new Libra in exchange for  
currency from new buyers to be satisfied, unless the issuing entity  
purchased these from a third party for cash.  
8
6
4
2
0
000  
000  
000  
000  
500  
(
*) by capitalisation  
0
2016  
2017  
2018  
2019  
2020  
Chart 1  
Source: Coin Metrics  
This type of digital asset is not a claim held on its issuer, unlike official  
currencies which represent a claim on the central bank (commercial The most likely approach would therefore be for sellers of stable assets  
bank deposits with the central bank, fiat money) or the issuing credit to be paid in one of the major currencies. Thus, the issuance of a Libra  
institution (bank deposits). By virtue of this first characteristic a real would have as its counterparty the receipt of a quantity of currency  
currency has the de facto backing of balance sheet assets, albeit that determined by the Libra exchange rate, which would then be used to  
these can be of variable quality or liquidity (the balance sheet of the settle the purchase of stable assets. This situation would create an  
central bank or issuing commercial bank). In the case of a commercial unbreakable link between the major currencies and Libra, which might  
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seem paradoxical for a new instrument that aims to compete with to receive, on relatively attractive terms, rights over the products or  
precisely these currencies (see Diagram 4).  
services offered by the company. Although it has been used primarily by  
start-up companies so far, this solution is a potential option for any  
company planning to sell a new product or service in the future. Tokens  
thus span a wide range from digitised assets to pre-financed projects,  
making the market for them more narrow and less liquid than that for -  
Stablecoin tightly linked to official currencies  
Stablecoin issuer  
2
coins .  
3
In France, Law 2019-486 of 22 May 2019 (the PACTE Act ) introduced  
Assets  
Liabilities  
a specific regime for ICOs, establishing the principle of approval by the  
AMF. This new regime, designed to encourage the development of  
ICOs, does not apply to the issue of tokens which can be considered as  
financial securities (Security Token Offerings, or STOs) but only to so-  
called utility token issues. Article 26 thus created a legal framework for  
ICOs, with the possibility of the AMF providing approval for proposals  
that it believes to be serious. It is worth noting that this approval is not  
required, and issuers are free to seek it or not. However, those who  
have not received approval may not solicit investment from the general  
public. The AMF issued its first approval to French-ICO, a financing  
platform for cryptocurrency projects, in December 2019. The approval  
will be valid until the end of the subscription period, which is expected to  
be on 1 June 2020.  
Cash  
Cash  
Seller of  
stable assets  
Buyer of  
stablecoin  
Stable assets  
Stablecoin units  
Diagram 4  
Source: BNP Paribas  
In the final analysis, a stablecoin is broadly comparable to a money  
market fund in which the units are digitised and can be traded on a  
blockchain. Unlike official currencies pegged to the dollar under the  
Bretton Woods agreements (1944 to 1971), stablecoins are not directly  
linked to a currency, but backed by ‘stable’ assets. As in the case of  
Libra, these can be in a range of currencies. This diversification  
naturally creates an exchange rate risk, not only with reference to any  
given user’s domestic currency but more importantly relative to any of  
the benchmark currencies making up the basket.  
Simplified matrix of currencies and crypto-assets  
Currencies and crypto-assets  
Physical  
Digital  
Some local  
currencies  
Fiduciary currency,  
coins and notes  
Unregulated  
Regulated  
Crypto-assets  
Legal  
status  
Electronic money  
Script money  
Table 1  
Source: Virtual currencies schemes, ECB, October 2012  
Another innovation in crypto-assets lies in the digitisation of certain  
physical assets (such as works of art) or intangible assets (patents,  
copyright) in the form of tokens, which are digital assets that represent a  
right to a future service (native token) or existing item (non-native token).  
Under the same principles as ‘cryptocurrencies’, these tokens can be  
exchanged on the internet without the intervention of a third party. The  
ledger for each protocol can function independently of the tokens,  
whereas primary crypto-assets (bitcoin, ether, ripple, etc.) are indivisible  
from it. A specific type of transaction, the Initial Coin Offering (ICO),  
allows the raising of funding in cryptocurrency.  
Cryptocurrencies fulfil the functions of a currency only very imperfectly.  
‘cryptocurrencies’ promoters sometimes lay claim to Hayek’s proposals,  
but it is clear that one of the main arguments on which these were  
based (the inflation associated with official currencies), whilst powerful  
in the 1970s is much weaker in current conditions (see Chart 2). Indeed,  
the European Central Bank is working hard to bring the annual inflation  
In France, the Autorité des Marchés Financiers (AMF) defines such rate back to its target level (below, but close to 2%) without much  
deals as a fundraising transaction carried out through a distributed success so far (inflation was an estimated +1.2% in February 2020).  
register system (or "blockchain") and resulting in a token issue. These  
tokens can then be used to obtain goods or services, as the case may  
be.” In common with share-based funding rounds, these transactions  
allow companies to raise funds at an early stage of their development.  
Money has taken many forms down the ages: shells (cowrie or  
porcelain money, the first traces of use of which date back to the Chang  
Dynasty in China [1600-1046BC]), stone money on the Micronesian  
island of Yap (large circular carved aragonite stone disks with pierced  
centres brought from the island of Palau some 400 kilometers  
However, they differ from Initial Public Offerings (IPOs), with which they  
are often compared, to the extent that, unlike shares, tokens do not give  
their holders rights over the company’s share capital but over the  
products or services that will be provided by the company in future. The  
can thus be considered as pre-sales (or pre-financing), allowing the  
company to receive cash in advance of the completion of the project  
and the subscriber  demonstrating their confidence in the company –  
2
The liquidity of coins should nevertheless be seen in context, as demonstrated  
by the significant volatility in the price of Bitcoin.  
3
PACTE Action Plan for Business Growth and Transformation  
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Conjoncture // February 2020  
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th  
away)between the end of the 17 century and the 1970’s, shell bead  
sufficiently stable for it to be a unit of measurement that is  
accepted by a large community if not universally. The extremely  
modest take-up of ‘cryptocurrencies’ and the small number of  
companies and merchants who accept them as a means of  
payment make it impossible to claim that they fulfil the unit of  
account function.  
th  
necklaces (or wampum) in northeast America between the early 17  
century and mid 18 century, or cocoa beans in Mesoamerica (covering  
the modern countries of Central America and Mexico), first used by the  
Mayans in the first millennium and still in use by the Aztecs in the 16th  
century. Money in the form of coins, still in use today, was probably  
th  
th  
invented in the 7 century BC by the Greeks of Asia Minor (Byzantium).  
Inflation  
Annual change in consumer prices  
%
60  
50  
40  
30  
20  
10  
0
It seems highly likely that the designer of one of the early  
‘cryptocurrencies was aware of the work of the Austrian School. Nick  
Szabo (who some suspect of being the creator of bitcoin, known only by  
the pseudonym Satoshi Nakamoto) invented a decentralised, digital  
currency, ‘Bit Gold’, as a theoretical exercise. He has referred to the  
work of Carl Menger, the economist and founder of the Austrian School.  
FRA  
ITA  
SPA  
USA  
GER  
JAP  
UK  
TOTAL OECD  
CAN  
OECD EUROPE  
A number of cryptography professionals freely refer to the 1976 work  
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The Denationalization of Money by Friedrich von Hayek (Nobel Prize,  
1974) as a theoretical basis for their innovations. Hayek argues for the  
creation of deregulated monetary conditions, under which private  
issuers would issue competing currencies.  
-
10  
1
9 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15  
According to Hayek, such a solution would help protect economies  
against inflation and monetary erosion, which he identified as the root of  
the problems of modern societies. Issuers, who would need to ensure  
that their currency attracted users, would be encouraged to protect its  
value and restrict its issuance. Hayek stressed that his proposal was not  
incompatible with Gresham’s Law, summarised pithily by W.S. Jevons  
as “Bad money drives out good”. This economic law applies in  
circumstances where there are two distinct currencies in circulation. An  
increase in the value of the underlying precious metal will lead to the  
good money (whose metal value is higher than its nominal value) being  
Chart 2  
Source: OECD  
Looking beyond this non-exhaustive list, all different forms of money  
shared the fact that they fulfilled, to a greater or lesser extent, the three  
major functions that the economics textbooks attribute to money:  
-
Store of value function. This implies that money will retain most of  
its purchasing power over time and that inflation (which results in  
erosion of monetary value) remains under control. The in-built  
control over the quantity of bitcoin issued (via algorithms) and,  
eventually, its upper limit, have not so far demonstrated their hoarded or used for other purposes, whilst the circulation of the bad  
ability to stabilise its value (even in relative terms), as shown by money (with a lower metal value) is encouraged. “What Jevons, as so  
many others, seems to have overlooked, or regarded as irrelevant,”  
wrote Hayek, “is that Gresham’s Law will apply only to different kinds of  
money between which a fixed rate of exchange is enforced by law.”  
the volatility of the price of bitcoin (see Chart 1). Stablecoins will  
no doubt have little difficulty in demonstrating their superiority on  
this criterion, which will allow them to stake a more legitimate  
claim to be a ‘store of value’.  
Means of exchange function. A currency must be recognised and  
accepted as a means of payment. This acceptance can also be  
imposed by positive law. Thus, in France, the ‘legal tender’ nature  
6
And yet, with all due respect to the cypherpunk community, it is hard to  
consider Hayek’s work as providing a theoretical base for  
-
‘cryptocurrencies’. First, and in the most general terms, Hayek did not  
share their libertarian worldview  far from it. Indeed, he recognised the  
legitimate role of government in many areas (other than money): social  
of cash forbids shopkeepers from refusing payment in this form for  
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protection, education and the support of certain business activities .  
4
sales below a certain amount (article R. 642-3 of the criminal Meanwhile, the Austrian School was the source of a number of  
code).  
sometimes contradictory opinions on the subject of money. Hayek’s  
proposals, for example, suffered a chilly reception, to the extent of being  
considered naive, even within the Austrian School. Some economists  
-
Unit of account function. Money must serve as a yardstick for the  
comparison of value of the objects being transacted for, which  
assumes that it is sufficiently widely used and its value is  
5
Hayek F. (1976), The Denationalization of Money, Institute for Economic  
Affairs, London  
4
6
They must, however, refuse cash payments of over EUR 1,000 where the  
A crypto-anarchist or libertarian capitalist movement of the 1980s in the USA.  
customer has their tax residence in France or is making the purchase for  
professional or business purposes; this limit is EUR 15,000 when the customer  
can prove they are not tax resident in France and is not making the purchase for  
business purposes.  
The originators of the first crypto-currencies promoted freedom of expression,  
free trade and privacy (enabled by cryptography) as means of overturning the  
social model based on a system of centralised power.  
7
Hayek F. (1960), The Constitution of Liberty  
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Conjoncture // February 2020  
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have suggested even more radical changes, which perhaps provide an in circulation is lower than economic growth over the long term, then  
interesting theoretical framework when considering the future of unless there is a steady increase in the velocity of its circulation there  
‘cryptocurrencies’. According to Murray Rothbard and Hans Hoppe, the will be a fall in prices, which in turn will depress activity. Growth in the  
most important function of money is as a medium of exchange, and it is supply of money (or a substitute) must at least match economic growth  
only natural that economic actors will spontaneously choose the if deflation is to be prevented.  
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currencies that they believe will be used by other economic actors .  
Over and above the rate of money creation in the medium term, there is  
They therefore viewed Hayek’s proposal as transitional in nature. These  
also the question of its adjustment to circumstances. Within a  
authors believed that were these proposals to be put in place, they  
distributed ledger, the rules for issuance of crypto-assets would, by their  
would lead to a trend of unification towards a single global currency:  
nature, be unable to reproduce the pragmatic approach taken by  
gold.  
monetary authorities in response to exogenous shocks. This lack of  
flexibility can exacerbate the situation, as was the case in the aftermath  
1
2
of the 1929 crisis. Friedman and Schwartz (1963) demonstrated how  
the economic crisis of the 1930s was preceded, in the USA, by a fall in  
broad measures of money supply (M2, M3), whilst the M0 and M1  
measures continued to rise. The central bank would have provided  
insufficient liquidity to the banking system to tackle the fall in deposits,  
limiting its open market operations at the beginning of the crisis, in late  
Notwithstanding their highly speculative nature and the substantial risk  
to which investors are exposed, the ECB does not believe that crypto-  
assets pose any threat to the financial stability of the euro zone . Their  
relative value remains modest compared to standard economic  
aggregates, and the cumulative indirect exposure of financial institutions,  
particularly banks, to these instruments is vanishingly small  
9
1929, and then again briefly in the summer of 1932. The resulting  
squeeze on the supply of bank lending would have amplified, in its turn,  
the economic slowdown. They argue that the Federal Reserve’s inability  
to respond effectively to this shock in demand for money was a powerful  
factor in aggravating the recession. More recent works support this  
(
EUR 20,000 in the third quarter of 2018), with ownership reserved  
almost exclusively to individuals (for a total of just over one billion  
euros). The IMF also judges that the development of ‘cryptocurrencies’  
and the exposure of economic actors to them remain modest given the  
1
3
analysis (ECB, 2004 ).  
1
0
absence of any impact on financial stability or monetary policy .  
However, this reasoning would only hold in circumstances where there  
However, none of this means that wider use of these new instruments  
will not have effects in the longer term.  
1
4
was only a single crypto-asset. As Bofinger (2018) highlights, whilst  
the total number of units issued by a private issuer may be capped in a  
Even a perfect mastery of the technology of crypto-assets does not give bid to protect the value of its crypto-asset, the principle of free  
a full understanding of their economic and social function. In the current competition between private issuers does not limit the number of  
context of monetary creation and fractional-reserve banking, the issuers. It follows that there is no limit in the total quantity of crypto-  
quantity of money is influenced rather than fully controlled by the central assets taken across all issuers. Over and above the risk of loss inherent  
bank (despite the powerful tools available to the latter). Moreover, the in holding any given crypto-asset, the overall quantity of crypto-assets  
supply of money, its velocity of circulation and levels of output inter- would quickly become uncontrollable. In such circumstances, the  
react, such that perfect price stability is something of a pipe dream opposite problem  that of inflation  would be the threat.  
(
hence central banks giving themselves a safety margin in their inflation  
This transposition of the quantitative theory of money to crypto-assets  
nevertheless relates to an imaginary scenario in which the use of  
targets).  
Even if we suppose that use of crypto-assets will become more ‘cryptocurrencies as a means of payment has expanded considerably.  
widespread, it is hard to see this happening with issuance rules set by It is first necessary to consider the possibility of a long-lasting  
protocolsalone. According to Danielson (2019) 11 , a crypto-asset  
coexistence of several competing private currencies. This topic was  
whose protocol sets out a slow mining process, which converges to widely debated as long ago as the late 1970s within the Austrian School  
zero (such as that used by bitcoin), would sow the seeds of persistent (see above). In addition, there is the question of the effectiveness of  
deflation. If the growth, through mining, of the quantity of a crypto-asset monetary policy in a situation where an official currency exists alongside  
1
5
one or more crypto-assets. Benigno (2019) , amongst others, have  
shown, through an analysis of different models of the coexistence of an  
official currency and currencies issued by private issuers, that  
competitive ‘currencies’ could reduce the central bank’s ability to use  
8
Hoppe H.-H. How Is Fiat Money Possible?--or, the Devolution of Money and  
Credit, The Review of Austrian Economics, 7, (2), 4974, 1994. Hoppe quotes  
Ludwig Von Mises p. 51 “(…) there would be an inevitable tendency for the less  
marketable of the series of goods used as media of exchange to be one by one  
rejected until at last only a single commodity remained, which was universally  
employed as a medium of exchange; in a word, money”  
1
2
Friedman M. and Schwartz A., A monetary history of the United States 1867-  
1960. Princeton University Press, 1963  
9
European Central Bank, Crypto-Assets: Implications for financial stability,  
1
3
monetary policy, and payments and market infrastructures, Occasional Paper  
Christiano L., Motto R., Rostagno M., The Great Depression and the  
Series, ECB Crypto-Assets Task Force, n° 223, May 2019  
Friedman-Schwartz Hypothesis, ECB Working Paper 326, March 2004  
Bofinger, Digitalisation of money and the future of monetary policy, VOX EU,  
1
0
14  
Franks J., Crypto-currencies and monetary policies, International Monetary  
Fund, Europe Office, 22 January 2019  
CEPR Policy Portal, 12 June 2018  
1
1
15  
Danielson, Cryptocurrencies: Policy, economics and fairness, London School  
of Economics, July 2019  
Benigno P., Monetary policy in a World of crypto-currencies, EIEF working  
Paper 19/05, April 2019  
8
Conjoncture // February 2020  
economic-research.bnpparibas.com  
the interest rate tool, and make it more difficult to achieve a balanced  
level of inflation. The entrance into the market of multiple private issuers,  
whose aim would be to maximise their profit, would in fact strip the  
central bank of any control over interest rates and the inflation rate,  
which would become dependent only on exogenous factors (time  
preference, market entrance and exit costs, etc.)  
Depending on the source used, estimates of the number of crypto-  
assets vary between 1,600 and over 3,000. Their total capitalisation  
saw exponential growth in 2017, taking it to more than USD 800 billion  
1
7
at the beginning of 2018 (Chart 3). By 26 January 2019, it had fallen  
The specific issue of the possible impact of stablecoins (see below) on back to USD 237.5 billion. At this point, bitcoin accounted for  
monetary policy is perhaps more acute, as these instruments clearly USD 156.3 billion, or 66%, of the total. However, its share of total  
have the greater potential for growth. In the event that ‘deposits’ in the capitalisation is itself highly volatile (Chart 4). It peaked at over 80% in  
form of stablecoins earned interest (the Calibra Association has early 2017, before the development of rival crypto-assets later that year,  
indicated that Libra deposits will not earn interest), the possible and then fell to less than 40% of the total when the value of bitcoin  
consequences for the transmission of monetary policy would depend on collapsed in early 2018. Since then it has seen a recovery marked by  
the level at which the interest rate was set (G7 Working Group on significant fluctuations, oscillating around 65% in January and February  
1
6
Stable Coins, 2019 ).  
2020. Since 2016, the top six crypto-assets have accounted for  
between 70% and 100% of total capitalisation. Their share is, however,  
trending downwards and fluctuating with increasing amplitude as  
competing crypto-assets take off.  
Let us suppose that this rate reflects the yield on the basket of assets  
used to back the coin. If the assets in question are denominated only in  
domestic currency, there will be little or no effect on monetary policy.  
However, if the basket of assets includes assets in other currencies (as Crypto-assets are in no sense currencies. However, given their shared  
is the case with Libra), the link between the central bank policy interest ambition to fulfil the functions of a currency, as reflected in their  
rate and the stablecoin interest rate will be all the looser as the share of inaccurate designation as ‘cryptocurrencies, there is a significant  
assets in the domestic currency falls, perhaps even to zero. Moreover, temptation to compare their capitalisation with real currencies.  
the rate of return on holdings of stablecoins would have an impact on  
We calculate that in December 2018, the aggregate money supply (in  
the outstanding amount of deposits, and thus on deposit and lending  
the broadest sense of the term) of the OECD nations and China was  
rates in the economy as a whole. The G7 working party noted that this  
more than USD 88,000 billion.  
effect would be fairly similar to that currently seen in countries affected  
by high levels of dollarization, but that it would extend to countries with Even narrow measures of money aggregrates, consisting solely of  
lower dollarization levels.  
assets available immediately to settle transactions or extinguish debts  
sight deposits and fiduciary money) have a value of a completely  
different order of magnitude than that of crypto-assets. By way of  
(
In addition, a substitution of bank deposits by stablecoins would  
increase the dependence of commercial banks on market resources. As  
the costs of such resources are more elastic than bank deposits to  
money market conditions, adjustments to monetary policy would  
certainly be accurately transmitted by the vector of bank lending, but  
this would play a smaller role. At the same time, and on a more  
structural level, coupled with greater volatility in client deposits, the  
increased dependence of banks on market resources could incite them  
either to cut lending volumes, or to increase the risk and extend the  
maturities of lending in response to the increase in the average cost of  
resources. The first response would affect the financing of the economy;  
the second, financial stability.  
illustration, on 31 January 2020, M1 money supply in the euro zone was  
1
8
EUR 8,975.5 billion whilst in the USA it was USD 3,968.6 billion .  
Despite the significant (if uneven) growth in their capitalisation since  
2016, crypto-assets have gone only a tiny fraction of the journey they  
will need to take to rival official currencies. Perhaps the realisation of  
the Libra project, due to its scale and the fact that it is a stablecoin, will  
be a more decisive step along this path. But this project is experiencing  
some vicissitudes.  
So far we have considered that the stablecoin’ is an alternative form of  
savings, but that banking and financial intermediation would continue in  
the domestic currency. Let us assume instead that financial  
intermediaries would emerge that would lend and borrow in ‘stablecoins’. Against the background of the emergence of numerous crypto-assets  
This new form of intermediation would again weaken the transmission and falling demand for fiat money (which is part of base money), several  
of monetary policy because the rate of return on holdings and the issuing institutions have begun to consider making central bank  
interest rate on such loans would be more clearly uncoupled from deposits available to non-banking actors.  
monetary policy.  
1
9
In his comments of 4 December 2019 , the Governor of the Banque de  
France identified three goals for the possible creation of a central bank  
1
1
7
8
Source: Coinmarketcap  
7 January 2020, Federal Reserve  
2
1
6
19  
G7 Working Group on Stable Coins, Investigating the Global Impact of Global  
Stable Coins, G7, IMF, BIS, October 2019  
Speech by François Villeroy de Galhau, A central bank digital currency and  
innovative payment solutions, Paris, 4 December 2019  
9
Conjoncture // February 2020  
economic-research.bnpparibas.com  
digital currency (CBDC). The first is the preservation of the link between  
citizens and the official currency, something made necessary in  
societies, such as Sweden, where the use of cash is in decline. The  
second is a reduction in intermediation costs in the central currency.  
The third and “most important” purpose lies in “the confirmation of the  
sovereignty [of the political authorities] faced with private initiatives such  
as Libra.”  
A central bank digital currency should not be thought of only as an  
official alternative to private-issuer ‘cryptocurrencies; the reality would  
be much more far-reaching. By making central bank money available to  
non-bank actors (non-bank financial intermediaries for so-called  
wholesale’ CBDCs, or even individual consumers or companies for  
retail’ CBDCs) in a form other than cash alone, the central bank digital  
Other arguments have also been put forward. For Dyson and Hogson  
20 21  
currency would become an alternative to cash. At the same time, if it is  
held in the form of accounts in a centralised register, it would also  
become an alternative to script money held as deposits with commercial  
banks (broad money).  
(
2016) and Rogoff (2017) , the substitution of a CBDC for cash would  
allow the removal of the ‘zero lower bound’ which limits the  
effectiveness of negative interest rate policies that these authors expect  
to persist.  
In order to assess the issues related to such a proposal, one needs to  
draw a distinction between two types of money:  
Total capitalization of crypto-assets  
-
Central bank money (high-powered money), consisting of commercial  
bank deposits at the central bank and fiat money;  
US bn  
9
8
7
6
5
4
3
2
1
00  
00  
00  
00  
00  
00  
00  
00  
00  
0
-
broad money supply, consisting of the part of central bank money in  
the form of banknotes and coins and to a much larger extent the money  
created in script form by credit institutions (the amount recognised in  
ledgers of bank deposits). If we exclude non-conventional monetary  
policy (quantitative easing) or, to a lesser extent, open market  
operations, all creation of money in its broad sense (M3 in the  
euro zone) has as its counterparty the simultaneous creation of a debt:  
the bank pays out the loan by crediting the account of the borrower. The  
broad money thus created allows to pay for the purpose of the loan and  
then circulates in the economy.  
2
01  
4
20  
15  
201  
6
2017  
201  
8
2019  
2020  
Sovereign money proposals, such as the Sigurjonsson parliamentary  
report in Iceland in March 2015 and the Swiss Vollgeld proposals of  
December 2015, sought to strip commercial banks of their ability to  
create money, reserving that right to the central bank alone. Far from  
being novel, these solutions dug up ideas that first saw the light of day  
in the thinking of Chicago School economists in the 1930s.  
Chart 3  
Share of total crypto-asset capitalization, %  
Source: CoinMarketCap  
Ethereum  
Ripple (XRP)  
Bitcoin (rhs)  
Total top 6 crypto-assets (rhs)  
100  
45  
40  
35  
30  
25  
20  
15  
10  
5
0
To achieve their main objective, supporters of these proposals favoured  
splitting client deposits currently recorded as liabilities by lending  
establishments into two separate types of account. “Transaction  
accounts,” which can be used to settle transactions and make transfers,  
would be recorded as liabilities on the central bank balance sheet whilst  
term deposits (Investment Accounts) would remain on the balance  
sheet of commercial banks, as they are at present. Money created by  
the central bank would exclusively be paid into transaction accounts,  
from which transfers could then be made to Investment Accounts.  
90  
80  
70  
60  
50  
40  
30  
20  
The bankswhich would only provide an interface between account  
holders and the central bank, and would have their role limited to that of  
a financial intermediary in payments, in the style of PayPal. However,  
they would retain Investment Accounts on their balance sheets. These  
would continue to be intermediated by the banking system, which would  
use these resources to make medium- and long-term loans.  
2
016  
2017  
2018  
2019  
2020  
Chart 4  
Source: CoinMarketCap, Coin Metrics, BNP Paribas  
Thus the creation of a ‘retail’ central bank digital currency displays  
significant similarities with these ‘narrow banking’ or ‘sovereign money’  
2
0
Dyson B. and Hodgson G., Digital cash : why central banks should start  
issuing electronic money, Positive Money, 2016  
concepts. Indeed, CBDCs are sometimes presented as a partial  
2
1
Rogoff, Dealing with Monetary Paralysis at the Zero Bound, Journal of restriction on the banking system, albeit one that is less radical than the  
Economic Perspective, September 2017  
1
0
Conjoncture // February 2020  
economic-research.bnpparibas.com  
proposal that ‘narrow’ banks must back all customer deposits with their distinguishing criterion between wholesale and retail CBDCs is  
2
2
own deposits at the central bank (Gouveia et al. (2017) ).  
accessibility (Chart 5). It is nonetheless important to analyse the very  
different issues raised by these two forms of CBDC.  
The creation of a CBDC differs from a sovereign money solution in its  
intensity. So long as the proportion of clients who transform their bank  
deposits into CDBC remains limited, the money creation process will be  
unaffected, and loans will continue to ‘create deposits’. However, this  
supposes that customers are not encouraged to move their deposits  
into the central bank currency, which in turn would require that deposits  
with commercial banks earn an adequate rate of interest. An increase in  
the rate paid on deposits would result in higher average costs for bank  
resources. This would either put pressure on the supply of credit, or it  
would be passed through into lending rates, thus reducing demand. In  
The report’s authors believe that the model of accounts held directly  
with the central bank would be more beneficial for the CBDC. However,  
this model would carry the risk of disintermediation of banking system  
deposits (see below) and the authors highlight that a token-based  
model would make this retail CBDC a simple “virtual complement to  
cash”, which would be more in keeping with its philosophy.  
any event, the new equilibrium would coincide in reduced money Irrespective of the means of circulation (transfers from account to  
creation, which could complicate central bank efforts to tackle account or tokens), the report’s authors believe that the distribution of a  
deflationary pressures. This risk of substitution would be exacerbated in CBDC could take place via intermediaries. Even in the event of a CBDC  
the event of a “digital” run on the bank (conversion of customer bank in the form of tokens, which would not, strictly speaking, involve CBDC  
deposits into the CBDC) and could heighten the threat to financial deposits substituting for bank deposits, holdings of the latter for the  
stability from a ‘normal’ bank run (flight of deposits of fiduciary money).  
Keynesian transaction motive would necessarily diminish. The effect on  
bank deposits would therefore be significantly less pronounced than for  
an account-based CBDC but would be far from neutral. Lastly, there is  
the question of interest. Some authors have argued for the benefits of a  
society in which cash become scarcer (Rogoff (2017) ), highlighting the  
more effective transmission of negative interest rates and the improved  
transmission of monetary policy that would result. But we believe that  
such an approach is incompatible with the spirit of a retail CBDC, which,  
in its roles as a digital equivalent to fiat money, would not by any logic  
earn interest.  
The "money flower", taxonomy of money and crypto-assets  
2
5
Issued by a central bank  
Electronic  
Virtual currency  
Settlement or  
reserve account  
Bank deposits,  
mobile money  
Wholesale  
CBDC  
Local currency  
Currency deposit  
account  
Retail  
CBDC  
Wholesale  
Crypto- crypto-asset  
asset  
Cash  
The main social advantage expected from a wholesale CBDC lies in the  
benefits of a blockchain-type technology (traceability if desired, cost,  
speed). Lending establishments already have access to central bank  
money in electronic form (reserves).  
Commodity  
money  
Peer-to-peer  
Universally accessible  
Diagram 5  
Source: Bech et Garatt (2017), BIS  
A wholesale CBDC also raises the issue of scope (whether it would be  
accessible to banks only or also to other non-financial institutions).  
Historically, access to central bank money has been limited to  
registered deposit-taking establishments. In return they are obliged to  
retain reserves in central bank money as a certain proportion of their  
short-term client deposits (in the euro zone the required reserves ratio  
has, since 2012, been 1% of the deposits which form the base). This  
constraint saw a de facto tightening under Basel III and the introduction  
of the Liquidity Coverage Ratio, or LCR. This makes central bank  
money held by lending establishments a coercive tool for the  
As CBDCs are still in the early stages of consideration, some of their  
core features have yet to be determined. In a document reporting the  
work of a Banque de France in-house working part (which “expresses  
the views of the authors and not those of the Banque de France or  
Eurosystem), the characteristics, benefits and risks of the two main  
categories of central bank digital currencies are discussed.  
2
3
Wholesale CBDCs are defined as digital currencies accessible only to transmission of monetary policy.  
financial institutions, or perhaps only to some of them. Retail CBDCs  
Some new actors, for example Fintech companies, seeking to invest in  
the payments market or take advantage of the opportunities created by  
the blockchain could have their activities facilitated by access to the  
central bank balance sheet. These conditions would require in-depth  
consideration given the redefinition of payment circuits and the  
modification of the respective roles of banks and payment  
2
4
are accessible to all. As identified by Bech and Garatt (2017) , the only  
2
2
Gouveia, Olga Cerquiera et al., Central Bank Digital Currencies: assessing  
implementation possibilities and impacts, BBVA, Working Paper n° 17/04,  
March 2017  
2
3
Internal working group at Banque de France, La monnaie Digitale de Banque  
centrale, 8 January 2020  
Bech M.L., Garatt R., Central bank cryptocurrencies, BIS Quarterly Review,  
2
4
25  
Rogoff, Dealing with Monetary Paralysis at the Zero Bound, Journal of  
17 September 2017  
Economic Perspective, September 2017  
1
1
Conjoncture // February 2020  
economic-research.bnpparibas.com  
intermediaries that could result (settlement in central bank money). The  
possible risks that these changes would create in terms of the operation  
of payment infrastructure, the transmission of monetary policy and  
financial stability would have to be taken into consideration.  
***  
The extent to which crypto-assets fulfil the functions of a real currency  
leaves considerable scope for improvement. They should not therefore  
be viewed as such. One desirable development would be to legislate to  
prevent issuing networks from promoting such assets to users as a  
‘currency’. This would mean that users would still be free to use the  
assets as a means of exchange, but would be less likely to  
misunderstand their true nature. From this point of view, stablecoins,  
which are backed by baskets of stable assets, clearly offer greater  
certainty as to their value. Their design makes them structurally  
dependent on official currencies, in a similar fashion to currencies linked  
to the dollar under the Bretton Woods agreements (1944-1971),  
distancing them from the libertarian approach that motivated the first  
generation of crypto-assets. The Libra stablecoin initiative and the  
perception of a possible threat to monetary sovereignty have  
accelerated the consideration of the creation of central bank digital  
currencies. However, these would not just be official alternatives to  
privately-issued ‘cryptocurrencies’. Some of their features, notably those  
giving access to individuals (retail CBDC) in the form of accounts, or  
opening access to non-bank intermediaries (wholesale CBDC), would  
bring structural changes in the operation of the banking system and  
have structural consequences for the process of money creation (in the  
real rather than virtual sense) and the vectors of transmission of  
monetary policy. In particular, a retail CBDC would introduce the risk of  
a ‘digital bank run’, which would have deleterious effects on financial  
stability. For these reasons alone further reflection is called for, and  
central banks would do well to “hurry up slowly”. Nor should the process  
of reflection concentrate solely on central bank digital currencies. It  
would benefit from being extended to the digital forms of script money  
issued by lending establishments that could provide users with the  
same services as a CBDC but without the same disadvantages.