Cryptocurrencies

Oonagh Mcdonald

Description

The advent of new digital currencies has challenged our notions about money, its function and purpose, and our faith in the financial and banking structures that underpin its legitimacy. Oonagh McDonald charts the spectacular rise of cryptocurrencies over the past decade and considers the opportunities and threats that cryptocurrencies pose to existing fiat currencies. This revised edition includes a new chapter dealing with the high-profile bankruptcies of the recent “crypto winter”.

The book considers how regulatory bodies have been slow to respond to a technology that is evading existing regulatory frameworks. Urgent and more robust protection is needed from fraudulent initial coin offerings, scams and hacks. Throughout her analysis, McDonald shows that trust is fundamental to the operation of finance and that this will ultimately protect commercial bank money from the threat of new digital currencies. The book offers readers an insightful appraisal of the future of money and the challenges facing regulatory bodies.

1. Introduction: Bitcoin beginnings

2. New cryptocurrencies and new developments

3. Stablecoins: the search for stability

4. Initial coin offerings: the “Wild West”

5. The regulatory response to ICOs

6. Global stablecoins: Libra

7. Reactions to stablecoins

8. Central banks and central bank digital currencies

9. The decline of cash

10. Credit and trust

11. Epilogue: the crypto winter

Appendix: smart contracts

Sujets

• Cryptocurrencies
• Banking
• Economie gestion
• Bitcoin
• Bank
• Libra
• Ripple
• Foreign exchange
• General officer
• Gerolamo Cardano
• Economics
• Currency
• Business
• General
• Diem
• Finance
• Balance (constellation)

Informations

• Publié par: Agenda Publishing
• Date de parution: 28 février 2023
• Nombre de lectures: 0
• EAN13: 9781788216456
• Langue: English
• Poids de l'ouvrage: 3 Mo

Extrait

“A must-read for anyone who has a stake in the future of money. It is an historical tour de force that painstakingly teases out of every corner of the cryptocurrency world the critical issues that governments, policy-makers, and consumers must consider before abandoning government fiat money.”
Thomas P. Vartanian, Professor of Law, George Mason University
“Oonagh McDonald, philosopher and former parliamentarian with extensive knowledge and experience of financial regulation, shows why it is trust and not technology that determines what is money. As billionaires lose their heads chasing cryptos, trust McDonald to guide you through the tangled woods of digital finance.”
Lord Desai, Emeritus Professor of Economics, London School of Economics
“In this ambitious book, McDonald helps the rest of the world catch up with her on the opportunities and risks associated with stablecoins. Even if one may disagree with her about their future, this book is an invaluable resource, especially as a teaching tool, because of her ability to synthesize and interpret a vast amount of information about complex and novel practices.”
Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia Business School
“An erudite and readable book on a very complex and puzzling issue … what sets this book apart is the clear and impartial analysis combined with a very good understanding of the nuts and bolts of digital currencies. It will prove a valuable companion for the lay reader with an interest in the rise of alternative money and a good source of study for the expert.”
Emilios Avgouleas, Chair of International Banking Law and Finance, University of Edinburgh
“An excellent review of the key issues around cryptocurrencies and money. It takes a very broad perspective and covers the essential technical, regulatory, economic and policy issues in a very informed and critical way.”
Robert Hudson, Professor of Finance, University of Hull
“Oonagh McDonald, always a voice of financial reason, provides a thorough consideration of cryptocurrency ideas and reality, together with the intertwined issues of technology, regulation, trust, and government monetary power. This is a very insightful and instructive guide for the intrigued.”
Alex J. Pollock, former Principal Deputy Director, Office of Financial Research, US Treasury
“An engaging and progressive assessment of cryptocurrency developments, which details many of the required conditions and hurdles to be overcome to ensure the future stability of these payment systems. Required reading for both policy-makers and academics working in this field.”
John Ashton, Professor of Banking, Bangor University

© Oonagh McDonald 2021, 2023
This book is copyright under the Berne Convention.
No reproduction without permission.
All rights reserved.
First published in 2021 by Agenda Publishing
Revised edition published in paperback 2023
Agenda Publishing Limited
The Core
Bath Lane
Newcastle Helix
Newcastle upon Tyne
NE4 5TF
www.agendapub.com
ISBN 978-1-78821-639-5
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan
Printed and bound in the UK by TJ Books
Contents
Preface
Acronyms
1 Introduction: Bitcoin beginnings
2 New cryptocurrencies and new developments
3 Stablecoins: the search for stability
4 Initial coin offerings: the “Wild West”
5 The regulatory response to ICOs
6 Global stablecoins: Libra
7 Reactions to stablecoins
8 Central banks and central bank digital currencies
9 The decline of cash
10 Credit and trust
11 Epilogue: the crypto winter
Appendix: smart contracts
Notes
Index
Preface
Until recently, we thought we were pretty clear about money. It was quite simply the notes and coins in our wallets, or our debit and credit cards, or the welcome additions to our bank accounts, appearing as credits on our screens or on our bank statements. We never doubted that a shop would accept cash, or cards, when we pay for goods and services. We transfer money to other people’s bank accounts either in the same country or to another, rarely doubting that it will arrive, even if we might consider the process slow and expensive. Most people in developed economies do not give the form of money or the underlying processes which ensure it functions a moment’s thought. Their only concern is very likely the need or desire for more money!
The arrival of new forms of “money” – so-called “cryptocurrencies” – has created much interest and considerable controversy. The purpose of this book is to describe, explain and evaluate the attempts to provide these new currencies as alternatives to fiat money, the government-issued currencies. We shall examine in detail these various forms of new currencies and consider whether or not they can really count as “money” and can replace the familiar forms. Concerns about the safety and reliability of digital assets and their impact on fiat money and monetary policy has led to many central banks exploring the possibility of issuing their own digital currency. The book shall also assess the possible emergence of a central bank digital currency and what that might mean for money.
The key theme throughout this book is that these various efforts to replace fiat currency with cryptocurrencies fail because their structures cannot establish trust, which is essential for money to operate as a means of exchange and value. It is ironic that “trust” was a key motivation behind the first “peer-to-peer electronic cash systems”, designed in the wake of the global financial crisis when faith in central banks and the global financial system was at its weakest. Satoshi Nakamoto, the developer behind Bitcoin, wrote in one of his posts in February 2009:
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency … Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our reserves. 1
The book begins with Bitcoin, by far and away the most well-known cryptocurrency. Chapter 1 outlines the development of Bitcoin and identifies some of the problems with it. The following chapters then examine the broader idea of a digital currency and its development over the ensuing decade or more. Chapter 2 examines attempts to overcome the vulnerabilities of Bitcoin, by introducing new variants of Bitcoin – “altcoins” – and the development of Ethereum, the decentralized, open source blockchain. Chapter 3 looks at “stablecoins”, an attempt to overcome the extreme volatility of Bitcoin by linking it to a fiat currency, such as the US dollar or physical assets such as gold or to some kind of algorithm. The characteristics of stablecoins and whether or not they meet the ideal standards are examined. Chapter 4 charts the proliferation of initial coin offerings in the heady years of 2017–18, which led to the introduction of a vast array of stablecoins, many of which did not actually come into existence and others which were used to defraud potential investors.
The era of unregulated ICOs led to increased regulatory attention and the introduction of regulations to cover stablecoins, which are discussed in Chapter 5 . The focus on stablecoins and then especially, global stablecoins, was sharpened by the potential introduction of Libra/Diem, the global stablecoin announced by Facebook in 2019. Chapters 6 and 7 considers this significant development and the intense regulatory and political scrutiny the proposals have received from international standard setting bodies.
The potential arrival of Libra (now called Diem) had another, probably unforeseen, effect. Central banks and regulatory authorities began to develop their own proof-of-concept projects to understand the core technology of cryptocurrencies, blockchain and distributed ledger technology (DLT) and how it might be used in clearing and settlement. These were undertaken, partly to understand the use and risks of the technology, and partly to ensure that such developments were under the purview of the central banks. These projects led, perhaps inevitably, to the central banks themselves considering their own central bank digital currency (CBDC), which are considered, alongside the decline in cash, in Chapters 8 and 9 . The final chapter returns to the notions of trust and credit and examines the unresolved challenges of privacy and the concentration of economic power that cryptocurrencies, including CBDCs, exhibit.
I would like to express my gratitude to David Black at OakHC/FT for his expertise on technical aspects and also to two anonymous referees. Needless to say, any remaining errors remain my responsibility.
Acronyms AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism BoE Bank of England BIS Bank for International Settlements CAFF Cambridge Centre for Alternative Finance CSA Canadian Securities Administrators CBDC central bank digital currency CFTC Commodity Futures Trading Commission CPMI Committee on Payments and Market Infrastructure CPP central counterparties CPU Central Processing Unit CSD Central Securities Depository CSD/SSS central securities depositories and securities settlement systems CTPs cryptoasset trading platforms DAO decentralized autonomous organization DApps decentralized applications DTCC Deposit Trust and Clearing Corporation DeFi decentralized finance DLT distributed ledger technology DVP delivery versus payment EBA European Bankers Authority ECB European Central Bank ESMA European Securities and Markets Authority FATF Financial Action Task Force FIEA Financial Instruments and Exchange Act (Japan) FINMA Financial Markets Supervisory Authority (Switzerla