Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2018 006

A Note on Cryptocurrencies and Currency Competition

Anna Almosova

The recent development of private cryptocurrencies has created a need to
extend existing models of private currency provision and currency competi-
tion. The outcome of cryptocurrency competition should be analyzed in a
model which incorporates important features of the modern cryptocurren-
cies. In this paper I focus on two such features. First, cryptocurrencies
operate according to a protocol - a blockchain - and are, therefore, free from
the time-inconsistency problem. Second, the operation of the blockchain
costs real resources. I use the Lagos-Wright search theoretic monetary model
augmented with privately issued currencies as in Fernandez-Villaverde and
Sanches (2016) and extend it by linear costs of private currency circulation. I
show that in contrast to Fernandez-Villaverde and Sanches (2016) cryptocur-
rency competition 1) does not deliver price stability and 2) puts downward
pressure on the in ation in the public currency only when the costs private
currency circulation (mining costs) are suciently low.

Currency competition, Cryptocurrency, In ation, Blockchain

JEL classication:
E40, E42, E50, E58