January 18, 20186min890

Federal Reserve published an article that emphasizes many of the benefits of cryptocurrencies

Aleksander Berentsen and Fabian Schär of the Federal Reserve Bank of St. Louis have recently published an article that emphasizes many of the benefits of cryptocurrencies. The authors stated we conclude that Bitcoin has a wide range of interesting applications and that cryptoassets are well suited to become an important asset class.

The true potential of blockchain technology will become apparent only once distributed ledger technology attains general adoption, which the authors anticipate may take “many years, or possibly decades.” As such, the authors conclude that one cannot predict the industries in which bitcoin and blockchain technology will have the greatest impact.

Price volatility and scaling issues frequently raise concerns about the suitability of Bitcoin as a payment instrument, bitcoin is described as a “novel technology” that allows the “storage and transfer of monetary units without the need for a central authority.

The article states that:

The Bitcoin creators’ intention was to develop a decentralized cash-like electronic payment
system. In this process, they faced the fundamental challenge of how to establish and transfer

digital property rights of a monetary unit without a central authority. They solved this challenge
by inventing the Bitcoin Blockchain. This novel technology allows us to store and transfer a
monetary unit without the need for a central authority, similar to cash.

Price volatility and scaling issues frequently raise concerns about the suitability of Bitcoin
as a payment instrument. As an asset, however, Bitcoin and alternative blockchain-based
tokens should not be neglected. The innovation makes it possible to represent digital property
without the need for a central authority. This can lead to the creation of a new asset class that
can mature into a valuable portfolio diversification instrument. Moreover, blockchain technology
provides an infrastructure that enables numerous applications. Promising applications
include using colored coins, smart contracts, and the possibility of using fingerprints to secure
the integrity of data files in a blockchain, which may bring change to the world of finance
and to many other sectors

 

They pointed out main risk concerns about blockchain tehnology:

  •  Forks

    As discussed in Section 1.8, the Bitcoin protocol can be altered if the network participants,
    or at least a sufficient number of them, agree on the suggested modification. It can happen
    (and in fact has happened) that a blockchain splits because various groups cannot agree about
    a modification. A split that persists is referred to as a “fork.” The two best examples
    of persistent splits are the Bitcoin Cash fork and Ethereum’s ideological dissent, which resulted
    in the split to Ethereum and Ethereum Classic

  • Energy Wastage

    Proof-of-work mining is expensive, as it uses a great deal of energy. There are those that
    criticize Bitcoin and assert that a centralized accounting system is more efficient because consensus
    can be attained without the allocation of massive amounts of computational power.
    From our perspective, however, the situation is not so clear-cut. Centralized payment systems
    are also expensive. Besides infrastructure and operating costs, one would have to calculate
    the explicit and implicit costs of a central bank. Salary costs should be among the
    explicit costs and the possibility of fraud in the currency monopoly among the implicit costs.
    Moreover, many cryptoassets use alternative consensus protocols, which do not (solely) rely
    on computational resources.

  • Bitcoin Price Volatility

    The price of Bitcoin is highly volatile. This leads us to the question of whether the rigid
    predetermined supply of Bitcoin is a desirable monetary policy in the sense that it leads to a
    stable currency. The answer is no because the price of Bitcoin also depends on aggregate demand.
    If a constant supply of money meets a fluctuating aggregate demand, the result is fluctuating
    prices.

    In government-run fiat currency systems, the central bank aims to adjust the money
    supply in response to changes in aggregate demand for money in order to stabilize the price
    level. In particular, the Federal Reserve System has been explicitly founded “to provide an
    elastic currency” to mitigate the price fluctuations that arise from changes in the aggregate
    demand for the U.S. dollar. Since such a mechanism is absent in the current Bitcoin protocol, it
    is very likely that the Bitcoin unit will display much higher short-term price fluctuations than
    many government-run fiat currency units.

It looks like USA and Federal Reserve the ”puppet master” is getting on the cryptocurrency train. That is good news for the  regulations part, but you never know what are they up to this is Federal Reserve we are talking about.


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