Cryptocurrencies Looking Beyond the Hype

Cryptocurrencies have attracted intense interest on the part of businesses and consumers, as well as central banks and other authorities. This attention comes from their promise to replace trust in long-standing institutions, such as commercial and central banks, with trust in a new, fully decentralized system founded on the blockchain and related distributed ledger technology (DLT). This paper shows that the essence of good money has always been trust in the stability of its value. For trust to be maintained, honest network participants need to control the vast majority of computing power, each and every user needs to verify the history of transactions, and the supply of the cryptocurrency needs to be predetermined by its protocol. However, trust can evaporate at any time because of the fragility of the decentralized consensus through which transactions are recorded in blockchain. Additional criticism includes: transactions are slow and costly, prone to congestion, and cannot scale with demand. The decentralized consensus behind the technology is also fragile and consumes vast amounts of energy. Public policy responses need to prevent abuses while allowing further experimentation.