Digital currencies

Documento final preparado para el presidente del BCRA Alejandro Vanolli en noviembre 2011. Las
versiones anteriores y los documentos de referencia están guardados en Z:\445\Emiliano
G\2015\2015-10 Monedas virtuales – Presidencia.

I CPMI report on “Digital currencies”

Digital currencies and distributed ledgers are an innovation that could have a range of impacts on
many areas. These impacts could include the disruption of existing business models and systems,
as well as the emergence of new financial, economic and social interactions and linkages.

Unlike traditional e-money, digital currencies are not liabilities of an specific individual or
institution, nor are they backed by an authority. Furthermore, they have zero intrinsic value and, as
a result, they derive value only from the belief that they might be exchanged for other goods or
services, or a certain amount of sovereign currency, at a later point in time. Accordingly, holders of
digital currency may face substantially greater costs and losses associated with price and liquidity
risk than holders of sovereign currency.

The genuinely innovative element seems to be the distributed ledger, especially in combination
with digital currencies that are not tied to money denominated in any sovereign currency. The
main innovation lies in the possibility of making peer-to-peer payments in a decentralised network
in the absence of trust between the parties or in any other third party.

There are different ways in which these systems might develop: either in isolation, as an
alternative to existing payment systems and schemes, or in combination with existing systems or
providers. These approaches would have different implications, but both could have significant
effects on retail payment services and potentially on financial market infrastructures (FMIs).

Digital currencies may have long term implications in financial stability and monetary policy.
Primarily, the potential impact on financial market infrastructures. The use of distributed ledgers
may also induce changes in trading, clearing and settlement as they could foster disintermediation
of traditional service providers in various markets and infrastructures. These changes may result in
a potential impact on FMIs beyond retail payment systems, such as large-value payment systems,
central securities depositories, securities settlement systems or trade repositories. Second, impact
on broader financial intermediaries and markets. Digital currencies and technology based on
distributed ledgers could, if widely used, challenge the intermediation role of current actors in the
financial system, especially banks. Banks are financial intermediaries that fulfil a role as delegated
monitor of borrowers on behalf of depositors. Banks also typically perform liquidity and maturity
transformation in the channelling of money from depositors to borrowers. If digital currencies and
distributed ledgers were to become widespread, any ensuing disintermediation might have an
impact on the mechanisms for saving or accessing credit. It is unclear who would take up the roles
of traditional financial intermediaries in an economy based on the use of these schemes or
whether these services could be provided at all in such a context. Third, implications for monetary
policy. If the adoption and use of digital currencies were to increase significantly, the demand for
existing monetary aggregates and the conduct of monetary policy could be affected, although at
present, the use of private digital currencies appears too low for these risks to materialise. The
impact of digital currencies in these areas would have many similarities with the potential impact

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of e-money. If the substitution is large and the interconnection is weak, then monetary policy may
lose efficacy.

II BCRA - Informe Comisión Monedas Virtuales: “Monedas virtuales: naturaleza e

implicancias”

A preliminary analysis of the internal report of BCRA indicates that virtual currencies, in particular
Bitcoins, cannot strictly be defined as money. They do not have legal tender and do not fully meet
the traditional functions of money. It might be possible that over time, virtual currencies will
accomplish these economic functions of money. However, is difficult to know if virtual currencies
would be legitimized by competent authorities.

Regarding the potential negative implications of virtual currencies, bitcoins do not pose risks to
monetary and financial stability in the short term. The main reason one might attribute this is the
lack of scale: their use is very limited. However, if in the long run the use of Bitcoins becomes
widespread, it could present potential risks.

In the particular case of Argentina, the negative effects of the implementation of the Bitcoin could
be: (a) elusion of exchange-rate regulations and a new alternative in the process of portfolio
dollarization and (b) money laundering, terrorist financing and other illicit activities. The Central
Bank has already warned of these potential risks. In the first case, to deepen the use of digital
currencies, it could enable a new channel through which depositors could maintain part of their
portfolios in these assets, avoiding regulations access to the exchange rate market. The potential
implications of the use of digital currencies in Argentina could be the possibility of exchange
regulations elution -potentially exacerbating the on-going portfolio dollarization process and
increasing exchange rate risk. For example, residents might buy bitcoin in Argentina, selling
afterwards these bitcoins abroad. Another example of the channels that could potentially have an
impact on output through the open currency market (i.e. MULC) could be the case where the
purchase of bitcoins is done through foreign internet operators using a local credit card.

Estimated statistics show that Argentina holds the largest community of virtual currency users in
Latin America (around 15,000 users), with steady growth. Estimations of daily total volume of
transactions in Bitcoins vary within a range of 400 to 500 Bitcoins. The volume of monthly total
transactions would be in a range between 3.6 and 4.5 million USD if we valuate 1 Bitcoin=300USD.

III Common themes for analysis on a future agenda

The document presented by both CPMI and the BCRA´s internal report suggests some common
themes for analysis on a future agenda.

From the document presented by the BCRA, a first fundamental question arises: is it possible to
consider virtual coins as money? The answer is an initial guideline to the current regulation and a
course of action for future regulations in relation to the current development of the monetary
system.

Secondly, both documents presented suggest the need to examine three possible alternative future
scenarios:

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 (1) Virtual coins still exist but in a small number of users circuit;
(2) Virtual currencies consolidated as a global monetary system in conjunction with the
current payment system;
(3) Virtual currencies consolidated as the main payment system.

This first characterization is essential to define a framework of analysis. The downside is that it is
not obvious what will be the final outcome. In the first case, the central bank regulation does not
appear necessary.

The second case requires an analysis of how could complement both systems. This case examines
the role of central and commercial banks under the new system. Could we think virtual scheme for
countries or regions? Could we think virtual currency for Mercosur? Andrew Haldane, Chief
Economist and Executive Director for Monetary Analysis and Statistics at the Bank of England,
spoke at the Portadown Chamber of Commerce in Northern Ireland on 18th September. During his
speech, Haldane offered several ways in which central bankers can conduct monetary policy during
a period when interest rates are close to or below zero. Haldane suggested that central bankers
consider making measures like quantitative easing a permanent part of their policy toolkit.
However, he warned that trust in central banking could be marred as a result. One solution, he
said, would be for the Bank of England to issue a state-backed digital currency based on bitcoin.
Supporting this initiative would be a negative interest rate levied on paper currency relative to the
digital currency. Conversely, Haldane suggested that paper money be banned entirely. On the
subject of bitcoin, Haldane joined a growing chorus of central bank figures in pointing to the
benefits of bitcoin and, more broadly, blockchain-based transaction systems. He said in the speech:
“What I think is now reasonably clear is that the distributed payment technology embodied in
bitcoin has real potential. On the face of it, it solves a deep problem in monetary economics: how
to establish trust – the essence of money – in a distributed network. Bitcoin’s 'blockchain'
technology appears to offer an imaginative solution to that distributed trust problem.”

The third possibility raises several questions. First, if the system could exist without a regulator, as
claimed by proponents of virtual currencies. Second, if there is a regulatory body, and what it
would be like. And third, what is the role of central and commercial banks in the system. Finally,
beyond the possible virtues of an international fixed system, one could think of a system with
similar problems to those of the gold standard?

Probably the interests of certain sectors can influence the scenarios. However, from an historical
point of view, money in many occasions responds to unintended consequences and spontaneous
developments. Bottom-line, the end seems open.