Journal of Financial Economics

REF 149 Digital Currencies and Cryptoassets

The “crypto” sector has promoted itself as an alternative to the flaws of our banking, financial, and monetary system. However, over 14 years after the creation of Bitcoin, we have to recognize that cryptos have created more problems than they have solved. A lack of regulation and, worse, accommodating regulation have led to a situation in which fraud, money laundering, and bankruptcies are growing along with the crypto market.

This is a result of political choices. Some policymakers have preferred a framework favoring the development of the crypto sector over the protection of consumers. This is what we call regulation washing – the regulations exist but they do not protect. For instance, the French double standard (registration and accreditation), which was created by the PACTE law, has proven to be at best counterproductive and at worst dangerous.

At the European level, although the MiCA regulation is a step in the right direction, it nevertheless validates the creation of specific crypto legislation. To genuinely regulate the crypto market, give the necessary powers to supervisors, and improve consumer protection, an end must be put to the French double standard and to the approach that leads to specific legislation.

For over a decade, blockchain and crypto-asset technologies have been at the epicenter of a global paradigm shift. By giving back to users the ownership and control of their assets, their data, and the value they create in the virtual world, and by allowing them to do what they want with them, within a few years “crypto” has propelled us to the new Web3 framework whose first building block, bitcoin, immediately set the stage for new, natively digital means of exchange.

In this article, we will portray the French and European crypto-asset industry, with its private and public stakeholders, as well as the studies that have already been conducted in order to apprehend and master this innovation. We will show that, although France and Europe embarked on the regulatory process around these new digital currencies very early on, much remains to be done so as to remove the obstacles to their development. We will then explain the three forms of digital currencies – cryptocurrencies, stablecoins, and central bank digital currencies – which are each part of the profound transformation that is taking place in the worldwide economy and finance.

This article examens the features of algorithmic stablecoins by differentiating those like Terra-Luna, whose reference asset has an endogenous value, from those for which the price of this asset is exogenous and independent of the protocol that has been set up. With a simple model of the process, we show that the system adopted for Terra-Luna is akin to a Ponzi scheme, since the promise of returns on investments made is impossible to keep. However, if this “false promise” is corrected, an algorithmic stablecoin can provide its owners with greater stability than does Bitcoin, for example, which makes it more attractive. It nevertheless remains a very risky asset, whose long-term stability cannot be guaranteed, even in the absence of a speculative attack.

This article presents an economic analysis of stablecoins, highlighting their ties with traditional finance. While there are stablecoins whose linkage is guaranteed by a trusted third party, this article focuses largely on stablecoins managed directly by a system of incentives on a decentralized blockchain. We point out the governance and liquidation challenges of decentralized stablecoins, which are at the heart of their system to maintain value. Finally, we discuss the risks associated with these stablecoins, in particular the mechanisms that lead to a loss of stability.

The number of discussions and studies regarding the creation of central bank digital currencies (CBDC) has exploded in recent years as the economy has become digitalized and the use of cash for transactions has declined, but also as crypto-assets have emerged and financial assets have been tokenized. This article historically and geographically reviews central bank digital currency studies throughout the world. The historical review shows that initially, some central banks focused on retail CBDC (targeting the general public), while other central banks focused on wholesale CBDC. Facebook's announcement about its Libra project shifted the focus to retail CBDC. However, more recently, there has been renewed interest in studying wholesale CBDC. The geographical review shows that 90 % of central banks are currently studying CBDC. A (necessarily selective) survey of these studies reveals the diversity of the motivations, contexts, and approaches behind them, but also a consensus on a number of founding principles.

The association of internet connectivity and embedded digital trust are reshuffling the cards of the payment world. A new world is opening through the growing usage of distributed ledger technologies in many finance applications. This article looks at cryptocurrencies, stablecoins, and central bank digital currencies from a technical and use case angle.

It discusses programmability, i.e. how to automatize the usage of transactions; stability, i.e. how to guarantee the stored value of these new assets; interoperability, i.e. how we can easily link and combine them, and the general usage of this new infrastructure.

This article analyses the legality of the creation of a digital euro by the European Central Bank with respect to European law. After having recalled and examined the various dispositions that could potentially be used and having discussed the judicial features of a digital euro and the notion of legal tender with respect to these same texts, the article considers that at the very least it would be preferable to modify the ECB's statutes, and ideally to modify article 128 of the Treaty on the Functioning of the European Union in order to avoid the legal risk of a challenge to the legality of the ECB's power.

The introduction of a central bank digital currency (CBDC), a retail currency for individuals and a “wholesale” one for interbank transactions, raises the question of the turmoil that this new form of central bank money could bring to the payment ecosystem. Using the example of the Eurosystem's “retail” digital euro project, the article shows that the traditional currency model, with its two-tiered architecture – central bank money (cash and commercial bank deposits at the central bank) and commercial bank money – has been preserved. Thanks to an appropriate division of labor and mechanisms for its implementation, this new form of central bank money will be complementary to other forms of money. As for the introduction of a “wholesale” CBDC, its job is to continue to provide the most secure settlement asset within the framework of tokenized finance.

Blockchain technology makes possible a new economy, which is called a “tokenized economy”, with digital assets of a new type. But the tokenized world still lacks maturity in its technological, legal, and regulatory aspects, as well as in its uses, and still has many challenges: cybersecurity, data sharing and protection, the technological issues of interoperability and scalability, the temptation of some public and private players to extensively recentralize, global systemic impacts (financial, environmental, and social), the need for education and to support the development of skills. While the field of application for blockchains is very broad, they have initially been used in financial services and payments, where decentralized technologies seem to have strong potential. Banks have a big role to play in shaping the foundations of this new economy. They are legitimate and can provide security, trust, and interoperability between new and traditional solutions for it. Despite the lack of regulatory clarity and technological maturity, they need to start experimenting and stepping up because for them, as for the other economic players, doing nothing is not an option.

Despite the experimental nature of the blockchain from which stablecoins are issued, the business of asset-based stablecoin issuers, such as Tether (USDT), Circle (USDC), and Binance (BUSD), is neither new nor innovative. We show that USDC and BUSD are composed of assets that resemble constant net asset value government money market funds. However, the assets of USDT, the largest stablecoin, which invests in commercial paper and risky assets, resemble the constant net asset value money market mutual funds that were banned in the EU subsequent to the global financial crisis. Regulations on crypto asset markets extend the field of application of the electronic money directive to stablecoins. But none of the stablecoin issuers discussed in this article would qualify for the license of an electronic money institution because they do not allow individual redemptions, are unlikely to respect the 2% equity capital ratio, and do not keep 30% of their funds in a separate account in a credit institution. Moreover, the new regulations do not allow issuers of stablecoins to apply for money market fund licenses.

Stablecoins offer open and global payment infrastructure. Their model and the underlying technology have inspired numerous private and public initiatives. However, regulating them as instruments of payment requires striking a certain balance. This paper analyzes the current state of stablecoins and their potential evolution by proposing two ways they could be regulated. The first is to turn to incremental frameworks. Stablecoins are emerging ventures, which have not been widely adopted and whose technology lacks maturity, but which have the potential to reach systemic significance. The second is to establish specifically technological frameworks. Stablecoins rely on infrastructure that is shared with peripheral intermediaries. The best way to safeguard the integrity of payments and to protect consumer interests requires creating tailored regulation with revamped and diversified responsibilities.

Money plays a pervasive role in economic trade and finance, so it is to be expected that the introduction of new forms of money, while likely to further improve the efficiency and liquidity of the economy, also creates new risks. These risks must be understood and addressed. Two new forms of money that are currently emerging, central bank digital currency (CBDC) and stablecoins, still play a limited role in practice, but may become important in the medium to long term. The implications for financial stability have been widely discussed in the literature in recent years. In this article, we summarize this literature and draw conclusions about the nature, extent, and mitigation options for these risks to financial stability.

This article examines the consequences for monetary policy of the issuance of central bank digital currencies (CBDCs) and stablecoins, which are broadly similar. These consequences should impact the transmission mechanism above all, with risks of disintermediation for all economies and of increased asymmetries and dollarization for emerging and developing economies. Moreover, the interest rate channel could be strengthened by compensating CBDC at an interest rate pegged to the key rate. Concerning monetary policy goals, inflation, economic growth, and money supply could temporarily accelerate. Above all, the exchange rate could become more volatile, making it more difficult to maintain a target rate. In normal times, the implementation of monetary policy would generally be little affected, unless a real-time monetary policy were to be adopted.

This article discusses the potential impact of stablecoins and central bank digital currencies (CBDC) on the international monetary system, particularly concerning the domination of the dollar. It is argued that stablecoins are likely to reinforce, rather than weaken, the dominant role of the dollar, since they are set up in a way that tends to favor an increased dollarization of private agents at the international level. Regarding CBDC, the article distinguishes between wholesale CBDC and retail CBDC. Wholesale CBDCs may affect the international monetary order because of their potential use in cross-border payments, depending on whether governments of major economies are involved in their creation. Retail CBDCs should not have a major effect on the international monetary system, but could eventually have an indirect influence, in particular through their effects on the banking sector and thereby on the relative performance of the different economies.

This paper suggests an objective approach to the issue of payment confidentiality. In the 18^th century, this question was simply seen from a criminal perspective. Later attempts to link it to company security, or to propose cryptographic solutions, proved inadequate. When retail banking discovered how to make money on operational data, payment confidentiality was finally defined as protecting databases for consumers and investors. The confidentiality issues raised by the digital euro project are examined from this perspective, as well as from a microeconomic point of view.

Created in 2016, the French SRI label was introduced in order to dissociate conventional mutual funds from those that promote extra-financial goals. By analyzing mutual funds investing in the Eurozone equity markets, this article aims to understand the financial impact of the extra-financial constraints required by the label. The results show that labelled mutual funds offer returns at least similar to the market and conventional counterparts. Hence, the French SRI label makes it possible to finance responsible issuers without incurring a significant financial cost.