Monetary Law and Monetary Policy 15. Blockchain and cryptocurrencies Dr Marek Porzycki Chair for Economic Policy

Issues covered Cryptocurrencies – concept and practical use Are cryptocurrencies money? Are cryptocurrencies Ponzi schemes? Blockchain: the technology behind cryptocurrencies Other uses of the blockchain „official cryptocurrencies”? Cashless money based on blockchain?

Cryptocurrencies – concept and practical use digital tokens intended to function as medium of exchange ( functions of money) based on cryptography to secure creation of tokens/units and perform transactions decentralized control ( blockchain): no single issuer comparable to a central bank, collective creation ( „mining”) and recording of transactions anonymity, possibility to conduct transactions outside the formal banking system and outside government control traded on decentralized exchanges/trading platforms

Bitcoin The first and most important cryptocurrency created in 2009 by an unknown person or group of persons under the name Satoshi Nakamoto Supply capped by design at 21.000.000 BTC (maximum total number to be created by „mining”) High price volatility: in 2017 BTC rose from below $1000 to all-time high of ca. $19.000 before falling to ca. $10.000-11.000 in January 2018

Are cryptocurrencies money? Means of payment? Universal acceptance? Measure of value? No legal tender status  under Polish law „a measure of value different from money” (Art. 3581 § 2 of the Civil Code), an asset subject to property rights and/or obligations; status according to CJEU judgment of 22.10.2015 Skatteverket/David Hedqvist (C-264/14): BTC is a „contractual means of payment”; exchange between BTC and actual currencies is not subject to VAT (under the „currency exemption” covering exchange of „currency, bank notes and coins used as legal tender”). No known issuer  cryptocurrencies cannot be usually considered financial instruments or electronic money under financial market regulations

Controversies about cryptocurrencies High price volatility  the bitcoin bubble Are cryptocurrencies a Ponzi scheme/pyramid scheme? Use in criminal activities („dark net”, organized crime, ransomware etc.) safety – disappearing or bankrupt bitcoin exchanges

Blockchain Continuosly growing list of records (blocks) created and secured by cryptography Each subsequent block linked to previous blocks; previous blocks cannot be altered without altering all subsequent blocks Timestamp used to confirm/secure creation time Managed by a peer-to-peer network  no single participant is able to control or modify records A tamper-proof construction  inherently resistant to modification of the data Distributed ledger technology  decentralized databases spread across multiple locations, managed by different entities, with modification possible only with consent of all participants ( tamper-proof). A broader concept than blockchain.

Uses of the blockchain and/or distributed ledger „blockchain 2.0” – use of blockchain beyond cryptocurrencies Useful technology to create tamper-proof databases: real estate registers; transaction records by banks; public health databases; fintech sector; etc. „smart contracts” – transactions conducted without any participation of third parties, yet trackable and irreversible.

Cashless money based on blockchain? Research projects done by i.a. the Bank of England (see https://www.bankofengland.co.uk/research/digital- currencies) central-bank issued digital currencies/ Digital Base Money  direct access of the general public to the central bank’s balance sheet  everybody will be able to hold central bank money and use it for cashless transactions? - see questions related to central bank digital currencies from the BoE website: https://www.bankofengland.co.uk/- /media/boe/files/research/cbdc.pdf in Poland: ePLN project vaguely discussed among experts cooperating with the Ministry of Digital Affairs but disowned by the Ministry. Conservative approach of the NBP.

Questions on the influence of central bank digital currency for the monetary system Will it reduce the role of commercial banks?  possible influence on the money creation mechanism as fractional reserve banking may become partially obsolete Will central banks apply interest rates to central banks digital currency held by the general public? Relation of central bank digital currency to physical cash? Will it exist alongside cash or rather enable central banks to abolish physical cash?

Some additional reading In English: R. Ali, J. Barrdear, R. Clews, J. Southgate, „The economics of digital currencies”; „Innovations in payment technologies and the emergence of digital currencies”, BoE Quarterly Bulletin 2014 Q3, https://www.bankofengland.co.uk/-/media/boe/files/quarterly- bulletin/2014/innovations-in-payment-technologies-and-the- emergence-of-digital-currencies.pdf; https://www.bankofengland.co.uk/-/media/boe/files/digital- currencies/the-economics-of-digital-currencies.pdf Speech by Y. Mersch, ECB Executive Board member, on Digital Base Money, Jan 2017 https://www.ecb.europa.eu/press/key/date/2017/html/sp170116.e n.html In Polish: materials of a project in the Ministry of Digital Affairs (Ministerstwo Cyfryzacji, „Strumień Blockchain/DLT i Waluty Cyfrowe”), in particular legal analysis by K. Zacharzewski and K. Piech: http://archiwum.mc.gov.pl/projekty/od-papierowej-do- cyfrowej-polski/strumien-blockchain-i-kryptowaluty