Cryptocurrencies: Review of Economics and Policy

In this review paper, I begin by discussing crypto’s market penetration, legal status, and economic opportunities for Pakistan. I mainly focus on the economics of digital “currencies”. Key questions include how does crypto “currency” compare with traditional fiat currencies as a substitute? Which economic problems does it currently solve or have the potential to solve (e.g. lowers verification and networking costs)? What are its economic limitations (e.g. high energy costs, speculative bubbles, prohibitive costs of maintaining incentive compatibility and the blockchain trilemma)? How does the widespread adoption of digital currencies change the monetary and fiscal policy paradigm? Which set of regulations are needed from policymakers to address crypto’s adverse effects, such as accommodating illicit activities and threatening consumer protection? In the appendix, I also summarise the design features of the technology that underlies cryptocurrencies.