Bitcoin – Its Economics for Financial Reporting

Despite its increasing popularity, no official guidance on the financial reporting of Bitcoin transactions has been provided by standard setters, although tax accounting guidance began to appear in 2014. Designed as a decentralised currency, Bitcoin is not intended to become a reporting currency and will instead complement fiat money. We argue that in the case of Bitcoin the accounting principle of faithful representation requires interpretation of the economic substance for financial reporting that varies with reporting entity: trading firms recognise Bitcoin like a foreign currency and measure the revenue, or expense, at the equivalent amount of the reporting currency and digital currency exchanges recognise Bitcoin as goods in line with tax accounting treatment. An Economica paper by Radford (1945), which describes the use of cigarettes as commodity money in a prisoner of war camp alludes to this economic basis. This paper applies accounting principles to a practical issue and contributes to the process by which standard setters may issue an interpretation.     

Does Bitcoin behave as a currency?: A standard monetary model approach

We derive the Bitcoin exchange rate dynamics by solving the exchange rate equation of the standard flexible-price monetary model to investigate any characteristics of Bitcoin like a currency. The dynamics is driven by an asymmetric mean-reverting fundamental shock which can be attributed to a money demand shock. A crash occurs when the exchange rate with a weakened mean-reverting force breaches a lower boundary where a smooth-pasting condition is imposed. The empirical results show the exchange rate dynamics can be calibrated according to the model, in which the mean reversion of the dynamics is positively co-integrated with the Bitcoin transaction volume indicating demand for Bitcoin; and with the risk reversals of the commodity currencies (Australian dollar and Canadian dollar) in currency option markets. The analysis shows that the Bitcoin exchange rate shares some characteristics of commodity currencies with crash risk. This suggests that Bitcoin behaves as a currency between fiat money and a crypto-commodity used for trading and investment purposes.     

Determination of equilibrium transaction fees in the Bitcoin network: A rank-order contest

Bitcoin users compete with one another over the timing of the settlement of their on-[block]chain transactions. Earlier settlement is valuable. Bitcoin users can accelerate the confirmation of the settlement of their transactions in the cryptocurrency by voluntarily bidding transaction fees with a user's optimal fee level dependent upon his or her impatience. We characterize this transaction competition as a contest with a rank-order allocation of prizes. Under this characterization, we derive the fee-bidding strategy at the symmetric equilibrium. Based on this equilibrium, we discuss the Bitcoin network and highlight the impacts of changes in different factors related to the mining industry. We find that fee–security feedback can amplify the impacts of these events.     

Price dispersion, information and learning

We consider an economy where trade is decentralized and agents have incomplete information with respect to the value of money. Agents’ learning evolves from private experiences and we explore how the formation of prices interacts with learning. We show that multiple equilibria arise, and equilibria with price dispersion entail more learning than equilibria with one price. Price dispersion increases communication about private histories, which in turn increases the overall amount of information in the economy. We also compare ex ante welfare under price dispersion and one price. Our results show that, despite the existence of some meetings where no trade takes place, ex ante welfare under price dispersion may be higher than under one price.     

The economics of Bitcoin and similar private digital currencies

Recent innovations have made it feasible to transfer private digital currency without the intervention of an organization such as a bank. Any currency must prevent users from spending their balances more than once, which is easier said than done with purely digital currencies. Current digital currencies such as Bitcoin use peer-to-peer networks and open source software to stop double spending and create finality of transactions. This paper explains how the use of these technologies and limitation of the quantity produced can create an equilibrium in which a digital currency has a positive value. This paper also summarizes the rise of 24/7 trading on computerized markets in Bitcoin in which there are no brokers or other agents. The average monthly volatility of returns on Bitcoin is higher than for gold or a set of foreign currencies in dollars, but the lowest monthly volatilities for Bitcoin are less than the highest monthly volatilities for gold and the foreign currencies.     

The individual's transactions demand for money: A utility maximization approach

This model of the transactions demand shows how an individual may simultaneously choose patterns of consumption, money holdings, and bond holdings over time that maximize utility when faced with a wide variety of possible cyclical patterns in his flow of income. Interesting conclusions about the transactions demand and the real balance effect are derived. For example, there is no theoretical reason to believe that a single individual's demand for money is proportional to his income, and a small excess stock of money is likely to cause a large increase in his level of consumption.     

Transferability, finality, and debt settlement

Payment, fundamental to exchange in a decentralized economy, often takes the form of transfers of inside money, i.e., specialized forms of debt. Associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts, and the allocation of the ensuing risks.In this paper we develop a model of debt as inside money. In a simple mechanism design framework we show that transferable debt that can be used to settle other debt obligations with finality can be a welfare improving arrangement in the presence of limited enforcement powers. Transferable debt has two advantages over simple chains of credit: it allows for removal of less-than-perfectly reliable agents from the chain in a timely fashion, and it allows agents to direct payments to the proper party without direct communication with other members of the credit chain.     

Money in the time of crypto

This paper investigates the evolution of cryptocurrencies. By nature and essence, Bitcoin challenged and implicitly threatened central bank money and its role in the monetary system. Meanwhile, central banks have been studying cryptocurrencies and launched pilot projects on their own digital currency, the Central Bank Digital Currency. Until recently, most economists considered Bitcoin merely as a speculative asset; however, the El Salvador decision in 2021 to establish it as a legal tender (through the Bitcoin Law) questions the status quo perception of Bitcoin. Given El Salvador’s legal obligation by law of their acceptance, allowing tax payments to the government and debts to be settled using Bitcoin, the Bitcoin Law challenges the boundaries of money. In light of the El Salvador experience, we consider different perspectives on the nature of money, allowing us to reject or include Bitcoin inside the money spectrum.     

Social norms and money

In an economy where there is no double coincidence of wants and without public record-keeping of past transactions, money is usually seen as the only mechanism that can support exchange. In this paper we show that, as long as the population is finite and agents are sufficiently patient, a social norm establishing gift-exchange can substitute for money. However, for a given discount factor, population growth eventually leads to the breakdown of the social norm. Additionally, increases in the degree of specialization in the economy can also undermine the social norm. By contrast, monetary equilibrium exists independent of the population size. We conclude that money is essential as a medium of exchange when the population is large.     

Countering money laundering and terrorist financing: A case for bitcoin regulation

Bitcoin was created in 2008 to serve as an alternative payment mechanism for both the under-banked and un-banked, or those in regions where the formal financial system suffers from broad corruption and efficient regulation. However, criminals and terrorists quickly exploited Bitcoin's unique properties, namely its peer-to-peer nature and pseudo-anonymity, to facilitate extensive terrorist financing and money laundering schemes. Government reactions to safeguard national security interests have been extremely varied, ranging from outright bans to passive tolerance. This inconsistency stems from how to effectively classify Bitcoin. On one side are those who argue Bitcoin is a currency, and on the other are those who claim it is a type of asset. In the US alone, these discrepancies have led to a bureaucratic turf war between different regulatory bodies, namely the Financial Crimes Enforcement Network, the Commodity Futures Trading Association, the Securities and Exchange Commission, and the Internal Revenue Service. This study seeks to move beyond the existing legal frameworks, arguing that Bitcoin should be classified as a technology and regulation should rest with private sector technology companies.     

Innovation in monetary policy: Challenge and response

This paper presents some relatively non-technical thoughts on the changing rôle of money under the pressure of declining transactions costs and the innovations in monetary policy-making it induces or requires. In the first part, recent British experience is interpreted as a serious warning about the special rôle of money among financial assets under present-day circumstances and the high cost of disregarding it. While this may please the ‘monetarists’, the remainder of the paper argues, as a counterpoint, that this may not remain so forever. In particular, as argued in the second part, the evolution of the Eurodollar market suggests that the rôle of bank money and the significance of the money multiplier are declining. The third part visualizes the outlines of an economy in which the decline in transactions costs has made money stocks generally obsolete.     

The transactions demand for money in a two-currency economy

In this paper the model of the transactions demand for money of Baumol (1952) is extended to an economy where transactions are conducted in two currencies. The currency substitution hypothesis - that the domestic demand for domestic money depends on the expected rate of depreciation, as well as the domestic rate of interest and level of income - is derived from the model. In addition, several new insights into the implications of currency substitution are provided.     

Wealth happens

The economic world is full of patterns, and one of the most controversial is the distribution of wealth. You might expect the balance between rich and poor to vary widely from country to country. But back in 1897, Vilfredo Pareto discovered a pattern of wealth distribution that appears to be universal. Whenever you double the amount of wealth within a country, the number of people in each successively higher wealth bracket falls by a constant factor. The factor varies among countries, but the pattern remains essentially the same. From a mathematical standpoint, Pareto's distribution has stubbornly defied explanation. But recently, researchers were able to replicate the curve by applying the principles of network organization. They began with two simple assumptions. First, wealth accumulates either by transfers from person to person or through investment returns, positive or negative. Second, rich people invest more money than poor people. Starting with a hypothetical group of 1,000 people of equal wealth and abilities, the model always produces Pareto's wealth distribution no matter how the links in the network are organized or how the balance between interpersonal transactions and investment returns are set. The model also indicates that the degree of wealth concentration can be influenced. Increasing the number of links in the network or the total amount of money flowing through an economy tends to decrease wealth disparities; increasing investment returns or volatility tends to increase it. Replete with public policy implications, the model is only one example of how network analysis can reshape our understanding of complex economic and social systems, which may have less to do with the behavior of individual members than with impersonal and seemingly insignificant forces.     

Anti-Money Laundering: Using data visualization to identify suspicious activity

Annually, money laundering activities threaten the global economy. Proceeds of these activities may be used to fund further criminal activities and to undermine the integrity of financial systems worldwide. For these reasons, money laundering is recognized as a critical risk in many countries. There is an emerging interest from both researchers and practitioners concerning the use of software tools to enhance detection of money laundering activities. In the current economic environment, regulators struggle to stay ahead of the latest scam, and financial institutions are challenged to ensure that they can identify and stop criminal activities, while ensuring that legitimate customers are served more effectively and efficiently. Effective technological solutions are an essential element in the fight against money laundering. Improved data and analytics are key in assisting investigators to focus on suspicious activities. Continually evolving regulations, together with recent instances of money laundering violations by some of the largest financial institutions, have highlighted the need for better technology in managing anti-money laundering activities. This study explores the use of visualization techniques that may assist in efficient identification of patterns of money laundering activities. It demonstrates how link analysis may be applied in detecting suspicious bank transactions. A prototype application (AML²ink) is used for proof-of-concept purposes.     

The optimal mix of taxes on money,consumption and income

We determine the optimal combination of taxes on money, consumption and income in transactions technology models where exogenous government expenditures must be financed with distortionary taxes. We show that the optimal policy does not tax money, regardless of whether the government can use as alternative fiscal instruments an income tax, a consumption tax, or the two taxes jointly. These results are at odds with recent literature. We argue that the reason for this divergence is an inappropriate specification of the transactions technology adopted in the literature.     

Who buys Bitcoin? The cultural determinants of Bitcoin activity

We examine the relationship between national culture and a country's Bitcoin activity. Given that Bitcoin is a high-risk currency/investment that is frequently used for illegal purposes and whose market is relatively opaque, we focus on the cultural dimension of individualism, which has been related to financial market participation, risk-taking behavior, and overconfidence. Using unique data that includes the originating country for Bitcoin transactions, we examine the relationship between individualism and a country's Bitcoin activity for a sample of 80 countries between 2009 and 2020. We find a significant and positive relationship between a country's individualism and its use of Bitcoin consistent with cultural values affecting the demand for such high-risk currency/investments.     

Price dynamics and speculative trading in bitcoin

Few innovations in the money markets have brought more attention by regulators and policy makers than the digital currency Bitcoin. However, few studies in the literature have examined the price dynamics of Bitcoin. Besides providing an exploratory glace at the value and volatility of the Bitcoin across time, we also test whether the unusual level of Bitcoin’s volatility is attributable to speculative trading. Results in this study do not find that, during 2013, speculative trading contributed to the unprecedented rise and subsequent crash in Bitcoin’s value nor do we find that speculative trading is directly associated with Bitcoin’s unusual level of volatility.     

Real liquidity and banking

In an economy where banks take numeraire goods, so called money, as deposits, money allows depositors suffering preference shocks to withdraw from banks prematurely without liquidation of real investment. If real liquidity, defined as the real value of the monetary base, is low, the amount of payment liquidity, constrained by the velocity of money, limits the short-term price level of investment goods before banks can settle their long-term loan contracts. This leads to an attractive nominal long-term investment return and over-investment. Allowing for inside money, that is, bank deposits, to be used for payment can improve social welfare but cannot fully resolve the liquidity shortage problem as the short-term interest rate offered by banks is constrained by the threat of bank runs. In the presence of systemic liquidity shocks, the price-adjustment mechanism cannot take full effects with insufficient payment liquidity, which can lead to non-zero profits for banks. Exchanging investment goods for numeraire goods through international trade can improve social welfare.     

比特币的货币属性分析

比特币作为一种新型电子货币,自产生以来受到了世界范围内的广泛关注。文章基于文献研究和对比分析,将比特币与传统货币进行对比,从货币本质、货币职能、货币发行机制等方面对比特币的货币属性进行分析。分析结果认为：比特币极其接近货币的本质,同时基本具备货币的五大职能,但是由于它在发行机制方面固有的特点（总量固定、产生速度由算法确定）,很难替代纸币成为未来的货币。同时,文章给出了比特币对传统货币和其他电子货币的启示和借鉴。