For the bitcoin/blockchain enthusiasts, this is from Cecchetti & Schoenholtz:
Virtual Frenzies: Bitcoin and the Block Chain: Bitcoin has prompted many people to expect a revolution in the means by which we make and settle everyday payments. Our view is that Bitcoin and other “virtual currency schemes” (VCS) lack critical features of money, so their use is likely to remain very limited.
In contrast, the technology used to record Bitcoin ownership and transactions – the block chain – has potentially broad applications in supporting payments in any currency. The block chain can be thought of as an ever-growing public ledger of transactions that is encrypted and distributed over a network of computers. Even as the Bitcoin frenzy subsides, the block chain has attracted attention from bank and nonbank intermediaries looking for ways to economize on payments costs. Only extensive experimentation will determine whether there are large benefits.
Again, however, we are somewhat skeptical. Today’s wholesale payments systems are so efficient that it is hard to see how or why one would make the costly and time-consuming effort to replace them. And the apparently high costs of retail transfers at least partly reflect factors that the block chain technology is unlikely to address. ...
After much discussion of these and other points:
So, what’s the bottom line? We share with Bitcoin advocates the desire to protect privacy (see, our post on paper money), but remain skeptical about the potential for any private currency – digital or otherwise – to do the job better than what we currently use. And the evidence so far is that government fiat monies – dollar, euro, yen, or whatever – are far more stable than Bitcoin. Not only that, but if there’s to be profit from issuing a currency, then we believe that it is the public that should benefit.
As for the block chain, there’s plenty of room for experimentation – with the potentially greatest benefits coming where the current payments system is the least developed. But it remains to be seen whether the public ledger can compete against the big clearinghouses that dominate wholesale payments and settlement, and whether it can ensure payments providers have the ability to reliably filter out illegitimate transactions.
Of course, even a big clearinghouse might find the block chain technology useful (see WSJ-gated story here). Wouldn’t it be ironic if it did so, but wished to keep the innovation private?