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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

Authors for Policy Hub: Macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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October 18, 2022

Decentralized Finance (DeFi): Potential and Risks

In a 2008 paperOff-site link by Satoshi Nakamoto, Bitcoin was proposed as a method of making electronic payments using a blockchain without the need to go through a financial institution. In a relatively short period of time, the basic idea laid out by Nakamoto has grown into a crypto finance world that at its recent peak in November 2021 was valued by CoinmarketcapOff-site link as being worth almost $3 trillion. However, contrary to Nakamoto's original vision, financial intermediaries have provided many of the financial services needed for the crypto finance world to grow to this level. Thus, it's not surprising to see the rise of an alternative method of providing many services not reliant on institutions. This method replaces centralized finance (or CeFi), which is delivered through institutions, with decentralized finance, or DeFi, which uses smart contracts (computer code) running on a blockchain.

DeFi had shown considerable growth starting in late 2020 through late 2021 (for more discussion of this growth, see here Adobe PDF file formatOff-site link). The standard measures of size, total value locked—saw DeFis reaching a peak of more than $180 billion in December 2021, according to one relatively broad measure (such as DeFiLlamaOff-site link, a total value locked data aggregator). Although these numbers may sound large, they are still a rather small part of the global financial system. For example, four US banks have total assets greater than $1.5 trillion. Moreover, the total value locked in DeFi has dropped dramatically since the start of the "crypto winter" earlier this year, reaching values below $55 billion in September 2022. Whether DeFi can become a major provider of financial services will likely depend upon the extent to which crypto finance either integrates with the existing financial system or evolves to become a parallel system for providing a wide range of financial services—or both.

Along with coauthors Francesca Carapella, Edward Dumas, Jacob Gerszten, and Nathan Swem, I recently posted an article on DeFi titled "Decentralized Finance (DeFi): Transformative Potential and Associated Risks" as part of the Atlanta Fed's Policy Hub series. (It is also available in the Board of Governors FEDS working paper series Adobe PDF file formatOff-site link and as a working paper Adobe PDF file formatOff-site link out of the Boston Fed's Supervisory Research and Analysis Unit.) This Policy Hub: Macroblog post summarizes some key ideas in our article.

DeFi overview
To understand developments in DeFi, it is helpful to understand the how and why of widely accessible (public, permissionless) blockchains. A blockchain is a database where the data are entered in time-stamped blocks and the blocks are cryptographically chained together so that any change in a prior record can easily be detected. Bitcoin facilitates the avoidance of financial intermediaries by using a public, permissionless blockchain, meaning that anyone can obtain a copy of the database, read the database, and potentially write to the database. The problem that such an open database can create is that of "double spending." An example of double spending would be Joe first making a payment to Jane and then trying to make a payment to Mary using the same funds. This circumstance could happen if Joe has ability to rewrite blocks that had been previously written. That is, he could rewrite the block he had used to pay Jane so that it no longer contains that payment and—using the funds he took back—make the payment to Mary.

Nakamoto's solution to double spending is to make it very costly to try to rewrite existing blocks. The person who gets to add a new block to a blockchain must win a computationally intensive contest called proof-of-work (participants in this contest are said to be "mining" Bitcoin). As this mining process is mandatory for adding each block, attempting to rewrite a previously written block requires the miner to rewrite every block thereafter to the present, solving the computationally difficult problem for each replacement block—a very costly process. The result is that the Bitcoin blockchain is highly resistant to tampering (often spurring exaggerated claims that blockchains are "immutable"). However, Bitcoin's protocol also takes a relatively long time to ensure that a transaction has been processed.

In practice, DeFi is a relatively small part of Bitcoin because Bitcoin was not designed for sophisticated programming. The Ethereum blockchain stepped into this gap and added the ability to run programs as part of creating new blocks. Consider a simple example of such a program: one for delivery versus payment (a crypto asset is delivered from agent A to agent B, if and only if B simultaneously pays A). These programs are referred to as dapps (distributed applications). One type of dapp is the smart contract, which automates the execution of financial transactions among different parties. Although some other blockchains have since followed Ethereum in allowing dapps, Ethereum has emerged as the most important blockchain for DeFi as measured by total value locked, according to DeFiLlama's blockchain pageOff-site link.

Ethereum originally adopted a version of Nakamoto's proof-of-work protocol to deal with the double-spending problem. However, on September 15, Ethereum replaced proof-of-work with proof-of-stake, in which the party who gets to add the next block is randomly chosen from a group who have locked up (or staked) the blockchain's native cryptocurrency (called Ether). The winner of this contest is called a validator. The switch to proof-of-stake is part of a long-term project to allow Ethereum to process more transactions in a given period.

DeFi uses
Our article discusses some of the most important financial services that decentralized finance is providing. Currently, one of DeFi's most important services is that of borrowing and lending. Decentralized lending platforms bring together borrowers and lenders. Borrowers incur fees (continuously accruing interest) from the time they take out the loan until its repayment. Lenders earn interest on the funds they lend.

Loans made through a DeFi are typically collateralized with other crypto assets. Participants in crypto finance are pseudonymous, meaning they are known only by their public address on the blockchain, which prevents lending based on reputation and the threat of resorting to bankruptcy courts. Moreover, because almost all the assets currently residing on blockchains are crypto assets, blockchain tokens representing off-chain assets such as equipment and real estate are generally not (yet, anyway) legally enforceable in law courts. As a result of the requirement for on-chain collateralization, borrowers take out many loans to finance off-chain consumption while retaining exposure to the crypto asset they are using as collateral—like a stock investor taking out a margin loan to buy a new car. (Another use of such loans is to increase leverage for those speculating on an increase in the value of a crypto asset—especially a cryptocurrency.)

A second important service type of DeFi service is decentralized exchanges (DEXs), which facilitate the trading of crypto assets with a centralized market maker or centralized order books. DEXs typically solicit investors to lock funds into so-called liquidity pools, rewarding these investors with fees (essentially, interest on their deposits). Users can exchange one cryptoasset for another by withdrawing a different cryptoasset than they deposited. A protocol called an "automated market maker" controls the rate at which one asset can be exchanged for another. If the price of one asset gets out of line with the views of investors or the prices on other exchanges, liquidity providers have an incentive to step in to close the price gap.

A third use of DeFi is the provision of derivatives, or claims whose value depends on (or is derived from) another asset. DeFi derivatives allow users to obtain price exposure to other assets, and this exposure is not limited to crypto assets but could include sovereign currencies, commodities, stocks, and indices. Like DEXs, DeFi derivatives connect buyers and sellers directly using collateral pools.

A fourth use of DeFi is to facilitate payments. One example discussed in our article is that of Flexa, which facilitates timely payments to merchants so that the transaction can be quickly completed despite delays inherent in the settlement of some cryptocurrencies. A second payments DeFi is the Lightning Network, which seeks to accelerate Bitcoin transactions by moving most of the work off the Bitcoin blockchain into what is called layer 2, with only the results recorded on the Bitcoin blockchain.

A third payments system our article discusses is Tornado Cash, a so-called "cryptocurrency tumbler," which is a service that obscures the relationship between the sending and receiving addresses of a cryptocurrency payment. Tornado Cash receives cryptocurrency funds from various sources and then, with some delay, distributes the funds to the intended recipient(s). The commingling of funds from various sources makes it more difficult to trace payments from one address to the intended recipient at another addresses. Tornado Cash was developed because although most cryptocurrencies are pseudonymous, everyone can nevertheless see payments sent from one address to another even though the blockchain itself does not reveal the identity of either party. However, information linking some addresses to specific parties, and some other analysis, can lead to discovery of many participants' identities. Thus, people who would prefer to send payments with reduced risk of revealing their identity might prefer to use a tumbler such as Tornado Cash. The problem is that in many cases the individuals seeking to hide their identity are engaged in illegal activities such as money laundering, ransomware schemes, and sanctions evasion. Thus, on August 8, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctionedOff-site link Tornado Cash. Among the consequences of this sanctioning is that Americans are prohibited from using Tornado Cash unless licensed by OFAC or the transaction has an exemption. This sanctioning has resulted in a sharp drop in the total value locked in Tornado Cash, according to Defi Llama (you can see a graph of historical values hereOff-site link).

The last type of DeFi service that we discuss in our article is asset management. Asset-management dapps are similar to mutual funds in that they pool investor funds so that they can be efficiently invested other assets. This ability to pool assets may be useful, for example, by facilitating investment in an index of cryptocurrency values.

DeFi risks
As noted earlier, the value of all cryptoassets and cryptoassets locked in DeFi is relatively small, given the scale of the global financial system. As such, DeFi is not yet large enough to pose a systemic risk to the financial system or to be a significant mitigant of systemic risk. Nevertheless, DeFi's potential risk implications merit careful review given its potential for growth.

In our article, we discuss how DeFi could reduce some risks but increase other risks in the financial system. Arguably the biggest potential for risk reduction is enhancing the ability of supervisors to track, in real time, major financial institutions' transactions on the blockchain, both as individual institutions and in aggregate. Having this ability would allow supervisors to respond nearly in real time. The cost, however, is that the complete record of transactions is available to everyone, and pseudo-anonymity can be broken in many circumstances. Thus, users of cryptofinance, including DeFi, have no guarantee that their transactions will remain private. This potential lack of privacy poses problems not only for individuals but also for businesses that would rather not have their financial transactions disclosed to competitors.

In terms of risks created by DeFi, many of them are like the risks that have always been part of traditional finance, including excessive leverage, maturity and liquidity transformation, and so forth. However, important operational differences exist between traditional finance and DeFi that could have significant risk implications. Some of these issues might have solutions, such as whether a blockchain can be made secure and scalable while remaining decentralized. However, many other problems are inherent in blockchains, dapps, and cryptofinance.

At the most basic level is governance of the blockchain and the individual dapps. In theory, the governance of blockchains and dapps is decentralized, with no one party exercising control. In practice, we observe a wide spectrum of governance arrangements. Some governance arrangements are de facto centralized with a small group—typically, the founders—exercising effective control (see, for example, hereOff-site link). Such centralized control facilitates correcting mistakes in programming and adapting to environmental changes. However, such centralization also allows those in control to change the operation of the dapp in ways that benefit themselves. At an extreme, this behavior can take the form of a "rug pull," in which the founders disappear with all the tokens locked in a smart contract. Conversely, as governance becomes more decentralized, making changes to the blockchain protocol or dapp might become more challenging, and the supervisors could have difficulty finding people to address regulatory concerns. Also, decentralization of governance does not guarantee against someone temporarily buying control to enact changes favorable to themselves, nor does it prevent a majority of the voters from taking actions that disadvantage a minority of the voters.

The process of creating new blocks introduces risks for DeFi users. New blocks typically contain multiple transactions with the miner (or validator) who "wins" the competition obtaining control over which transactions get entered in the block and in which order. One result is that the structure of blockchains allows something akin to front-running in traditional markets. The resulting profit accruing to miners (and validators) is called miner's extractable value (as discussed in detail hereOff-site link).

Focusing more specifically on smart contracts, this computer code is subject to two problems. First, mistakes in the programming (bugs) are common in computer code. Of course, traditional financial intermediaries' programs also have bugs. However, the resistance of blockchains to rewriting historical blocks makes reversing errors almost impossible unless the receiver of a payment agrees to reverse the transaction. Second, the code must state (explicitly or implicitly) what will happen in every possible circumstance. Yet as I have previously observed, traditional contracts are often intentionally left incomplete for a variety of good economic reasons.

A third issue related to risk is that of trust. Users of traditional financial intermediaries need to place considerable trust in their intermediary, its regulator, and the judicial system. On the other hand, cryptofinance is described as "trustless," meaning that its user can verify all transactions on a blockchain and inspect the code being used by a dapp. In practice, though, very few people would have the technical skills (or the time) needed to carefully analyze a dapp to find any programming bugs, fully understand the dapp's economic incentives, and understand how that dapp could interact with other dapps. Thus, as a practical matter, almost all users will need to trust third parties if DeFi is to become mainstream.

The issue of trust is exacerbated by something called "censorship resistance," which is a property of public, permissionless blockchains. In principle, anyone can initiate any transaction on a blockchain as long as it complies with the blockchain's protocol. This openness can have benefits, such as preventing governments from trying to financially cripple political opponents. However, it also means that the blockchain is open to every bad actor no matter where they are in the world. As a result, blockchains have been used to facilitate scams, theft, and money laundering. Although similar problems exist in traditional finance, the extent of such problems is reduced by financial intermediaries' incentive to build customer trust, regulators' ability to enforce regulations around financial conduct, and, in some cases, regulators and judicial authorities' ability to enforce the reversal of improper transactions.

One unusual feature of dapps is their interoperability, a potential advantage in that smart contract composability allows for dapps to interoperate and thus provide services and products that are not available from any single dapp. However, such interoperability also creates the risk that if a financial or operational issue arises with one dapp, the problem could spread to other parts of the DeFi ecosystem.

Another risk we discuss in the article is DeFi's interconnections with the traditional financial system. In part, this risk arises because traditional finance and DeFi simply have different mindsets and take different risk-mitigation approaches. Participants in DeFi might not appreciate the potential risks they are incurring from involvement with traditional finance, such as the risks that the investment portfolios of some stablecoins have taken. Similarly, traditional financial institutions might not fully appreciate their risks through DeFi when they interact with crypto finance. Moreover, traditional financial institutions could face greater exposure to legal risk as they—unlike almost all dapps—can be readily identified, and their deep pockets make them attractive targets.

DeFi is opening a new avenue for the provision of financial services and might provide significant benefits. However, alongside exposure to most of the risks incurred in traditional finance, DeFi introduces new risks that arise from its unique operational structure. While DeFi is still a relatively small part of the financial system, policymakers should try to get ahead of developments in this area and decide what regulatory controls would be appropriate.

November 9, 2020

The Importance of Digital Payments to Financial Inclusion

Editor's note: In December, macroblog will become part of the Atlanta Fed's Policy Hub publication.

A recent Atlanta Fed white paper titled "Shifting the Focus: Digital Payments and the Path to Financial Inclusion" calls for a concerted effort to bring underbanked consumers into the digital payments economy. The paper—by Atlanta Fed president Raphael Bostic, payments experts Shari Bower and Jessica Washington, and economists Oz Shy and Larry Wall—acknowledges the importance of longstanding efforts to bring the full range of banking services to unbanked and underbanked consumers. (For another take on the white paper and its relationship to the Atlanta Fed's mission, you can read here.) However, the white paper observes, progress towards this goal has been slow. It further notes the growing importance of digital payments for a wide variety of economic activities. It concludes by highlighting a number of potential policies that could expand inclusion in the digital payments economy for policymakers to consider.

The 2017 Federal Deposit Insurance Corporation (FDIC) National Survey of Unbanked and Underbanked Households found that 6.5 percent of U.S. households are unbanked and an additional 18.7 percent underbanked. In this survey, a household is considered underbanked if it has a bank account but has obtained some financial services from higher-cost alternative service providers such as payday lenders. The proportions are even higher in some minority communities, with an unbanked rate for Black households at 16.9 percent. These figures were down modestly from earlier FDIC surveys, but progress remains inadequate.

The white paper retains full inclusion as the ultimate goal but argues we should not let the difficulties of achieving full inclusion deter us from moving aggressively to spread the benefits of digital payments. Such digital payments in the United States are typically made using (or funded by) a debit or credit card. Yet a recent paper by Oz Shy (one of the coauthors of this post) finds that over 4.8 percent of adults in a recent survey lack access to either card. Moreover, those lacking a card tend to be disproportionately concentrated in low-income households, with almost 20 percent of households earning under $10,000 annually and over 14 percent of those earning under $20,000 a year having neither card. These numbers also vary by ethnic groups: 4.8 percent of white and 10.2 percent of Black surveyed consumers.

The lack of access to digital payments has long been a costly inconvenience, but recent developments are moving digital payments from the "nice-to-have" category toward the "must-have" category. Card payments are increasing at an annual rate of 8.9 percent by number in recent years. While cash remains popular, debit cards have overtaken cash for the most popular in-person type of payments. Moreover, the use of cards in remote payments where cash is not an option nearly equals their use for in-person transactions. Most recently, COVID-19 has accelerated this move toward cards, with a 44.4 percent year-over-year increase in e-commerce sales in the second quarter of 2020.

These trends in card usage relative to cash usage pose several problems for consumers who lack access to digital payments. First, some retailers are starting to adopt a policy of refusing cash. Second, many governments are deploying no-cash parking meters, along with highway toll readers and mass transit fare machines that do not accept cash. Third, the growth of online shopping is being accompanied by a decrease in the number of physical stores, resulting in reduced access for those lacking cards.

The last part of the white paper discusses a number of not mutually exclusive ways of keeping the shift from paper-based payments (cash and checks) to digital payments from adversely affecting those lacking a bank account. A simple, short-term fix is to preserve an individual's ability to obtain cash and use it at physical stores. No federal law currently prevents businesses from going cashless, but some states and localities have mandated the acceptance of cash.

However, merely forcing businesses to accept cash does not solve the e-commerce problem, nor does it promote the development of faster, cheaper, safer, and more convenient payment systems, so considering alternatives takes on greater importance. One option the paper discusses is that of cash-in/cash-out networks that allow consumers to convert their physical cash to digital money (and vice versa). Examples of this in the United States include ATMs and prepaid debit cards, as well as prepaid services such as mass transit cards that can be purchased for cash in physical locations.

Another option is public banking. One version of this that has been proposed is a postal banking system like the ones operating in 51 countries outside the United States and the one that was once available here. Another public banking possibility would provide consumers with basic transaction accounts that allow digital payments services. The government or private firms (such as banks, credit unions, or some types of fintech firms) could administer such services.

The paper concludes with a discussion of some important challenges inherent in moving toward a completely cashless economy accessible to everyone. One such consideration is access to mobile and broadband. This issue has a financial dimension, that of being able to afford internet access. It also has a geographic dimension in that many rural areas lack both high-speed internet and fast cellphone networks. Another dimension is that of providing a faster payment service that would allow people to obtain earlier access to their incoming funds, and result in bank balances more accurately reflecting outgoing payments. Finally, the white paper raises the potential for central bank digital currency to expand access to digital payments. However, central bank digital currency raises a large number of issues that the federal government and Federal Reserve would need to work through before it could be a viable option.

May 28, 2020

Firms Expect Working from Home to Triple

The coronavirus and efforts to mitigate its impact are having a transformative impact on many aspects of economic life, intensifying trends like shopping online rather than visiting brick-and-mortar stores and increasing the incidence of working from home. Indeed, many tech giants have already made working from home a permanent option for employees.

Working from home, or telecommuting, is not a new phenomenon. According to a survey by the U.S. Bureau of Labor Statistics (BLS), around 8 percent of all employees worked from home at least one day a week before the arrival of COVID-19. However, only 2.5 percent worked from home full-time in the 2017–18 survey period.

Working from home has surged in the wake of social distancing and other efforts to contain the virus, and this surge brings up a good question: How many jobs can be done at home? Some careful research by Jonathan Dingel and Brent Neiman indicates that nearly 40 percent of U.S. jobs can be done at home.

While this provides an upper bound, can does not mean will, so a natural follow-up question is: How many jobs willbe done at home? To get a sense of how many jobs and how many working days will beperformedat home after the pandemic recedes, we turn to our Survey of Business Uncertainty (SBU). To preview our conclusion, the share of working days spent at home is expected to triple after the COVID-19 crisis ends compared to before the pandemic hit, but with considerable variation across industries.

In the May SBU, we asked two questions to gauge how firms anticipate working from home to change. To get a pre-pandemic starting point, we asked panelists, "What percentage of your full-time employees worked from home in 2019?" And to gauge how that's likely to change after the crisis ends, we asked, "What percentage of your full-time employees will work from home after the coronavirus pandemic?" We asked firms to sort the fraction of their full-time workforce into four categories, ranging from those employees working from home five full days per week to those who rarely or never work from home.

Chart 1 summarizes firms' responses to these two questions. It also summarizes the responses by workers to questions about working from home in the BLS's 2017–18 American Time Use Survey. For the period preceding COVID-19, SBU results and the Time Use Survey results are remarkably similar. Both surveys say 90 percent of employees rarely or never worked from home, and a very small fraction worked from home five full days per week. As reported in the chart's rightmost column, about 5 to 6 percent of all working days happened at home before the pandemic hit.

Chart 1: Working From Home, Pre- and Post-COVID

According to the SBU results, the anticipated share of working days at home is set to triple after the pandemic ends—rising from 5.5 percent to 16.6 percent of all working days. Perhaps even more striking, firms anticipate that 10 percent of their full-time workforce will be working from home five days a week.

Overall, firms say that about 10 percent of their full-time employees worked from home at least one day a week in 2019. That fraction is expected to jump to nearly 30 percent after the crisis ends (well below the upper bound estimated by Dingel and Neiman). Chart 2 gives a look at firm's working-from-home expectations for major industry groups.

Chart 2: Working From Home at Least One Full Day Per Week, Pre- and Post-COVID, by Industry

The share of people working from home at least one day a week is expected to jump markedly in the construction, real estate, and mining and utilities sectors, presumably by granting front-office staff working-from-home status. It is also expected to jump markedly in health care, education, leisure and hospitality, and other services, possibly by relying more heavily on remote-delivery options (for example, online education and virtual doctor's visits). Firms in the business services sector anticipate that working from home will rise to nearly 45 percent.

For the industries we can match directly to American Time Use Survey statistics, the two data sources imply a similar incidence of working from home before COVID-19. For manufacturing, SBU data indicate that 9 percent of employees worked at home at least one day a week prior to COVID-19, and the American Time Use Survey indicates that 7.3 percent did so. For retail and wholesale trade, the corresponding figures are 4.1 percent and 4.0 percent, respectively.

To summarize, our survey indicates that, compared to before the pandemic, the share of working days spent at home by full-time workers will triple after the pandemic. Our results also say that this shift will happen across major industry sectors. These changes in the location of work are also likely to exert powerful effects on the future of cities and the demand for high-rise office space (more on that next month).

Regarding the long-run impact of the shift to working from home, there are grounds for optimism, including a potential boost to productivity—although if you're juggling kids at home and working from your couch or bedroom, we can understand if it's hard to imagine right now.


November 29, 2018

Cryptocurrency and Central Bank E-Money

The Atlanta Fed recently hosted a workshop, "Financial Stability Implications of New Technology," which was cosponsored by the Center for the Economic Analysis of Risk at Georgia State University. This macroblog post discusses the workshop's panel on cryptocurrency and central bank e-money. A companion Notes from the Vault post provides some highlights from the rest of the workshop.

The panel began with Douglas Elliot, a partner at Oliver Wyman, discussing some of the public policy issues associated with cryptoassets. Drawing on a recent paper he cowrote, Elliot observed that there are "at least four substantial market segments" that provide long-term support for cryptoassets:

  • libertarians and techno-anarchists who, for ideological reasons, want a currency without a government;
  • people who deeply distrust their government's economic management;
  • seekers of anonymity, who don't want their names associated with transactions and investments; and
  • technical users who find cryptoassets useful for some blockchain applications.

Besides these groups are the speculators and investors who hope to benefit from price appreciation of these assets.

Given the strong interest of these four groups, Elliot argues that cryptoassets are here to stay, but he also asserts that these assets raise public policy issues that regulation should address. Some issues, such as anti–money laundering, are being addressed, but all would benefit from a coordinated global approach. However, he observes that of the four long-term support groups, only the technical users are likely to favor such regulations.

Another paper, by University of Chicago professor Gina C. Pieters, analyzed the extent to which the cryptocurrency market is global using purchases of cryptocurrency by state-issued currencies. She finds that more than 90 percent of all cryptocurrency transactions occur using one of three currencies: the U.S. dollar, the South Korean won, and the Japanese yen. She further finds that the dominance of these three currencies cannot be explained by economic size, financial openness, or internet access. Pieters also observed that transactions involving bitcoin, the largest cryptocurrency by market value, do not necessarily represent a country's cryptomarket share.

Warren Weber, former Minneapolis Fed economist and a visiting scholar at the Atlanta Fed, discussed so-called "stable coins," one type of cryptocurrency. The value of many cryptocurrencies has fluctuated widely in recent years, with the price of one bitcoin soaring from under $6,000 to more than $19,000 and then plunging to just over $6,000—all within the period from October 2017 to October 2018. This extreme price volatility creates a significant impediment to Elliot's technical users who would like some method of buying blockchain services with a currency controlled by a blockchain. In an attempt to meet this demand, a number of "stable coins" have been issued or are under development.

Drawing on a preliminary paper, Weber discussed three types of stable coins. One type backs all of the currency it issues with holdings of a state-issued currency, such as the U.S. dollar. A potential weakness of these coins is that they incur operational costs that require payment. Weber observed that interest earnings might cover part of these expenses if the stable coin issuer holds the dollars in an interest-bearing asset. Additionally, charging redemption fees might offset some or all of the expense.

The other two alternatives involve the creation of cryptofinancial entities or crypto "central banks." Both of these approaches seek to adjust the quantity of the cryptocurrency outstanding to stabilize its price in another currency. However, Weber observed that both of these approaches are subject to the problem that the cryptocurrency could take on many values depending upon people's expectations. If people come to expect that a coin will lose its value, neither of these approaches can prevent the coin from becoming worthless.

The question of whether existing central banks should issue e-money was the topic of a presentation by Francisco Rivadeneyra of the Bank of Canada. Summarizing the results of his paper, Rivadeneyra observed that central banks could provide e-money that looks like a token or a more traditional account. The potential for central banks to offer widely available account-based services has long existed. However, after considering the tradeoffs, central banks have elected not to provide these accounts, and recent technological developments have not changed this calculus. However, new technologies may have changed the tradeoff for token-based systems. Many issues will need to be addressed first, though.