Impact of Crypto Assets on Central Banks in Digital Economy

This report delves into the transformative impact of crypto assets and distributed ledger technologies (DLT) on the future role of central banks within a digital, sharing, and decentralized service economy. It begins by highlighting the emergence of cryptocurrencies as a response to monetary policies and the increasing interest in crypto assets for investment and value storage. The report then explores how the adoption of crypto assets and DLT can revolutionize the financial system, enhancing transaction speed, reducing costs, and broadening access. It discusses the rise of crypto assets, their advantages like anonymity and quicker cross-border payments, and the emergence of Bitcoin and Ether. The role of DLT, including blockchain, and the challenges it addresses, such as the double-spending problem are analyzed. The report concludes by emphasizing the need for central banks to adapt to these changes, ensuring that the relationship between real and crypto currencies remains stable and that regulations are applied consistently to both.

International Banking

Table of Contents
Introduction on the issue............................................................................................................3
Discussion on crypto assets and distributed ledger technologies...............................................3
References..................................................................................................................................5

Introduction on the issue
Crypto currencies are the response to monetary destruction and the currency wars that are
implemented by the central banks (Focus Economics, 2017). Crypto currencies are attracting
the people for investment and storing a value although, the risks are high and the penetration
for payment is low. The adoption of the crypto assets and the distributed ledger technologies
can change the financial system to a great extent and can also increase the speed of the cross
border and domestic transactions, and can also reduce the cost of the transactions. Along with
this, it can broaden the access to financial system. The records of the transactions of the
crypto currencies can be recorded with the help of DLT. The rise in adoption of DLT and
crypto assets can reduce the role of the central banks in the future. The central bank works on
the basis of the regulations and recording the transactions in an effective manner. The
emergence of crypto currencies can decrease the role of central banks, which can bring the
challenges. The central banks have to focus more on ensuring that the ties linking the real
currencies and crypto currencies should not be parasitic. It is important for the central banks
to apply same regulations and risk for the crypto currencies as well although, this can result
in increased challenges for the central banks (Carstens, 2018).
Discussion on crypto assets and distributed ledger technologies
In the present time, the crypto coins have gained the attention of the people and, an asset in
the form of cryptocurrency is considered as crypto asset. They are utilized as money and can
be used for other application apart from payment purposes. Crypto currency is a type of
digital asset that helps in providing with the medium of decentralized exchange through
utilizing the cryptography for facilitating the transactions. The crypto currency is different
from larger monetary environment apart from being supported by government or central
bank. The usage of these currencies has increased as it provides with the advantages

(Knutson, Liu, & Schlenker, 2018). These currencies offer anonymity of cash and also allow
the transactions at long distances as well as unit of transaction is divisible. These things make
the crypto assets more attractive for the micro payments in the service- based and new
sharing digital economy. The transaction of the crypto assets could be settled and cleared
quickly. The cross- border payments are more advantageous and quicker with the help of the
crypto assets. On the other hand, crypto currencies have no such cash flows, historical
dividend payments or the financial statements for the purpose to analyse unlike the corporate
investment. It also lack metrics that is utilized for value fiat currencies like official fiscal,
economic indicators, monetary policies, discernable political climates, international trade
records and such others (He, 2018). In the recent time, Ether and Bitcoin have emerged as
clear leaders in the market of cryptocurrency. Both are mined by using the distributed ledger
technology (DLT) that is a shared record of the transactions which is considered as block
chain. The computer resources are used by these currencies for running trillions of
computations. The computer resources process the computations and catalogue transactions,
which are processed and become the next block in block chain. After the processing of the
block, the currency is awarded to miner. This process is considered as a Proof of Work
(Richards, 2018). The technological challenges in the peer-to-peer digital exchange are
known as double spending problem. The digital form of the money is replicable which can
result in fraudulently spent. It is possible to reproduce the digital information easily in
comparison to the physical bank notes. It is important to keep the record of the transactions of
the digital transactions for solving the issue of double spending. The crypto currencies
overcome the issue of double spending through decentralised record keeping with the help of
distributed ledger. Ledger is considered as a file that includes the initial distribution of the
records of all the transactions and the cryptocurrency. Every user can store the up-to-date
copy of ledger. The verification of the ledger is possible by every user with the help of

distributed ledger related to the transactions. All the crypto currencies depend on distributed
ledger, but they differ in the manner the ledger is updated. The permissioned DLT are used to
stop the abuse. The updates in the ledger can be made by the trusted participants. The
participants are selected by central authority. The permissioned system is different from that
of the conventional money, as it differs in terms of storing the records of transactions.
Permissionless DLT is used for establishing trust in decentralised setting. The recording of
the transactions in the ledger can be changed by considering the participants in currency
(BIS, 2018).
References
BIS. (2018). V. Cryptocurrencies: looking beyond the hype. Retrieved from Bis.org:
https://www.bis.org/publ/arpdf/ar2018e5.pdf
Carstens, A. (2018). Money in the digital age: what role for central banks? Retrieved from
Bis.org: https://www.bis.org/speeches/sp180206.pdf
Focus Economics. (2017). 21 experts tell us what the future looks like for cryptocurrencies
and blockchain. Retrieved from Focus-economics.com: https://www.focus-
economics.com/blog/cryptocurrencies-block-chain-future
He, D. (2018). Monetary Policy in the Digital Age. Finance & Development, 55(2), 13-16.
Knutson, A., Liu, M., & Schlenker, D. (2018). The Digital Asset of the Future. Retrieved
from www.economist.com:
https://www.economist.com/sites/default/files/the_digital_asset_of_the_future__team
_byu.pdf
Richards, T. (2018). Cryptocurrencies and Distributed Ledger Technology. Retrieved from
www.rba.gov.au: https://www.rba.gov.au/speeches/2018/sp-so-2018-06-26.html