Blockchain and cryptocurrencies: essential tools in a two-tier financial system

Abstract

• This article discusses the current situation in the market of cryptocurrencies and joins the debate about the regulation of these financial innovations. • It argues that the appearance of cryptocurrencies was a response to market demand for more affordable and more inclusive banking. • It also argues that distributed ledger technology (DLT) which supports cryptocurrencies and has different characteristics than the technology used by traditional banking could help to create with cryptocurrencies a new, lower cost, more inclusive financial ecosystem separate from the traditional one. • The two ecosystems (traditional and new one) would form a larger two-tier financial ecosystem, which, overall would be more inclusive and more affordable. Also, it would be more effective in containing contagion and major economic disruption during future financial crises. • The current reliance on a single, ever growing, and immensely complex financial ecosystem is not sustainable longer term as systemic risks grow with the system and there are no mechanisms available to fully eliminate these risks. The costs of regulating the current market architecture are also excessively high.