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Eggs in One Basket: Security and Convenience of Digital Currencies

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  • Charles M. Kahn
  • Francisco Rivadeneyra
  • Tsz-Nga Wong

Abstract

Digital currencies store balances in anonymous electronic addresses. We analyze the trade-offs between safety and convenience of aggregating balances in addresses, electronic wallets and banks. In our model agents balance the risk of theft of a large account with the cost to safeguarding a large number of passwords of many small accounts. Account custodians (banks, wallets and other payment service providers) have different objectives and tradeoffs on these dimensions; we analyze the welfare effects of differing industry structures and interdependencies, and in particular the consequences of "password aggregation" programs which in effect consolidate risks across accounts.

Suggested Citation

  • Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2020. "Eggs in One Basket: Security and Convenience of Digital Currencies," Working Papers 2020-032, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:88727
    DOI: 10.20955/wp.2020.032
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    Cited by:

    1. Agur, Itai & Ari, Anil & Dell’Ariccia, Giovanni, 2022. "Designing central bank digital currencies," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 62-79.
    2. Charles M. Kahn & Francisco Rivadeneyra, 2020. "Security and convenience of a central bank digital currency," Staff Analytical Notes 2020-21, Bank of Canada.
    3. Charles M. Kahn & Maarten R.C. van Oordt, 2022. "The Demand for Programmable Payments," Tinbergen Institute Discussion Papers 22-076/IV, Tinbergen Institute.
    4. Daniela Balutel & Marie-Hélène Felt & Gradon Nicholls & Marcel-Cristian Voia, 2024. "Bitcoin awareness, ownership and use: 2016–20," Applied Economics, Taylor & Francis Journals, vol. 56(1), pages 33-58, January.
    5. Chiu, Jonathan & Wong, Tsz-Nga, 2022. "Payments on digital platforms: Resiliency, interoperability and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 142(C).
    6. Li, Jiaqi, 2023. "Predicting the demand for central bank digital currency: A structural analysis with survey data," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 73-85.
    7. Zhixiu Yu, 2023. "On the Coexistence of Cryptocurrency and Fiat Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 147-180, July.

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    More about this item

    Keywords

    digital currencies; wallets; hacking; theft; welfare;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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