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Demand for blockchains such as Bitcoin and Ethereum is far larger than supply, necessitating a mechanism that selects a subset of transactions to include “on-chain” from the pool of all pending transactions. This paper investigates the problem of designing a blockchain transaction fee mechanism through the lens of mechanism design. We introduce two new forms of incentive-compatibility that capture some of the idiosyncrasies of the blockchain setting, one (MMIC) that protects against deviations by profit-maximizing miners and one (OCA-proofness) that protects against off-chain collusion between miners and users. This study is immediately applicable to a recent (August 5, 2021) and major change to Ethereum’s transaction fee mechanism, based on a proposal called “EIP-1559.” Historically, Ethereum’s transaction fee mechanism was a first-price (pay-as-bid) auction. EIP-1559 suggested making several tightly coupled changes, including the introduction of variable-size blocks, a history-depend...

In the past decades, privately owned payment systems (e.g., PayPal, M-Pesa, Alipay, and Square) have gained widespread popularity. Recently, various cryptocurrencies further caused a fundamental reorientation of domestic and international monetary and payment technologies, as well as of policies and regulatory frameworks governing payment systems (Brunnermeier, James, and Landau, 2019; Adrian and Mancini-Griffoli, 2019; Cong, Li, and Wang, 2021a). Many countries around the globe react to these trends by actively researching on Central Bank Digital Currencies (CBDCs, see, e.g., Bech and Garratt, 2017; Duffie, 2021; Duffie and Gleeson, 2021), as revealed by the sharp rise in the number of central banks in the process of developing their own digital currencies (Boar, Holden, and Wadsworth, 2020; Boar and Wehrli, 2021).1 Due to their potential to be safer, cheaper more efficient, interoperable, and versatile, digital currencies have the potential to challenge or even replace traditional fi...

Capital flows can bring substantial benefits for countries but also carry risks. They help smooth consumption and finance investment, diversify risks, and contribute to a more efficient allocation of resources. They can also foster economic growth by transferring technology and managerial skills, stimulating financial sector development, and generating incentives for better governance and stronger macroeconomic policies. At the same time, large and volatile flows can pose macroeconomic and financial stability risks, which can be magnified by gaps in a country’s financial and institutional infrastructure. To mitigate such risks while retaining policy autonomy, many IMF member countries, particularly emerging market and developing economies with less-developed financial markets, maintain some form of restrictions on capital flows. Capital flow management measures (CFMs) can be part of a broader policy toolkit to help countries reap the benefits of capital flows while managing the associa...

How societies organise their monetary systems is a consequence of the interaction of ideas (e.g. should a central bank target price stability?) with technology (e.g. how good are we at issuing money that is hard to counterfeit?). This interaction is dynamic: improvements in technology drive how we think about money and, vice versa, changes in our ideas about money lead to developing new monetary technologies. Also, it is a punctuated interaction: periods of rapid change are intersected among long years of stability. Right now, we are living in one of those times of quick transformation. The internet, advanced cryptography, and fast computational power mean that it is well within the realm of feasibility to completely change our financial system. And these technologies have led the private sector to introduce new ideas in the form of digital currencies, from bitcoin to Facebook’s diem. In response to this technological and private sector pressure, central banks are considering a move fr...

Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour. https://www.ft.com/content/b4fa13c7-7b4b-469b-8401-638c85e79289 The boundaries between cryptocurrencies and traditional asset classes are blurring ever further, as established Wall Street players make trading digital assets part of their main business — and companies native to bitcoin push into mainstream markets. The arrival of institutional investors into the $1.3tn digital asset market has meant the influence of big banks and professional traders has grown. As a result, the relationship between the price of mainstream assets, such as stocks and bonds, and crypto has tightened. But, so far, the majority of the...

6. Practical Implications for Banks 6.1. Flight to Safety/Bank Runs The main concern for commercial banks when it comes to the implementation of retail CBDCs and especially direct CBDCs is the resulting risk of a consumer flight to safety and the consequent risk of bank runs that this creates. At present, bank runs are theo-retically possible but are harder to execute due to physical limitations. During contem-porary bank runs, consumers have to physically go to a local bank branch and line up to get their money. However, the execution of these withdrawals when using retail CBDCs is far easier, where a bank run would then be possible simply with frictionless digital transactions on a computer or smartphone. From this, there is clearly the possibility that retail CBDCs may make bank runs very easy and thus, more probable. This risk may henceforth pose a great risk to financial stability during times of heightened demand for bank deposit withdrawals. In support of this sentiment, Willi...