Design and Regulation of Financial Infrastructure and Payment Systems
240 pp., 5 x 8 in, 11 figures
- Published: October 6, 2020
- Published: October 6, 2020
An economic analysis of what distributed ledgers can do, examining key components and discussing applications in both developed and emerging market economies.
Distributed ledger technology (DLT) has the potential to transform economic organization and financial structures. In this book, Robert Townsend steps back from the hype and controversy surrounding DLT (and the related, but not synonymous, innovations of blockchain and Bitcoin) to offer an economic analysis of what distributed ledgers can do and a blueprint for the optimal design and regulation of financial systems. Townsend examines the key components of distributed ledgers, discussing, evaluating, and illustrating each in the context of historical and contemporary economies, reviewing featured applications in both developed economies and emerging-market countries, and indicating where future innovations can have large impact.
Throughout, Townsend emphasizes the general equilibrium impact of DLT innovations, the welfare gains from these innovations, and related regulatory innovations. He analyzes four crucial components of distributed ledgers—ledgers as accounts, e-messages and e-value transfers, cryptography, and contracts—assessing each in terms of both economics and computer science, and forges some middle ground. Relatedly, Townsend highlights hybrid systems in which some of these components allow useful innovation while legacy or alternative pieces deal with the problem of scale. The specific applications he analyzes include an intelligent financial automated system that provides financial services to unbanked and under-banked populations, and cross-border payments systems, including financial systems that can integrate credit and insurance with clearing and settlement. Finally, Townsend considers cryptocurrencies, discussing the role and value of tokens in economies with distributed ledger systems.
The open access edition of this book was made possible by generous funding from Arcadia – a charitable fund of Lisbet Rausing and Peter Baldwin.
Sustaining money through decentralized consensus entails not just technological and cryptographic advances but also the overall coherence of incentives. Townsend shows this with mastery as a top-notch theorist and with concrete examples. This impressive book is a must-read for all serious observers of digital currencies and the payment system.
Hyun Song Shin, Economic Adviser and Head of Research, Bank for International Settlements
The study of money as an integral part of larger economic systems is critical due to the recent rapid advances in cryptology-based monetary systems. In this book, economics meets computer science in a foundational contribution to the many issues and opportunities circling the development of a new digital financial system.
Jacky Mallett, Assistant Professor of Computer Science, Reykjavik University; Supervisory Director, Central Bank of Iceland
Funding provided by: Arcadia Fund