DEEP - DIGITAL TECHNOLOGIES AND MONETARY POLICIES: THE ROLE OF CRYPTOCURRENCIES

Programma: PNRR M4C2 – Investimento 1.1 PRIN PNRR 2022

Settore ERC: SH - Social Sciences and Humanities

Codice progetto: P2022EZBTE – CUP: B53D23026500001

Responsabile scientifico: Prof. Carlo D’Ippoliti

Capofila: Sapienza Università di Roma

Partner (Altre Unità): Università degli Studi di Milano “La Statale”

Contributo Totale progetto: € 269.966 ,00

Contributo per l’Ateneo: € 146,323

Durata: 24 mesi (dal 01/12/2023 al 30/11/2025)

The rapid integration of technological advancements in the digital sector, particularly through innovations like cryptocurrencies, is transforming the financial system and influencing economic and social structures. This project aims to deepen understanding of this transformation by addressing three key areas:

  1. Mapping the cryptocurrency landscape: A comprehensive analysis of cryptocurrency types, market dynamics, risks, and systemic implications will be conducted. This includes assessing their volatility, market exchange mechanisms, and representation within a financial balances framework to evaluate potential threats to financial stability and systemic risk accumulation.
  2. Exploring Central Bank Digital Currencies (CBDCs): The project will examine how CBDCs could reshape monetary policy by enhancing transmission channels, leveraging programmability via distributed ledger technology (DLT), and addressing economic resilience, policy interactions, and inequality.
  3. Improving private cryptocurrency exchanges: The project proposes a theoretical framework for a novel "Proof of Efficiency Loss" consensus algorithm, designed to enhance the sustainability of private cryptocurrencies by reducing energy consumption and increasing operational efficiency. This conceptual development will examine the current state of consensus algorithms and outline potential pathways for improvement. However, the realization of this proposal would require further engineering and computational contributions to validate and implement the model in practice.

 

By addressing these interconnected dimensions, the project seeks to contribute to a nuanced understanding of the financial and technological innovations shaping the global economy.

Abstrac

The technological advances in the digital sector are increasingly applied within the financial system, with the rise of new instruments such as cryptocurrencies. Financial and technological innovation is changing the economic environment and will have an impact on economic and social life. This project aims at increasing the knowledge of its impact, by looking at three aspects: - the state of the art, mapping the different kinds of cryptocurrencies and their potential evolution; - the possible consequences of central banks issuing public digital currencies; - the efficiency and risks of private cryptocurrency markets. In the first part of the project, a detailed analysis of the state of the art of the cryptocurrency world will be developed. This new class of financial assets will be analyzed with reference to their risk, their volatility, how they are exchanged in the market, and how they can be conceptualized and formally represented with a financial balances approach. A mapping of the state of the art of the crypto world is particularly important to increase the knowledge on the potential threat of these new assets on the financial system and how they can have an impact on financial fragility and the accumulation of systemic risk. The second part of the project is devoted to the analysis of Central Bank Digital Currencies (CBDC) and aims to increase the knowledge of how the launch of a CBDC could have an impact on how Central Banks will conduct Monetary Policy. Our starting assumption is that a CBDC might strengthen the transmission channel of monetary policy to the real economy in different ways, e.g. with the increase in the level of granularity that can be achieved using this new tool and with the programmability allowed by DLT (distributed ledger technology). In this part of the project, we wish to study how these new possibilities for monetary policy might increase the resilience of the financial system, as well as how they may reshape the interaction between fiscal and monetary policy and what the impact on aggregate income and wealth inequality might be. The third part aims to study how the exchange of private cryptocurrencies could be improved, with the aim both to increase the resilience of the financial sector and to mitigate the environmental impact of this class of assets. Specifically, we plan to develop a new consensus algorithm: ‘Proof of Efficiency Loss’. Consensus algorithms are one of the main infrastructures that enable the smooth functioning of cryptocurrencies; we wish to study the state of the art of consensus algorithms, and we will develop a proposal for a new “proof of work” of the exchange of cryptocurrencies with less use of nodes and less use of energy. With a “Proof of Efficiency Loss” consensus algorithm, cryptocurrencies might become more environmentally sustainable.

I progressi tecnologici nel settore digitale vengono sempre più applicati all’interno del sistema finanziario, con la crescita di strumenti come le criptovalute. L’innovazione finanziaria e tecnologica sta cambiando l’ambiente economico e avrà un impatto sulla vita economica e sociale. Questo progetto ha l’obiettivo di aumentare la conoscenza di questi impatti, analizzando tre aspetti principali:

  • lo stato dell’arte, ovvero una mappatura dei diversi tipi di criptovalute e delle loro possibili evoluzioni future;
  • le conseguenze possibili dell’emissione di valute digitali pubbliche da parte delle banche centrali;
  • l’efficienza e i rischi dei mercati delle criptovalute private.

Nella prima parte del progetto, verrà sviluppata un’analisi dettagliata dello stato attuale del mondo delle criptovalute. Queste nuove classi di asset finanziari verranno analizzate considerando il loro rischio, la loro volatilità, come vengono scambiate sul mercato e come possono essere concettualizzate e rappresentate formalmente attraverso un approccio di bilancio finanziario. È molto importante fare questa mappatura per aumentare la conoscenza sui potenziali rischi di queste nuove risorse per il sistema finanziario, e capire come possano influenzare la fragilità finanziaria e l’accumulo di rischi sistemici.
La seconda parte del progetto si concentra sull’analisi delle Monete Digitali delle Banche Centrali (CBDC). L’obiettivo è capire come il lancio di una CBDC potrebbe influenzare la conduzione della politica monetaria. Partiamo dall’idea che una CBDC potrebbe rafforzare il canale di trasmissione della politica monetaria all’economia reale, grazie a strumenti più dettagliati e alla programmabilità offerta dalla tecnologia DLT (Distributed Ledger Technology). In questa fase, vogliamo studiare come queste nuove possibilità possano aumentare la resilienza del sistema finanziario, e come potrebbero modificare l’interazione tra politica fiscale e monetaria, oltre a valutare l’impatto su reddito e ricchezza a livello aggregato.
Infine, la terza parte del progetto si propone di migliorare lo scambio di criptovalute private, con l’obiettivo di rendere il settore finanziario più resistente e di ridurre l’impatto ambientale di queste risorse. In particolare, intendiamo sviluppare un nuovo algoritmo di consenso chiamato “Proof of Efficiency Loss”. Gli algoritmi di consenso sono fondamentali per il funzionamento delle criptovalute; vogliamo studiare lo stato attuale di questi algoritmi e proporne uno nuovo, che richieda meno nodi e consumi meno energia, rendendo le criptovalute più sostenibili dal punto di vista ambientale.

Parole chiave

  1. cryptocurrencies
  2. central bank digital currency
  3. financial stability
  4. financial resilience
  5. systemic risk
  6. monetary policy