Eggs in One Basket:  Security and Convenience of Digital Currencies

Kahn, Charles M.; Rivadeneyra, Francisco; Wong, Tsz-Nga

doi:10.20955/wp.2020.032

Working Paper

Eggs in One Basket: Security and Convenience of Digital Currencies

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.

Keywords: digital currencies; wallets; hacking; theft; welfare;

JEL Classification: E42; E51; E58;

https://doi.org/10.20955/wp.2020.032