Social currencies and cryptocurrencies: Characteristics, risks and comparative analysis

Abstract

This article deals with the concepts of social currencies and cryptocurrencies. The objective of the present paper is to identify similarities and differences between to two currency systems which represent a new generation of money that exists alongside the official and legal money system. The paper includes an analysis of the major characteristics of both currencies, their operating mechanisms in global and local contexts, as well as their risks and challenges for the financial markets. The article uses a mainly documentary research method and presents selected contributions of experts on the topics of social currencies and cryptocurrencies. Furthermore, empirical evidence is presented to highlight some important characteristics of the Bitcoin currency. The principal result of the paper is that, indeed there exist similarities between social currencies and cryptocurrencies, as for example the absence of a central bank, a lack of regulation and a limited minting process. However, because of aspects like their different origins, their local vs. global character and their inherent financial risks, the two money systems need to be interpreted as fundamentally different. Especially with reference to globally operating cryptocurrencies, given that there does not exist any public cover of the currency nor sufficient regulation, risk management mechanisms need to be improved in order to diminish the speculative tendencies inherent to this currency.