Eggs in One Basket: Security and Convenience of Digital Currencies

Digital currencies store balances in anonymous electronic addresses. We analyze the trade-offs between the 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 of safeguarding a large number of passwords for many small accounts. Account custodians (banks, wallets and other payment service providers) have different objectives and trade-offs along these dimensions. We analyze the welfare effects of differing industry structures and interdependencies. In particular, we examine the consequences of “password aggregation" programs, which, in effect, consolidate risks across accounts.