Cryptocurrencies and Blockchain

Office of the Chief Economist

May 2018

Europe and Central Asia Economic Update

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Cryptocurrencies

and Blockchain

WORLD BANK ECA ECONOMIC UPDATE MAY 2018

Office of the Chief Economist

© 2018 International Bank for Reconstruction and Development / The World Bank

1818 H Street NW, Washington, DC 20433

Telephone: 202-473-1000; Internet: www.worldbank.org

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DOI: 10.1596/978-1-4648-1299-6

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Contents

iii

Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Regional Classification Used in this Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

PART I: Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1 Economic Developments and Prospects . . . . . . . . . . . . . . . . . . . . . . . 3

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Growth is strong throughout the region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Growth appears to have peaked. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The region has shifted toward more exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

. . . and adapted to technological change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

A combination of factors caused the decline in labor productivity after the crisis. . . . . . . . . . . . 12

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

2 Cryptocurrencies and Blockchain: Hype or Transformational

Technologies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Creating digital money without central banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Creating digital markets without intermediaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Blockchain applications in Europe and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Policy challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Part II: Selected Country Pages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Albania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Armenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Azerbaijan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Belarus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Bosnia and Herzegovina. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Bulgaria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Croatia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Georgia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Kazakhstan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Kosovo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Kyrgyz Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Macedonia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Moldova. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Montenegro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

iv ● World Bank ECA Economic Update May 2018

Figures

1.1 Industrial production growth has soared since 2016, globally and in Europe

and Central Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.2 Commodity prices have followed the economic upswing. . . . . . . . . . . . . . . . . . . . . . . . . 6

1.3 Acceleration of growth has resulted in lower unemployment. . . . . . . . . . . . . . . . . . . . . . 7

1.4 Normalization of inflation in Europe and Central Asia continues. . . . . . . . . . . . . . . . . . . 8

1.5 Housing prices in the European Union have risen since 2013. . . . . . . . . . . . . . . . . . . . . . 9

1.6 The Purchasing Managers’ Index reached an all-time high in Europe and

Central Asia in 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.7 Government deficits in the region have fallen sharply since 2009. . . . . . . . . . . . . . . . . . 11

1.8 Since the crisis, production in Europe and Central Asia has shifted toward exports. . . . . 12

B1.1.1 Recovery in Central Europe was similar to recovery after Asian financial crisis. . . . . . . . . 13

B1.1.2 Investment rates adjusted immediately to reversal in capital flows. . . . . . . . . . . . . . . . . . 13

1.9 Even after full recovery, the effects of the global financial crisis remain. . . . . . . . . . . . . . 14

1.10 After the crisis, labor productivity increased at a slower rate. . . . . . . . . . . . . . . . . . . . . . 15

1.11 The contribution of total factor productivity (TFP) to labor productivity growth

declined after the crisis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.12 Labor productivity growth in Germany is on a long-term downward trend. . . . . . . . . . . . 16

2.1 As the price of bitcoin soared in 2017, so did competition among miners. . . . . . . . . . . . 26

2.2 Three large mining pools provide half of all network blocks. . . . . . . . . . . . . . . . . . . . . . . 27

2.3 Most mining revenue comes from the seignorage (block reward) of the network. . . . . . 29

2.4 Daily price movements of bitcoin continue to be large. . . . . . . . . . . . . . . . . . . . . . . . . . . 31

B2.2.1 Farmers in Europe and Central Asia are underinsured. . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.5 Early use of bitcoin was clustered around gambling and the dark web. . . . . . . . . . . . . . 38

2.6 Adoption of bitcoin is negatively correlated with the quality of institutions. . . . . . . . . . . 39

2.7 Europe and Central Asia is the site of many initial coin offerings (ICOs). . . . . . . . . . . . . . 41

B2.3.1 Georgia had the fastest-growing electricity consumption in Europe and

Central Asia in 2010–14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

B2.3.2 Unexplained electricity demand in Georgia has risen rapidly since 2009. . . . . . . . . . . . . 44

Boxes

1.1 Similarities between recoveries in Central Europe after 2009 and

East Asia in the late 1990s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.2 A new normal in Armenia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.1 Equilibrium mechanisms in the bitcoin market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2.2 Providing access to secure insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.3 Cryptocurrency mining and the demand for electricity in Georgia. . . . . . . . . . . . . . . . . . 43

2.4 Will central banks issue digital currencies?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Romania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Russian Federation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Serbia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Tajikistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Turkey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Turkmenistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Uzbekistan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Tables

E.1 Regional classification used in this report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

1.1 Growth has reached an all-time high in most countries in Europe and Central Asia. . . . . 4

v

Acknowledgments

This Europe and Central Asia (ECA) Economic Update is a joint product of ECA’s

Office of the Chief Economist, the Macro and Fiscal Management Global Practice,

and the Poverty Global Practice.

Part I was prepared by a team in the Chief Economist’s Office led by Hans

Timmer and including Roy Sudharshan Canagarajah, Breda Griffith, Bingjie Hu,

Georgi Panterov, Charalampos Papamanthou, William Shaw, and Ekaterina

Ushakova. Chapter I benefitted from forecasts (presented in Part II) prepared by

economists in the Macro and Fiscal Management Global Practice. David Michael

Gould, Erik Feyen, Vincent Launay, Christopher David Miller, Stela Mocan,

Anthony Molle, and Young Chul Kim provided valuable comments on Part I.

Part II was prepared by teams from the Macro and Fiscal Management Global

Practice (led by Andrew Burns, Maria De los Angeles Cuqui Gonzalez Miranda,

Lalita M. Moorty, and Gallina Andronova Vincelette) and the Poverty Global

Practice (led by Luis-Felipe Lopez-Calva), with inputs from the Developments

Prospects Group (led by Ayhan Kose). These teams included the following staff:

Erdem Atas, Joao Pedro Wagner De Azevedo, Sarah Nankya Babirye, Elena

Bondarenko, Cesar Cancho, Marie-Anne Chambonnier, Alexandru Cojocaru,

Marcel Chistruga, Pablo Facundo Cuevas, Maria Eugenia Davalos, Agim

Demukaj, Mariam Dolidze, Donato De Rosa, Bakyt Dubashov, Olga Emelyanova,

Josip Funda, Mismake D. Galatis, Anastasia Golovach, Claudia Gutierrez, Gohar

Gyulumyan, Kiryl Haiduk, Sandra Hlivnjak, Stella Ilieva, Maria Gabriela

Inchauste Comboni, Saida Ismailakhunova, Charl Jooste, Jonathan George

Karver, Yeon Soo Kim, Aurelien Kruse, Sanja Madzarevic-Sujster, Mikhail

Matytsin, Kristina Cathrine Mercado, Moritz Meyer, Jose Montes, Evgenij Najdov,

Metin Nebiler, Minh Cong Nguyen, Trang Van Nguyen, Catalin Pauna, Habib

Nasser Rab, Alisher Rajabov, Nadir Ramazanov, Julio Revilla, Monica Robayo,

Paul Andres Corral Rodas, Armineh Manookian Salmasi, Apurva Sanghi, Ilyas

Sarsenov, William Hutchins Seitz, Asli Senkal, Lazar Sestovic, Hilda Shijaku,

Bojan Shimbov, Emilia Skrok, Karlis Smits, Sangjin Song, David Andrew Stephan,

Thi Thanh Thanh Bui, Eskender Trushin, Vincent Belinga De Paul Tsoungui,

Christoph Ungerer, Ekaterina Vostroknutova, Pinar Yasar and Bakhrom Ziyaev.

Ekaterina Ushakova oversaw the layout and production of the report. Barbara

Karni edited and Michael Alwan typeset it. Paul Anthony Clare, Tamar Kobakhidze,

Artem Kolesnikov, and Inga Paichadze provided communications and outreach

support, including the dedicated webpage (http://www.worldbank.org/en/

region/eca/publication/europe-and-central-asia-economic-update).

vii

ACP Attraction Centers Program

BoA Bank of Albania

BiH Bosnia and Herzegovina

CAD Current account deficit

CBA Central Bank of Armenia

CBR Central Bank of Russia

CBU Central Bank of Uzbekistan

CNB Croatian National Bank

CPI Consumer price index

CROSTAT Croatian Bureau of Statistics

DLT Distributed Ledger Technology

ECA Europe and Central Asia

ECAPOV ECAPOV (ECA Poverty) database of standardized household surveys

EEU Euroasian Economic Union

EFSD Eurasian Fund for Stabilization and Development

EU-SILC European Union Statistics on Income and Living Conditions

FDI Foreign direct investment

FX Foreign exchange

FYR Fiscal year

GDP Gross domestic product

GoA Government of Azerbaijan

HPP Hydro-power plant

IBA International Bank of Azerbaijan

ICO Initial coin offerings

ICT Information and communication technology

IFI International financial institution

IMF International Monetary Fund

IPO Initial public offering

IT Information technology

LCU Local currency unit

MSII Minimum Social Inclusion Income

NBG National Bank of Georgia

NBKR National Bank of the Kyrgyz Republic

NBM National Bank of Moldova

NBP National Bank of Poland

Abbreviations

viii ● World Bank ECA Economic Update May 2018

NBR National Bank of Romania

NBU National Bank of Ukraine

NPL Non-performing loans

OPEC Organization of the Petroleum Exporting Countries

PPA Power Purchasing Agreements

PPP Purchasing power parity

SAR Special administrative region

SDR Special Drawing Rights

SME Small and medium enterprise

SOE State-owned enterprises

SWIFT Society for Worldwide Interbank Financial Telecommunications

TFP Total factor productivity

TSA Targeted Social Assistance

UFRD Uzbekistan Fund for Reconstruction and Development

WB World Bank

WDI World Development Institute

Albania ALB

Argentina ARG

Armenia ARM

Australia AUS

Austria AUT

Azerbaijan AZE

Belarus BLR

Belgium BEL

Bosnia and Herzegovina BIH

Brazil BRA

Bulgaria BRG

Canada CAN

Chile CHL

China CHN

Colombia COL

Croatia HRV

Czech Republic CZE

Cyprus CYP

Denmark DNK

Dominican Republic DOM

Estonia EST

Finland FIN

France FRA

Georgia GEO

Germany DEU

Greece GRC

Hong Kong SAR, China HKG

Hungary HUN

India IND

Indonesia IDN

Iran, Islamic Rep. IRN

Ireland IRL

Italy ITA

Japan JPN

Kenya KEN

Kazakhstan KAZ

Kosovo XKX

Kyrgyz Republic KGZ

Latvia LVA

Lithuania LTU

Luxembourg LUX

FYR Macedonia MKD

Malaysia MYS

Malta MLT

Mexico MEX

Moldova MDA

Morocco MAR

Montenegro MNE

New Zealand NZL

Nigeria NGA

The Netherlands NLD

Norway NOR

Pakistan PAK

Peru PER

Philippines PHL

Poland POL

Portugal PRT

Romania ROM

Russian Federation RUS

Saudi Arabia SAU

Serbia SRB

Singapore SGP

Slovak Republic SVK

Slovenia SVN

South Africa ZAF

Spain ESP

Sweden SWE

Switzerland CHE

Tanzania TZA

Tajikistan TJK

Thailand THA

Turkey TUR

Turkmenistan TKM

Ukraine UKR

United Arab Emirates ARE

United Kingdom GBR

United States USA

Uzbekistan UZB

Venezuela, RB VEN

Vietnam VNM

Country Codes

ix

This report covers 47 countries referred to as Europe and Central Asia (ECA) coun￾tries. These are divided into 10 groups: Western Europe, Southern Europe, Central

Europe, Northern Europe, Western Balkans, South Caucasus, Central Asia, Russia,

Turkey, and Other Eastern Europe.

Regional Classification

Used in this Report

TABLE E.1 Regional classification used in this report

Europe

and

Central

Asia

European

Union

and

Western

Balkans

European Union

Western

Balkans

Western

Europe

Southern

Europe

Central

Europe

Northern

Europe

Austria

Belgium

France

Germany

Ireland

Luxemburg

The Netherlands

United Kingdom

Greece

Italy

Portugal

Spain

Cyprus

Malta

Bulgaria

Croatia

Czech Republic

Hungary

Poland

Romania

Slovak Republic

Slovenia

Denmark

Finland

Sweden

Estonia

Latvia

Lithuania

Albania

Bosnia and Herzegovina

Kosovo

FYR Macedonia

Montenegro

Serbia

Eastern

Europe

and

Central

Asia

South

Caucasus

Central

Asia

Russian

Federation Turkey

Other Eastern

Europe

Armenia

Azerbaijan

Georgia

Kazakhstan

Kyrgyz Republic

Tajikistan

Turkmenistan

Uzbekistan

Belarus

Moldova

Ukraine