26 Jun 2022

Bitcoin and Monetary Policy

Are you questioning if Bitcoin has a monetary policy? Read this detailed article to understand this digital asset and the monetary policy.

Since Bitcoin was created in 2009 by Satoshi Nakamoto, the cryptocurrency has attracted the attention of consumers, policymakers, and the media. On the other hand, money is a social institution that serves as a unit of account, an exchange medium, and a store of value. However, with the emergence of decentralized ledger technology, this digital asset represents a new form of money. The traits characterizing it are private use, digital nature, and peer-to-peer transactions. Bitcoin also represents speculative assets rather than money. In this context, it becomes critical to understand Bitcoin and monetary policy.

Should Central Banks Issue their Cryptocurrencies?

It is without a doubt that not all central banks are directly antagonistic toward cryptocurrencies. Leasers of several major banks have varying opinions and have commissioned research and formed exploratory committees to determine how their institutions best leverage these much-discussed technologies. 

These central bank officials recognize that this digital money can serve a very similar function to cash, a semi-anonymous medium of exchange accessible to banks and the population. The digital nature of this electronic money is attractive because it may be cheaper and easier to manage than a cash system.

Moreover, some central banks have tried to consider launching their cryptocurrencies as a substitute or a replacement for their current money base. For instance, the governor of the Bank of England has expressed interest in the idea of a central bank-backed cryptocurrency. However, the caveat is that such a responsibility would be quite a ways off in the future.

Furthermore, it is admirable that these central bank officials keep an open mind about the promise of distributed digital currencies. These officials will likely find that these projects do not meet their requirements for a central bank-created monetary base. Any one party cannot control the financial supply of this digital money. It is, however, mined at a predictable rate, as coded into that project's protocol, by miners who run and maintain the network. On the other hand, a central bank used to tightening or loosening the money supply in response to changing economic conditions will be frustrated to find that their official cryptocurrency is rigid to their policy needs. 

Still, central banks may decide to buy and hold existing cryptocurrencies via platforms like as a part of their reserves. And this is what they do for gold and other assets. If Bitcoin achieves a significant enough level of value and stability, bankers may find it prudent to add it to their portfolio of investments. Some have also suggested that Bitcoin's properties as money are an improvement over the current system, which is the central banks.

Is Bitcoin a Threat to the Federal Reserve's ability to Conduct Monetary Policy?

Most people believe that this electronic money can co-exist within the current monetary system, regardless of whether individuals purchase units as an alternative investment or for their targeted technological applications. On the other hand, others fear that if more entities adopt Bitcoin on a broad scale, it could have a negative externality or spillover effect on the economy as a whole in the form of monetary instability. In addition, this electronic asset constitutes a minuscule fraction of the world's investments. Perhaps, this may change the future, which could, as a result, affect the menu of options available to central bankers in certain economic situations. 

The Bottom Line

Bitcoin holds much promise to expand the range of monetary options available to all classes of people. However, some people don't understand how this virtual currency fits in the world or complement conventional economic policies.


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