Monetary Policy in the Age of Cryptocurrencies

Abstract

Money has been the foundational layer for economic activity throughout the history of human civilisations. Sound money that can be reliably used as a store of value, a medium of exchange and a unit of account is critical for economic development and prosperity. Many types of monetary technology have been used since humans started engaging in specialisation and trade. This current report reviews the historical instances of commodity money, commodity-backed money, fiat money and discusses the potential impact of adopting cryptocurrencies with programmatic monetary issuance schedules (e.g., Ethereum and Bitcoin) as legal tender on the economy. The report focuses on programmatic cryptocurrencies only (like Bitcoin and Ethereum) and does not discuss tokenised currencies (like stablecoins).

The report contains three chapters, with chapter 1 discussing the development of monetary technologies throughout history, monetary policies under each monetary regime standard. It compares economic growth and inflation under the gold monetary standard (commodity-backed money standard) and fiat monetary standard. Chapter 2 discusses the potential challenges and opportunities of adopting cryptocurrencies as legal tender. Moreover, chapter 3 conceptualises the difference between the monetary issuance of proof of work and proof of stake consensus rules and their potential implications for money concentration, monetary policy and economic growth.

Keywords: Blockchain, Cryptocurrency, Economic Growth, Inflation, Monetary Policy, Monetary Systems

JEL Classification: E31; E42; E52; O47