Monetary Policy in the Digital Age

Source: International Monetary Fund (IMF.org)

Crypto assets may one day reduce demand for central bank money

by
Dong He

The global financial crisis and the bailouts of major financial institutions renewed skepticism in some quarters about central banks’ monopoly on the issuance of currency. Such skepticism fueled the creation of Bitcoin and other crypto assets, which challenged the paradigm of state-supported currencies and the dominant role of central banks and conventional institutions in the financial system (He and others, 2016).

Twenty years ago, when the Internet came of age, a group of prominent economists and central bankers wondered whether advances in information technology would render central banks obsolete (King 1999). While those predictions haven’t yet come to pass, the rise of crypto assets has rekindled the debate. These assets may one day serve as alternative means of payment and, possibly, units of account, which would reduce the demand for fiat currencies or central bank money. It’s time to revisit the question, will monetary policy remain effective in a world without central bank money (Woodford 2000)?

For the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies. What is more, they do not enjoy the same degree of trust that citizens have in fiat currencies: they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities.
Addressing deficiencies

But continued technological innovation may be able to address some of these deficiencies. To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age.

(Read more at International Monetary Fund (IMF.org))

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