Bitcoin exchange store in Tel Aviv, Israel, December 30, 2022. (Photo by Beata Zawrzel/NurPhoto via … (+) Getty Images)
NurPhoto (from Getty Images)
In recent years, there has been a growing body of research from central banks and financial institutions focusing on Bitcoin and its potential impact on monetary policy. These studies, published by organizations such as the Minneapolis Federal Reserve, the European Central Bank (ECB), and the International Monetary Fund (IMF), show that the disruptive nature of Bitcoin and other cryptocurrencies could limit the ability of central banks. It highlights the important theme of gender. Because it fulfills its traditional role in managing the economy. Proponents argue that Bitcoin can be an alternative to central banks, but have central banks finally recognized Bitcoin as a potential threat?
Can Bitcoin lead to inequality?
Researchers at the European Central Bank have published two papers on Bitcoin, both of which offer surprisingly different perspectives. The first book was published in the wake of the FTX collapse in 2022, when Bitcoin was trading at $16,000, and was titled “Bitcoin’s Last Stand,” which saw Bitcoin in its final death throes. It is portrayed as a failed financial experiment. In 2024, with Bitcoin trading near $70,000, the same authors at the European Central Bank published a paper acknowledging a different reality.
The latter paper argues that the existence and continued rise of Bitcoin is having a major impact on the distribution of wealth. According to the paper, as the price of Bitcoin rises, early Bitcoin holders become richer. But since Bitcoin does not create anything or increase economic output, this increase in wealth and consumption by early holders must come directly from decreased consumption by everyone else in society. This means that when early Bitcoin holders spend their profits on goods and services, they are taking advantage of the purchasing power they took away from non-holders and those who bought Bitcoin later. This reduction in people’s purchasing power would occur even if Bitcoin’s price continued to rise forever, and it would also affect individuals who never buy Bitcoin.
The key insight is that Bitcoin wealth does not create new economic value, but only redistributes existing wealth. Even in the most optimistic scenario, where the price of Bitcoin continues to rise, early holders will only become richer while others become relatively poorer. The authors argue that this is different from increases in stock and real estate values, which can reflect and contribute to actual increases in economic productivity and output. In the case of Bitcoin, the profits are purely redistributive, as Bitcoin itself does not produce anything or increase economic capacity.
The ECB’s position reflects long-standing criticisms of central banks that Bitcoin supporters have made. The Cantillon effect, named after the 18th century economist Richard Cantillon, is when central banks print money, while disproportionately enriching those closest to the money supply (such as banks and the wealthy). This suggests that the purchasing power of the remaining population will decline. force. When new money enters the economy, it does not affect all prices at the same time. Instead, the first recipients of new money (usually financial institutions) can spend it before the price rises, but only those furthest from the money supply (usually the general public) spend that money. You can. Experience the resulting inflation.
The redistributive properties of monetary policy have been widely documented and debated. The central bank itself is investigating whether quantitative easing, in which central banks buy financial assets to stimulate the economy, has increased wealth inequality. Quantitative easing tends to push up asset prices by purchasing assets such as government bonds and mortgage-backed securities, benefiting those who already own such assets. This creates a redistributive effect similar to what the ECB is criticizing with Bitcoin. That is, wealth is transferred from one group to another without necessarily creating new economic value.
Could Bitcoin jeopardize monetary policy?
A recent research paper from the Federal Reserve Bank of Minneapolis looks at Bitcoin from a different angle. The paper argues that if people were free to buy and hold Bitcoin (or similar “useless pieces of paper”), it would become harder for governments to run consistent budget deficits. Usually, by selling government bonds, the government can spend more than it receives from taxes. For this to work, these bonds need to remain valuable. But the existence of Bitcoin as an alternative creates a complication. No matter what smooth and predictable policies a government tries to use, it can end up in a situation where it only has to spend what it collects in taxes. Researchers have discovered that there are only two ways to solve this problem. It could either ban Bitcoin completely or impose certain taxes on Bitcoin ownership. It’s worth noting that this isn’t about the price of Bitcoin or the number of people using Bitcoin, it’s just that Bitcoin exists as something people can buy, and this is not about the complexity of government deficit spending. It means that it will occur.
The Minneapolis Fed is not alone in worrying that Bitcoin could undermine the effectiveness of monetary policy. The IMF’s 2023 policy paper focused on how crypto assets could undermine the effectiveness of monetary policy, particularly in emerging markets with unstable currencies and weak financial frameworks. Although countries are skeptical about implementing a complete ban on Bitcoin and other virtual currencies, they should first focus on strengthening their monetary policy frameworks and institutions. The paper argues that stablecoins pegged to a foreign currency are better suited to currency substitution (“cryptocurrency ”) is likely to occur.
The paper specifically recommends against granting legal tender status to cryptoassets, as this would further undermine monetary sovereignty. Instead of an anti-cryptocurrency program, the IMF advocates comprehensive regulation alongside strong macroeconomic policies. According to the IMF, the key to safeguarding the effectiveness of monetary policy is maintaining reliable institutions and sound financial frameworks, and addressing the root causes that make people want to switch to cryptocurrencies in the first place. The IMF’s approach is that while cryptocurrencies pose risks to monetary policy transmission, the solution lies primarily in strengthening traditional monetary and fiscal frameworks, rather than focusing primarily on restricting cryptocurrencies. reflects the current views of
Central bankers are taking Bitcoin more seriously
Central bank and IMF surveys show that monetary policymakers are taking Bitcoin much more seriously than before. While the working paper does not necessarily reflect the thinking of central bank decision-makers, it nonetheless shows how seriously monetary policy is taking Bitcoin. This goes beyond academic research papers and is reflected in policy, with the IMF’s 2022 bailout of Argentina including several anti-cryptocurrency provisions.
The European Central Bank’s claims against Bitcoin warrant some introspection by central bankers themselves. If there is a problem with Bitcoin’s redistributive effect in that it transfers purchasing power from latecomers to early adopters, then this is fundamentally attributable to monetary policy that transfers purchasing power from places far from the money supply to places close to the money supply. What is the difference? Both mechanisms appear to create winners and losers through the redistribution of purchasing power rather than productive economic activity. In any case, it would not be a surprise to central bankers if Bitcoin’s widespread adoption impeded the ability of central banks to make monetary policy decisions. This has been a long-time goal of Bitcoin enthusiasts. From its inception, Bitcoin has billed itself as providing an alternative to centrally planned monetary policy.
