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Cryptocurrencies and monetary policy

G. Claeys, M. Demertzis & K. Efstathiou, (2018), “Cryptocurrencies and monetary policy”, Bruegel, 28 June

This Policy Contribution tries to answer two main questions: can cryptocurrencies acquire the role of money? And what are the implications for central banks and monetary policy?

Money is a social institution that serves as a unit of account, a medium of exchange and a store of value. With the emergence of decentralised ledger technology (DLT), cryptocurrencies represent a new form of money: privately issued, digital and enabling peer-to-peer transactions.

Historically, currencies fulfil their main functions successfully when their value is stable and their user network sufficiently large. So far, cryptocurrencies are arguably falling short against these criteria. They resemble speculative assets rather than money. Primarily this is because of their inherent volatility, which is the by-product of their inelastic supply, and which limits their widespread use as a medium of exchange.
Cryptocurrency protocols could theoretically evolve to limit their volatility and correct their current deficiencies. If successful, this could lead to an increase in their popularity as an alternative to official currencies. A successful alternative to official currencies could put pressure on those who manage official currencies to provide better policies.

But the widespread substitution of central bank currency for cryptocurrencies would effectively create parallel currencies. This by itself could create risks to the effectiveness of monetary policy, to financial stability and ultimately to growth.

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