Bitcoin’s potential for monetary policy is generating growing interest among central banks

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This article is also available in Spanish.

Bitcoin, the most significant cryptocurrency in the world, is designed to act as a means of payment or payment beyond anyone’s control. Using a cryptocurrency that is decentralized and peer-to-peer eliminates the involvement of third parties such as central banks. This promise of Bitcoin has redefined the financial landscape, helped the unbanked and empowered those who want independence. However, the ecosystem has its critics, including central banks.

The role of central banks is decreasing as the Bitcoin ecosystem develops and its applications expand. This prevailing belief is supported by a growing number of studies conducted by financial institutions and central banks that they evaluate The destructive nature of Bitcoin. A growing narrative is focusing on Bitcoin’s role in promoting inequality and its potential to disrupt central bank policies.

Bitcoin’s role in wealth distribution

One focus of central bank research highlights Bitcoin’s role in wealth distribution. To support us understand the role of Bitcoin, we will look at two documents published by the European Central Bank. The first article, published after the FTX fiasco in 2022, is titled “Bitcoin’s Last Stand” which sees the most popular cryptocurrencies as a failed monetary project coming to an end.

BTC is currently trading at $68,805. Chart: TradingView

However, in 2024, when Bitcoin reached an all-time high, the same researchers conducted another study, rating Bitcoin positively. The article argued that cryptocurrencies could influence the distribution of wealthbut only the first owners get wealthy. Since the operate of Bitcoin or cryptocurrencies does not lead to the creation of a product or service, the increased wealth of early adopters results from the decreased consumption of all other members of society.

Does BTC Disrupt Monetary Policy?

Other finance-related research looks at Bitcoin’s impact on monetary policy. For example, the Minneapolis Federal Reserve says that when people can hold and operate Bitcoinit is hard for the state to maintain a budget deficit on a regular basis.

Traditionally, the government may simply offer bonds in the event of a revenue collection deficit. But governments can only spend what they usually collect if it’s Bitcoin. The study suggests two options: one, prohibiting the adoption of Bitcoin and the other, taxing this asset.

In addition to the Minneapolis document, the IMF’s 2023 policy paper highlighted Bitcoin’s influence on monetary policy. The article argues that Bitcoin influences state policy, and emerging markets are most vulnerable. As a solution, researchers recommend first strengthening your monetary policy before banning Bitcoin.

Central banks and financial institutions are now taking Bitcoin seriously

Recent studies and studies by central banks indicate that Bitcoin is redefining finance. While these documents do not reflect the ideas and thinking of decision-makers at these institutions, they do give us insight into how the industry views Bitcoin. Some recent policies, including recommendations for an IMF bailout of Argentina in 2022, include several anti-cryptocurrency provisions.

Bitcoin’s continued popularity is now becoming an obstacle for many central banks in their efforts to create monetary policy. One of the main goals of Bitcoin proponents is to offer society an alternative financing landscape free from the influence, if not the clutches, of banks.

Featured image from Dall-E, chart from TradingView

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