Competing With Bitcoin - Some Policy Considerations for Issuing Digitalized Legal Tenders

Abstract

The proliferation of peer-to-peer virtual alternatives to traditional banknotes has raised concerns among policymakers about the future of traditional means of making payments and how it might affect monetary policy implementation and its effectiveness. This study provides a brief overview of the existing research in this area. It compares positions taken in the literature by authors on some of the key policy issues relevant for central banks when thinking about the issuance of digitalized legal tenders. We examine the implications of government issued digital alternatives to traditional currencies for monetary policy effectiveness, payments and settlements, and financial market stability. We also discuss recent advances in financial technology to improve the making of payments and settlements, which might help contribute to financial inclusion. At the same time, new technologies represent challenges for regulatory authorities, for instance related to efforts to contain anti-money laundering and prevent financing of terrorism. A number of authors argue that government issued digital currency is necessary to address the flaws in private crypto currencies, and to improve monetary policy effectiveness. Central banks have begun to analyze possible features of digitalized legal tenders, to better understand the policy considerations involved and effects these could have for interest rate transmission and financial markets, but there is no clear consensus on key modalities associated with digitalized legal tenders. Moreover, many central banks do not regard privately issued virtual currencies as a serious threat to traditional currencies. Given the ongoing debate, it is difficult to make firm predictions about the impact of central bank issued digital currencies on monetary policy transmission and financial markets at this point.

Portfolio diversification benefits of alternative currency investment in Bitcoin and foreign exchange markets

“…Bitcoin transactions, unlike those in the traditional payments system, do not require intermediaries (Chiu and Koeppl 2019). Kovanen (2019) argued that the growing interest of speculative investors in cryptocurrency trading and the digitalization of currencies around the world are likely to encourage central banks to accept cryptocurrencies as mainstream currencies. Brandvold et al (2015) found that the currency of trade for Bitcoin was an important determinant of the price differences in different alternative currencies' Bitcoin exchanges, which could provide significant value addition for speculative investors and portfolio diversification.…”

Prospects of Digital Currency in India- A Way Forward

“…For this purpose, secondary research is undertaken. The approach different data sources from where the information on what and how the policy framework was brought to work [9].…”

Central Bank Digital Currencies: A Comprehensive Study of Characteristics, Implications and Future Perspectives

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