How would a bitcoin standard fare for a monetary system? An analysis by the Bank of Canada examined that scenario, conjecturing how a bitcoin standard would perform based on the performance of a gold standard that existed from 1880 to 1913. The gold standard was a monetary system in which nations’ currencies were tied to gold.
The 37-page paper [PDF] is written by Warren E. Weber, research consultant at the Bank of Canada, visiting scholar for the Federal Reserve Bank of Atlanta, and adjunct professor at the University of South Carolina.
The paper claims that because there would be no arbitrage costs for global transactions under a bitcoin standard, nations would not be able to follow independent interest rate policies. Central banks would retain limited ability to serve as last-resort lenders. Benefits Over Fiat Currency
A bitcoin standard would have two key benefits over fiat currency. One is there would be more price level predictability on account of the deterministic rate by which the cryptocurrency is created. A second is that resources devoted to hedging against exchange rate fluctuations would be free to use in more productive ways. Based on the classic gold standard period from 1880 to 1913, the paper claims currency under a bitcoin standard would have mild deflation and constant exchange rates.
Countries adopted the gold standard to achieve exchange rate stability against those of other countries that also adopted the standard. Stability was achieved through gold arbitrage. But because gold arbitrage incurred costs, exchange rates between different countries’ fiduciary currencies were not fixed but were limited to a range around their par values. Bitcoin Would Mimic Gold
The bitcoin standard would be similar to the gold standard in that it would not be under the control of a monetary authority or a central bank.
The changes in the […]
