Cryptocurrencies and the institutional powers of central banks - My current work in progress

Hey everybody :)

I have written a policy paper for African Institute for Decentralised Finance and Blockchain (AIDBLOCK) regarding cryptocurrencies and international financial institutions such as the IMF, BiS, and G20. 

At the moment, I am in the process of finalizing a new paper focusing on crypto and public monetary policies regarding central banks, governments, and CBDCs. 

In the paper "Money, Cryptocurrency, and Monetary Policy", academics Kee-Youn Kang and Seungduck Lee analyze the implications of cryptocurrency on monetary policy and the institutional power of central banks to control inflation in the context of an increasingly digital economy. The authors develop a simple model to analyze the roles of money, cryptocurrency, and the central bank. The model considers government-issued fiat currency and privately-issued cryptocurrency as the two forms of money. 

The paper focuses on arguments that as the relative demand for cryptocurrency grows, the central bank's ability to manage inflation through traditional monetary policy tools, such as interest rates, diminishes. This weakened control is because the money supply becomes more dependent on the supply of cryptocurrencies, which the central bank cannot regulate. To counteract this loss of power, the authors suggest that central banks can regain control over the money supply and retain their ability to conduct effective monetary policy if they start issuing CBDC or offer a risk-free interest rate on cryptocurrency deposits.

However, the paper also highlights potential unintended consequences of introducing a CBDC, such as the increased risk of bank runs. This risk becomes more pronounced as the demand for central bank liabilities reduces commercial bank deposits. Consequently, the careful design and implementation of CBDCs are crucial for mitigating any negative impacts on the financial system.

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