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Bitcoin, the world’s first cryptocurrency, was designed to serve as a cash or payment option outside anyone’s control. The use of cryptocurrencies, which are decentralized and peer-to-peer, removes 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 wanted independence. However, the ecosystem has its share of critics, including central banks.
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The role of central banks is shrinking as the Bitcoin ecosystem grows and its use cases expand. This widespread belief is validated by an increasing amount of research conducted by financial institutions and the central banks that conduct the evaluation The disruptive nature of Bitcoin. An ever-growing narrative focuses on Bitcoin’s role in promoting inequality and its ability to disrupt central bank policies.
The role of Bitcoin in wealth distribution
One topic of central banking studies highlights the role of Bitcoin in wealth distribution. To help us understand Bitcoin’s role, we take a look at two research papers published by the European Central Bank. The first paper, published after the failure of FTX in 2022, is titled “Bitcoin’s Last Stand” Which sees the top cryptocurrency as a failed monetary project that is coming to an end.
But in 2024, when Bitcoin reached all-time highs, the same researchers presented another study, where they painted Bitcoin in a positive light. Cryptocurrencies can, the paper argued Impact of wealth distributionBut only the first ones get richer. Since the use of Bitcoin or cryptocurrencies does not result in a product or service, the increased wealth of early adopters comes from decreased consumption by all other members of society.
Will BTC disrupt monetary policy?
Other finance-related research examines the impact of Bitcoin on monetary policy. For example, the Minneapolis Fed says that when people can keep them and use them BitcoinIt is difficult for the state to manage the budget deficit on a regular basis.
Traditionally, the government could only offer bonds if there was a shortfall in revenue collection. But governments may not spend what they normally raise unless there is bitcoin. The study proposes two options: first, banning the adoption of Bitcoin, and second, imposing a tax on these assets.
In addition to the Minneapolis paper, an IMF policy paper in 2023 highlighted the impact of Bitcoin on monetary policy. The paper argues that bitcoin influences state politics, and that emerging markets are most at risk. As a solution, researchers recommend strengthening their monetary policies first before banning Bitcoin.
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Central banks and financial institutions are now taking Bitcoin seriously
Recent studies and research conducted by central banks indicate that Bitcoin is redefining finance. While these papers do not reflect the thoughts and thinking of policymakers at these institutions, they do give us insight into how the industry views Bitcoin. Some recent policies, including the IMF’s 2022 Argentina bailout recommendations, include some anti-crypto provisions.
Bitcoin’s continuing popularity has now become an obstacle for many central banks in their efforts to create monetary policies. One of the main goals of Bitcoin proponents is to offer the public an alternative financing landscape away from the clutches of, if at all, banks.
Featured image by Dall-E, chart from TradingView