Abstract

Bitcoin has ushered in the age of blockchain-based digital currency systems. Secured by cryptography and computing power, and distributed across a decentralized network of anonymous nodes, these novel systems could potentially disrupt the way that monetary policy is administered – moving away from today’s human-fallible central bankers and towards a technocratic, rules-based algorithmic approach. It can be argued that modern central banks have failed to stem macro-economic crises, and may have, in fact, exacerbated negative outcomes by incentivizing excessive risktaking and moral hazard via unconventional monetary tools such as quantitative easing and negative interest rates. A central bank typically serves three primary functions: to issue and regulate the supply of money; to serve as clearinghouse for settlement of payments transactions; and to serve as lender of last resort. Could a digital currency system serve as a rational substitute for a central bank? This perspective paper examines that question, and then suggests that indeed it could be plausible. While Bitcoin in its current form will prove to be inadequate to function as monetary authority, I put forward what an operative case could resemble.

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