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The Economic Consequences of Bitcoin

July 2014

This report discusses Bitcoin from a monetary economics perspective, exploring how crypto-currencies might be adopted by central banks and the consequences to monetary policy. The report argues that, similar to the origin of paper currencies, central banks will be compelled to create their own crypto-currency protocols due to the inherent financial instability that results from privately created crypto-currencies. This could be done by simply forking current crypto-currency protocols such as Bitcoin, where going forward the central bank would have sole discretion over the protocol's rules. In this new world of crypto-currencies, central banks can conduct monetary policy by increasing and decreasing their protocol's block reward for mining. A method is also explained for central banks to access an unlimited supply of their crypto-currency, so that they can continue to act as lenders of last resort.

You can read the report in 4 sections published as blog articles:

1.  A Friendly Introduction for Economists to the Bitcoin Protocol
2.  A Monetarist View of Money and Bitcoin
3.  A Brief History of Paper Currency and Central Banking
4.  Will Bitcoins Ever Become Money? A Path to Decentralized Central Banking

Most of the report's contributions are contained in Part 4, while Parts 1-3 provide essential pre-requisite information that can be skipped by the informed reader.