The New Gold Standard: What Would Happen if Bitcoin Ruled World Finance

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Due to the growing interest in the Bitcoin digital currency, a research consultant for Canada's central bank decided to imagine a world where the monetary system was based on the emerging cryptocurrency; interestingly enough, it would resemble the gold standard and would seriously damage central banking as we know it.

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“Suppose that the use of Bitcoin has grown to such an extent that it has replaced existing fiat currencies and has become the predominant medium of exchange or at least the backing for the predominant medium of exchange in a large group of countries,” Warren Weber writes in his 37-page paper on the issue entitled “A Bitcoin Standard: Lessons from the Gold Standard”.

“I will call a monetary system the Bitcoin standard, because such a monetary system will very likely be similar to the gold standard,” the author suggests.

“The two standards are similar in that changes in the supply of the anchor of the monetary system are not under the control of any central bank or monetary authority. Changes in the supply of Bitcoin are set deterministically by the algorithm that governs how many new Bitcoins “miners” receive for verifying Bitcoin transactions and adding them to the blockchain. Changes in the world stock of gold were determined by gold discoveries and the invention of new techniques for extracting gold from gold-bearing ores.”

The predictions? Central banks would generally have a lot less room for their business:  key interest-rate setting power would vanish thanks to the “virtually costless arbitrage of Bitcoin across countries.”

In other words, bitcoin-holders around the world could actually offset the actions of central banks, and affect the national money supply, just by chasing better returns for themselves.

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Weber also suggests that since bitcoins are created by the bitcoin network at a predetermined rate, a central bank under a bitcoin standard would be “limited in what it can do because it cannot act as the lender of last resort to itself” by printing unlimited amounts of its own currency.
Hence Weber says that governments and central banks will “take actions” to prevent the new currency from taking over for two reasons.

One is to protect the revenues they bring in from “the ability to almost costlessly create money,” he writes.

The second is to protect their ability to “implement interest policies to affect their domestic economies. Governments would lose the ability to do either or both of these under the Bitcoin standard,” he writes — not an acceptable outcome.

The paper therefore concludes that even if the Bitcoin standard were to come into existence, it would not last long, for two reasons:

“The payments world is changing so rapidly that there will be a technological innovation that provides a potential medium of exchange with the same or greater benefits of Bitcoin or with lower costs. Such an innovation could come either from the private sector or from the government.”

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And second, there would be “pressure to return to a fiat money system so that a more activist monetary policy could be pursued”.

Meanwhile, chairman of the finance department and a professor at New York University Stern School of Business David Yermack has explained Bitcoin’s true value as an investment rather than a standard.

It likely lies in its enabling technology, called blockchain, rather than its potential as a digital currency. Just as the internet transformed the way we share information, blockchain promises to do the same for financial services.

International Business Times explained that this technology works almost like a shared Google Sheets spreadsheet, allowing multiple parties to view, edit and validate a transaction, eliminating the need for a middleman.

Successful tests with mainstream banks such as Citigroup and JPMorgan Chase have shown that blockchain can indeed cut costs and make financial transactions more efficient.

“In 10 years there may be no more stock exchanges and far fewer banks and so forth. All of these things can be made 90 percent cheaper by introducing this technology,” said David Yermack,

“Financial services are going to get a lot cheaper for most people.”

If blockchain continues to gain traction, the magazine explains, everything from buying homes to using debit cards could be drastically different in the near future.

“In an industry that has been extremely resistant to change, the implications for financial institutions that do not adapt to the emerging technology could be devastating,” it finally states.

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