The market for cryptoassets like bitcoin has exploded in the last two years, with trading volumes rising to levels comparable to some traditional financial assets. Cryptoassets, and especially the underlying blockchain technology, could transform entire industries, from financial services to supply chain management.
Sources: Coinmarketcap.com and Securities Industry and Financial Markets Association
From a central banking perspective, the monetary landscape 10 to 15 years from now could look radically different than it does today. Important research and policy questions for central banks include:
- What is fundamentally new about the technology that underpins cryptocurrencies and other cryptoassets?
- How do cryptocurrencies affect a central bank’s role in the economy?
- With a rise in cryptoassets and a decline in the use of cash, should digital payments be left entirely to the private sector or should central banks issue their own digital currencies?
Our staff discussion paper examines these three questions, and we highlight what aspects of them are most important to central bankers and what needs to be done to properly answer them. If central bankers can address the above questions then this research and policy work could have a fundamental impact on social welfare.
In examining the first question, we think the technology underlying cryptoassets—blockchain—could make financial services, among other industries, more efficient. However, we observe a couple of inherent contradictions in the cryptoasset landscape:
- The need for trust prevails in what is supposed to be a “trustless” technology.
- What is sold as a “decentralized solution” is in fact highly concentrated.
For the second question, we argue that a cryptocurrency could struggle to form the basis of a stable or desirable monetary policy regime. In fact, the money supply rule underpinning cryptoassets like bitcoin may turn out to be more of a disadvantage than an advantage.
Finally, for the third question, we examine what implications the emergence of cryptoassets together with a declining use of cash in transactions have on whether a central bank should issue its own digital currency. We argue that, while cash is a public good, several outstanding questions need to be answered before determining whether a central bank digital currency would be in the public interest. The Bank of Canada, along with other central banks, is pursuing an active research agenda in this area.