The Bitcoin Standard Financial System

Warren E. Weber, a research consultant at Bank of Canada published a 37-page long research paper, considering how a financial system where bitcoin would be the standard currency, would differ from the current system, which is based on fiat currencies.

Weber is also a visiting scholar at the Federal Reserve Bank of Atlanta and adjunct professor at the University of South Carolina. He explored the similarities between the Bitcoin standard and the now defunct gold standard.

Two Main Similarities

• A lack of control of central banks or other monetary authorities on the money supply
• A limit in the supply: the algorithm caps the bitcoin amount in circulation to a maximum of 21 million BTC, while gold is, of course, scarce and finite.

Three distinct media of exchanges

• Bitcoin as the main currency
• Fiduciary currencies issued by central banks
• Fiduciary currencies issued by commercial banks (banknotes or deposits)

Issuing these fiduciary currencies will be one of the powers central banks will have left under such a system. Importantly, the ability of central banks to impose interest rate policies that affect domestic economies, would be removed, due to the nature of Bitcoin’s arbitrage.

Potential benefits of this new system

• Predicting the price level of the cryptocurrency more easily (because of a known mining rate)
• Capital that is currently being used up for hedging against fluctuations in the currency exchange rates could be used in more productive ways

Likely issues or obstacles

• Opposition by central banks and governments – since they will lose the power of meddling with interest rates
• They would no longer be able to generate revenues from almost costlessly creating greater amounts of fiat currencies (i.e: through printing or instant digital creation)

While the longevity of such a Bitcoin standard is unclear, it is likely that another, perhaps superior cryptocurrency standard may take its place. There is of course, always the risk that a financial crisis, may cause a loss of confidence in such a cryptocurrency based financial system, which may trigger a return to an old financial system, whether fiat or gold standard.

For more information, please consult the BitcoinMagazine article.