According to a new study conducted by an international body of researchers, the existence of Bitcoin is good for everyone. That includes people who don’t use it, because it impacts economic policy. It further found that governments could benefit from encouraging cryptocurrency.

Study Background

The study used economic theory, predictive modelling, and data on cryptocurrency in countries that have recently had economic crises. 

The paper specifically looks at cryptocurrency as an alternative to fiats. That is, opposed to looking at them as speculative assets. Creators’ intent aside, that is how most people in countries with stable fiats commonly use them.

As long as governments have maintained monopoly power over the printing presses, there has existed a temptation to devalue a country’s sovereign currency, the authors state. In order to mitigate or at least function through such a collapse, individuals throughout history have turned to alternatives to state-backed money.

So, say the authors, cryptocurrency is just the most recent in a long line of solutions to this problem. While Satoshi developed Bitcoin in the wake of the 2008 financial crisis, other countries have already seen subsequent financial disasters.

Following the financial crisis, a number of developing countries have experienced significant declines in the value of their sovereign currencies, bordering on crisis levels. Two examples are the Turkish lira and the Argentine peso, the authors write. These are the first currency crises since the creation of Bitcoin, and therefore they offer an opportunity to investigate the impact that alternative digital currencies have on unstable sovereign markets.

Varieties of Digital Currencies

The paper’s discussion of digital currencies defined them as being public versus private and as centralised versus decentralised.

Public digital currencies have some relationship to a sovereign state. Private digital currencies do not have a relationship to a sovereign state, but are instead governed by private individuals or entities. They further explain that a digital currency is centralized if it has formal barriers to entry that prevent participation in the software writing and validation process of the network.

So, Bitcoin is private-decentralised because it is not a government currency and there are no formal barriers to entry.

Some stable coins, like Libra, are private-centralised because they are not state-sponsored, but not just anyone can be a developer.

Public-centralised currencies are digital currencies that the government directly controls. Because more money is digital than physical these days, most fiat currencies actually fall under this category.

The paper also describes a theoretical fourth category of public-decentralised currencies. These would be currencies that a government accepts but does not control.

How Cryptocurrency Helps Everybody

The first way in which the existence of cryptocurrency helps people is by offering them diversification. This is the earlier-discussed use of cryptocurrency as a store of value in the event of fiat devaluation.

The second way in which the existence of cryptocurrenc helps people is by competing with the fiat. Most fiats are the only currency accepted within a country, meaning that the government has a monopoly over currency. However, central banks must now take competing currencies into account when making monetary policy.

Private digital currency serves as competition for local investment so that the existence of the private digital currency restrains monetary policy, thereby generating lower inflation, the paper claims.

The paper also highlights that cryptocurrency actually encourages local investment. It does this by serving as a store of wealth that holders can spend. People can’t use traditional stores of wealth like gold in this way. Because gold is difficult to spend in the real world, it is difficult for people who have gold to readily use it. This isn’t the case with cryptocurrencies like Bitcoin.

Why Governments Should Promote Cryptocurrency

The biggest claim made by the paper is a sum of these points. Namely, the authors find that governments can protect their fiats by promoting digital currencies. This is precisely because it allows people to maintain their wealth during recessions while also making purchases. These local purchases, the government still taxes to generate revenue.

The government extracts revenue gains from citizens through taxation. Higher local investment generates higher tax revenues for the government, explains the paper. Private digital currency investment provides diversification from capital investment, so that a permissive regulatory policy may increase capital investment, which in turn increases government tax revenues.

Interestingly, as the paper notes, governments have an active interest in moving to digital currencies – just not always private-decentralised examples.

There are a number of reasons that governments wish to move away from cash, including combating tax evasion, as well as monitoring the financial activity of their citizenry, the authors state. 

For all of the paper’s impressive research and modelling, perhaps its most significant contribution is its final argument.

Crypto zealots and economists alike have long argued in favour of government tolerance of cryptocurrency. However, most of these arguments have simply pointed out that policing crypto is virtually impossible.

This paper puts forward a compelling and comprehensive argument that the state should allow cryptocurrency for the state’s own sake.

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