The Growing Role of Cryptocurrency: What Does It Mean for Central Banks and Governments?

Abstract

Cryptocurrency has recently been in the news due to the growing interest in this new form of currency. This paper discusses how cryptocurrency is able to fulfill the three fundamental functions of money: medium of exchange, unit of account, and store of value. This paper then provides a money market model that incorporates cryptocurrency into the total money demand and total money supply, and examines the cases when governmental organizations issue cryptocurrency, and secondly when non-governmental organizations are able to issue cryptocurrency. An IS-LM model shows that a newly introduced cryptocurrency results in an increase in total money supply and a decrease in the interest rates. An MP model further explains how cryptocurrency affects inflation, suggesting that tightening of monetary policies can be used to achieve target interest rates and offset the effects of cryptocurrency.