Challenges and Opportunities offered by Cryptocurrencies

Over the last decade, cryptocurrencies have proliferated and gained immense popularity in western countries and financial markets. However, cryptocurrencies are still not a liquid form of payment that is widely accepted for everyday transactions as some expect they will become in the future. Nevertheless, major questions remain surrounding what economic and financial effects the widespread acceptance of cryptocurrencies would have in a country like the United States. Like in most countries, the US only has one official and widely accepted currency, the US Dollar, which is regulated by the federal government. Furthermore, the US Dollar has been a free floating currently, not backed by any metallic mineral standard such as gold, since 1971.

Challenges and Opportunities offered by Cryptocurrencies

The widespread use and acceptance of parallel cryptocurrencies within the United States would require the proliferation of a national payment system that accepts these currencies as well as the simplification of cryptocurrency wallets for individuals to carry around in digital form and have readily available. If or when this scenario becomes a reality, official government agencies, particularly the Federal Reserve, would have an even more complex task in regulating national monetary policy.

In the distant and unlikely case that cryptocurrencies became an everyday item for households and retail, there would be two parallel currencies circulating within the US economy. Likewise, the Federal Reserve would only be able to implement monetary policy on one of them and the total Money Supply would increase. For instance, in the case of interest rates, which are set by the Federal Reserve through the commercial banking system, cryptocurrencies would not be directly affected by official interest rates. Nevertheless, it can be expected that as the interest rates on the US Dollar rise, individual savers would migrate from cryptocurrencies towards the dollar and individual borrowers would migrate towards whichever currency is less costly to hold debt on. Similarly, the issue of increasing the national Money Supply through cryptocurrencies can be problematic because it can represent a level of quantitative easing (QE) or helicopter money that is not controlled by the central financial authority. Fortunately, thus far, most cryptocurrencies have limited and paced the release (or mining) of new value units.

Another important economic indicator within this hypothetical framework would be inflation. If cryptocurrencies proliferate to a large degree, at least in major financial centers, the prices of items would be presented in dollars as well as in cryptocurrency valuation. Therefore, in the short-term, the overall inflation of the national economy would be somewhere between that of each currency or pricing system. Based on current trends, the dollar would continue to register a positive inflation between 1.0% and 2.0%, whereas cryptocurrencies would continue to gain in value and popularity, thus registering levels of deflation or negative inflation. However, it is expected that both the dollar and cryptocurrencies would, in the long-term, register similar levels of either inflation or deflation.

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