In recent years, a growing body of research has emerged from central banks and financial institutions, focusing on Bitcoin and its potential impact on monetary policy. These studies, published by organizations including the Minneapolis Federal Reserve, the European Central Bank (ECB), and the International Monetary Fund (IMF), highlight a key theme: the disruptive nature of Bitcoin and other cryptocurrencies could limit the capacity of central banks. to fulfill their traditional role in managing economies. Proponents have argued that Bitcoin could be an alternative to central banks. Are central banks finally recognizing Bitcoin as a potential threat?

Can Bitcoin lead to inequality?

European Central Bank researchers have published two papers on Bitcoin, both of which offer surprisingly different perspectives. The first, released following the 2022 FTX collapse when Bitcoin was trading at $16,000 – titled “Bitcoin’s Last Stand» – describes Bitcoin as a failed and dying monetary experiment. In 2024, when Bitcoin was trading at nearly $70,000, the same authors at the European Central Bank published a paper acknowledging a different reality.

This latest article argues that the existence and continued appreciation of Bitcoin has a significant impact impact on wealth distribution. According to the newspaper, when the price of Bitcoin rises, early Bitcoin holders get richer. However, since Bitcoin produces nothing and does not increase economic production, this increased wealth and consumption by early holders must come directly from reduced consumption by everyone else in society. This means that when early Bitcoin holders spend their profits on goods and services, they are using purchasing power that was taken away from non-holders and people who purchased Bitcoin later. This reduction in people’s purchasing power occurs even as the price of Bitcoin continues to rise and affects even people who don’t buy Bitcoin at all.

The key idea is that Bitcoin wealth does not create new economic value – it simply redistributes existing wealth. Even in the most optimistic scenario where the price of Bitcoin continues to rise, this only makes early holders richer by making everyone else poorer in relative terms. The authors argue that this is different from gains in inventory or real estate values, which can reflect and contribute to real increases in economic productivity and output. With Bitcoin, the gains are purely redistributive since Bitcoin itself produces nothing and does not increase economic capacity.

This view from the ECB reflects a long-standing criticism made by Bitcoin proponents of central banks. The Cantillon effectnamed after the 18th century economist Richard Cantillon, suggests that central banks, by printing money, disproportionately enrich those closest to the money supply (such as banks and wealthy individuals), while the rest of the population sees their purchasing power decrease. When new money enters the economy, it does not affect all prices simultaneously: instead, the first recipients of the new money (usually financial institutions) can spend it before prices fall. increase, while those furthest from the money supply (usually ordinary citizens) only. suffer the resulting inflation.

The redistributive properties of monetary policy have been widely documented and debated. Central banks themselves have examined whether quantitative easing – where central banks buy financial assets to stimulate the economy – has increased wealth inequality. By purchasing assets such as government bonds and mortgage-backed securities, quantitative easing tends to raise asset prices, thereby benefiting those who already own such assets. This creates a redistributive effect similar to what the ECB criticizes in Bitcoin: wealth is transferred from one group to another without necessarily creating new economic value.

Can Bitcoin endanger monetary policy?

A recent working document of the Minneapolis Fed looks at Bitcoin from a different angle. The paper argues that when people can freely buy and hold Bitcoin (or similar “useless pieces of paper”), it becomes more difficult for the government to run consistent budget deficits. Normally, the government can spend more than it collects in taxes by selling government bonds. For this to work, these bonds must remain valuable. But when Bitcoin exists as an alternative, something tricky happens: no matter what flexible and predictable policies the government tries to use, the government could find itself forced into a situation where it only has to spend what it needs. he collects in taxes. Researchers have only found two ways to solve this problem: either ban Bitcoin completely or impose a specific tax on its possession. It’s worth noting that it’s not about the price of Bitcoin or how many people use it – its mere existence as something people can buy creates these complications for government deficit spending.

The Minneapolis Fed is not the only institution concerned about Bitcoin’s ability to hinder the effectiveness of monetary policy. The IMF’s 2023 policy paper focused on how cryptoassets could weaken the effectiveness of monetary policy, particularly in emerging markets with unstable currencies and weak monetary frameworks. Although skeptical about implementing blanket bans on Bitcoin and other cryptocurrencies, countries should first focus on strengthening their monetary policy frameworks and institutions. The paper suggests that currency substitution (“cryptoization”) is more likely to occur with stablecoins pegged to foreign currencies, as they offer a less volatile alternative to the domestic currency, rather than with volatile cryptocurrencies like Bitcoin.

The document specifically recommends against granting legal tender to crypto assets, as this would further weaken monetary sovereignty. Instead of anti-crypto programs, the IMF advocates for comprehensive regulation alongside robust macroeconomic policies. According to the IMF, the key to protecting the effectiveness of monetary policy is to maintain credible institutions and strong monetary frameworks – addressing the root causes that might lead citizens to want to switch to cryptocurrencies in the first place. This approach reflects the IMF’s current view that while crypto poses risks to monetary policy transmission, the solution lies in strengthening traditional monetary and fiscal frameworks rather than focusing primarily on crypto restrictions.

Central bankers are taking Bitcoin more seriously

Research from central banks and the IMF shows that monetary policymakers are taking Bitcoin much more seriously than before. The working papers do not necessarily reflect the thinking of central bank policymakers, but nevertheless indicate how monetary policy is increasingly taking Bitcoin seriously. This goes beyond academic working papers and is also reflected in policy: the IMF’s 2022 bailout of Argentina included several anti-crypto provisions.

The European Central Bank’s arguments against Bitcoin warrant some introspection from central bankers themselves. If the redistributive effects of Bitcoin are problematic because they transfer purchasing power from laggards to early adopters, how is this fundamentally different from monetary policy that transfers purchasing power from those far removed from the money supply towards those who are closest to it? Both mechanisms appear to create winners and losers through the redistribution of purchasing power rather than through productive economic activity. Regardless, central bankers should not be surprised if growing Bitcoin adoption becomes an obstacle to central banks’ ability to dictate monetary policy. This has been a long-time goal of Bitcoin enthusiasts. Since its inception, Bitcoin’s stated goal has been to provide an alternative to centrally planned monetary policy.