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Cryptocurrencies unlikely to crowd out fiat currency entirely: Bank of Korea paper

The Bank of Korea (BoK) has published a new working paper which analyses a dual currency regime with fiat currency and digital currency.

Titled, “Crowding out in a Dual Currency Regime? Digital versus Fiat Currency”, the paper has been authored by KiHoon Hong (Hongik University), Kyounghoon Park (BOK), and Jongmin Yu (Hongik University). The paper also investigates potential crowding-out effects of fiat currency or digital currency under the traditional monetary economic model framework.

“High costs of using fiat currency increase the demand for digital currency. Similarly, high costs of using digital currency relative to fiat currency raise the demand for fiat currency. In a world of imperfect currencies with uncertain costs associated with the use of a currency, it is unlikely that the relative costs of using digital currency will be low enough to drive out and accordingly crowd out fiat currency entirely”, the authors wrote.

Further, noting the efforts by the Bank of England and other central banks to consider the issuance of digital currencies, the authors believe that such attempts could drastically change the monetary system.

“With the possibility of ‘death of cash’ and the rise of digital currencies (such as Bitcoin), there are strong arguments that central banks should start issuing “digital cash” – an electronic version of notes and coins”, they added.

According to the paper, with digital cash or central bank digital currency, monetary policy instruments are expected to have a different impact on the cost of using money.

“Therefore, in future research, it is necessary to examine how monetary policy will affect the direction and the speed of changes in the demand elasticity of money, directly or indirectly”, it added.

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