Analysis of Cryptocurrencies' Effects on US Monetary Policy

This report delves into the multifaceted impact of cryptocurrencies on US monetary policy. It begins by defining cryptocurrencies and exploring various types, with a particular focus on Bitcoin. The report then examines the core concepts of monetary policy, including the quantity theory of money and the Mises regression theorem, providing a theoretical foundation for understanding the relationship between digital currencies and traditional financial systems. A comprehensive literature review covers the evolution of cryptocurrencies, their adoption, and their implications for monetary policy, including regulatory landscapes and economic considerations. The research methodology outlines the design, instruments, data collection methods, and analytical approaches used to investigate the research questions. The findings and discussions section presents key results, analyzing how cryptocurrencies influence monetary policy in the US. The report concludes with a summary of major findings, recommendations for policymakers, limitations of the study, and suggestions for future research, offering a comprehensive overview of the evolving relationship between cryptocurrencies and the US monetary system.

CRYPTOCURRENCIES AND THEIR IMPACTS ON
MONETARY POLICY

Table of Contents
CHAPTER 1: INTRODUCTION.....................................................................................................................1
1.1 Background.......................................................................................................................1
1.2 Research questions...........................................................................................................2
1.3 Research objectives..........................................................................................................2
1.4 Significance of the study..................................................................................................3
1.5 Thesis structure.................................................................................................................4
CHAPTER 2: LITERATURE REVIEW .........................................................................................................5
2.1 Concept of cryptocurrencies.............................................................................................5
2.2 Different kinds of cryptocurrencies..................................................................................6
2.3 Definition of monetary policies........................................................................................9
2.4 Quantity theory of money...............................................................................................10
2.5 Mises regression theorem...............................................................................................11
2.6 Cryptocurrencies as medium of exchange......................................................................12
2.7 Fiat currency vs. digital currency...................................................................................13
2.8 Recent researches...........................................................................................................15
2.9 The rapid spread and use of cryptocurrencies................................................................15
2.10 Cryptocurrencies Monetary Policy...............................................................................16
2.11 Regulatory landscape of digital currencies in the US..................................................16
2.12 Economic and Legal aspects of cryptocurrencies........................................................17
2.13 Cryptocurrencies and their impact on Monetary policy in the United States...............17
2.14 Prediction on the effects Cryptocurrencies will present in future................................18
CHAPTER 3: RESEARCH METHODOLOGY ...........................................................................................18
3.1 Research design..............................................................................................................19
3.2 Research Instruments......................................................................................................21
3.3 Data Collection...............................................................................................................23
3.4 Research Ethics..............................................................................................................25
3.5 Data Analysis..................................................................................................................26
3.6 Research Reliability and Validity...................................................................................26
CHAPTER 4: FINDINGS AND DISCUSSIONS .........................................................................................26
Key Findings/Results............................................................................................................26
How do cryptocurrencies impact on the Monetary policy in the US...................................26

Discussion.............................................................................................................................26
CHAPTER 5: CONCLUSION AND RECOMMENDATION .....................................................................26
Summary of Major Findings................................................................................................26
Recommendations................................................................................................................26
Limitations of the Study ......................................................................................................26
Suggestions for Future Research..........................................................................................26
REFERENCES...............................................................................................................................................27
APPENDIX.....................................................................................................................................................31
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CHAPTER 1: INTRODUCTION
1.1 Background
Cryptocurrency is considered as the digital assets that serve as a medium of exchange. It
is the form of digital money in which cryptography method is being used in order to convert
legible information into uncrackable code (Pieters, 2017). It is the type of virtual currency in
which concerned authorities use encryption techniques for generating units of currency and
secure transfer of funds. Bitcoin was the first open source software that was introduced in market
in the year 2009. It works on decentralized cryptocurrency method. Bitcoin is the first electronic
cash system that prevents public from double spending. It is decentralized system in which no
central authority exists. Bitcoin was developed by Satoshi, initially all attempts were failed but
later on, Satoshi had built digital cash system by using peer to peer network. Cryptocurrencies
ensure efficiency in financial proceedings and reducing transactions cost (LeBlanc, 2016).
Cryptocurrencies impact on the monetary policies to a great extent; it is essential for the
economic benefits. It plays a significant role in production of money in the nation. The
fundamental reason of introducing Bitcoin; a decentralised system was to record immutably
monetary transactions. This digital money transactions system has supported in improving the
economic condition of nation. Bitcoin system is the unexplored zone for central banks globally.
Now, electronic cash transaction system has supported suppliers in sending money from one
country to another without involving central banks or intermediaries (Bitcoin may have
implications for monetary policy, 2017). These transactions are recorded in block chain but this
block chain system does not disclose that whether the transaction was within nation or across the
border.
In the year 2013, United Stated had faced banking crisis situation. After that, authorities
have made limitations on daily money supply. It has been restricted to 300 per day. After this
crisis, banks have restricted using cheques and banned high amount of cash transfer. After this
restriction, it was very difficult for the suppliers in sending money to other nations. But,
cryptocurrencies methods such as bitcoin have helped people in sending money to other
countries easily just like sending email to other person (The Effects of Electronic Payments on
Monetary Policies andCentral Banks, 2015). Due to fluctuations in economy conditions
electronic payment system is in high demand. In the year 2013, Cypriot banking crisis has taken
place that has created fear in capital market in entire region. But this has helped in the raising
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prices of bitcoin from about 15 to 200. Interest of Chinese market was increasing due to which in
third quarter of 2013, prices got increased.
With the increasing pricing, interest of public was enhancing as well and thus, more
electronic transactions were taking place through electronic payment system. This has affected
the monetary policies significantly (Can digital/crypto currencies influence monetary policy,
2017). Quantity theory of money explains that if velocity of money and real output of economy
are constant then it can enhance price level which may cause inflation in country that impacts on
economic condition of the nation to a great extent. Bitcoin system has affected US Dollar Federal
Reserve monetary policies. If bitcoin electronic payment system is being used in high amount
then velocity of money can be increased. In such condition, inflation can get arise. In the
inflation status, central bank of country has to decrease money supply in order to maintain
economic condition of region. Cryptocurrencies highly impact on the macroeconomic stability of
region. This is associated with dollarization like effects such as re denomination of assets
(Bitcoin may have implications for monetary policy, 2017).
Present study will discuss the impact of cryptocurrencies on monetary policies of US. It
will explain the kinds of cryptocurrencies that are used in market. Furthermore, it will explain
Mises regression theorem. Furthermore, research will describe fiat currency vs. digital currency.
Economic and Legal aspects of cryptocurrencies will be discussed in this dissertation.
1.2 Research questions
Aim
“To identify the impact of cryptocurrencies on monetary policies: A study on United States”
Based on the above aim of the investigation, the research questions that can be framed are
as follows:
 What is the core concept of cryptocurrency?
 What are the various types of cryptocurrency?
 What is the impact of cryptocurrency on overall monetary policies of the country?
1.3 Research objectives
Based on the above aim being framed, following research objectives can be formulated:
 To understand the concept of cryptocurrency
 To prepare an assessment of various types of cryptocurrency
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 To assess the impact of cryptocurrency on overall monetary policies of country
1.4 Significance of the study
It is quite important for the researcher to choose a topic that is significant enough and is
able to serve purpose of one or tother aspects. The present study deals with understanding
concept of cryptocurrency and its impact on monetary policy formation of country.
Cryptocurrency is the digital currency in which encryption techniques are taken into
consideration (Iwamura, Kitamura and Matsumoto, 2014). It helps in regulation of generated
units of the currency in a manner that verified funds can be transferred. It has the characteristics
and advantages of being operated through central bank independently (Scott, 2016).
Cryptocurrency is considered to be a future of currencies in the coming period. It is inclusive of
certain blockchain technology as uses cryptograph so as to generate money and verify certain
transactions. Since, it is a technical term and people may be required to generate informtiona
regarding the same so as to ensure that they are aware of it before entering into a virtual currency
market; it becomes important to gather adequate knowledge about it (Ametrano, 2016).
Another important aspect that is related to cryptocurrency is that it has been able to grab
the eyeballs of various investment intuitions when suddenly some of the cryptocurrencies raised
in the market. One of the most famous out of it is Bitcoin. It is the new investment trend that
various countries have been experiencing these days. Various people who tried to make
investment in it have been able to gather benefits out of it in an unimaginable manner. It has
increased the interest of various people. Since, cryptocurrency is a low-cost means, one does not
have to sell out money so as to gain and exchange digital returns. An individual is just required
to deal with the help of mobile phone and an internet connection. It is due to easy and effective
method in which people can easily deal is also making them attracted towards cryptocurrency
format (Fry and Cheah, 2016).
In majority of the digital currencies, an individual is required to pay for transaction. It is
the transaction charge which is present in case of other digital currencies. However, in case of
digital currency, there is no transaction charge involved in it. The people who are involved in
dealing with the cryptocurrencies are called as miners and get compensated from the network
itself. In this scenario, they are not liable to pay any transaction cost for any of the dealings. It is
due to this reason, majority of the individuals opt for cryptocurrency transactions (Hileman and
Rauchs, 2017).
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In order to serve all these functions, adequate efforts will be made to make the readers
aware regarding various aspects of cryptocurrency. The research will also be responsible of
making them aware regarding impact on monetary policies due to existence of this type of
cryptographic currency. Hence, the research is quite significant to develop the knowledge of
readers and policy makers with respect to cryptocurrency.
1.5 Thesis structure
Structure of the thesis is described as below:
Chapter 1 Introduction: It would be the first section in which brief discussion about
cryptocurrencies and its impact on US monetary policies will be done. In this section, scholar
will define aim and objectives of the research (LeBlanc, 2016). Furthermore, significance of the
research will be discussed in this study.
Chapter 2 Literature review: It would be the next part in which various literatures of other
authors on same topic will be involved. This would be the most important part of study as by
reviewing literature of other authors, scholar will be able to develop in-depth understanding
about cryptocurrencies and its impact on US monetary policies (Pieters, 2017).
Chapter 3 Research methodology: It would be the next part of dissertation in which scholar
will select appropriate research methods that will help scholar in carrying out study in an
effective manner. Research methods support researcher in identifying the way of conducting
entire investigation. Hence, in order to serve this purpose, the chapter will be important to
ascertain and find out research approach, philosophy, type of investigation, etc. Research
methodology will also be responsible for discussing the data collection methods and its analysis
that have been opted for research purpose. At the end, reliability and validity of the research will
be identified and signified that all important aspects have already been taken care of by
researcher (Hayes, 2017).
Chapter 4 Findings and Discussion: It is another most important chapter of overall dissertation
which helps in ascertaining findings based on data that has been collected by researcher on stated
subject. The chapter also discusses regarding various important topics of research and helps in
developing a clear understanding regarding cryptocurrency. Thematic analysis will be conducted
in this research chapter where themes will be formulated so as to ascertain important aspect of
the research and discuss on its key points. The chapter will then be responsible for determining
various loopholes that may be noticed in the presented research by other researcher which must
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have been assessed with help of secondary study. The chapter will be further divided into two
subparts, where first part will discuss regarding findings and results being collected by
researcher. It also discusses other sub parts which help in creating discussion with respect to
key points (Gandal and Halaburda, 2014).
Chapter 5: Conclusion and recommendations: It is one of the most important chapters of
whole dissertation which helps in developing key understanding regarding stated topic. It also
helps in ensuring key and specific points that have been covered by researcher. The overall
chapter will be further divided into four subparts. The first part will be responsible for discussing
summary of major findings based on what has actually being collected in the form of secondary
literature. The second sub part of this chapter discusses regarding recommendations that can be
extended to the policy makers with respect to formation of monetary policies in the country
(Park, Fuchsbauer and Gazi, 2015). It will also be responsible of examining various loopholes in
the current policy frameworks and steps that can be initiated to bring change and make it quite
effective. The third sub part of this chapter will be responsible to various assess various
limitations of the study where all restrictions that have been taken into consideration while
conducting this research so as to make readers aware about it. At the end, fourth subpart of
chapter, that is, suggestions for future research will help in mentioning suggestion of various
topics on which research can be conducted by researcher so as to gain concrete as well as
specific knowledge regarding cryptocurrency.
CHAPTER 2: LITERATURE REVIEW
2.1 Concept of cryptocurrencies
According to Delmolino and Shi, (2016) cryptocurrency is a digital currency which
involves encryption techniques that can be used in regulation and generation of currency and
verifying the transfer of funds. It is generally operated though central bank and do not have to
deal with any other bank in between. One of the most common yet modern example of
cryptocurrency is bitcoin which has now been able to offer an outlet for personal wealth beyond
any type of confiscation and restrictions. It has been considered that encrypted currency is one
of the safest as well as trusted kind of digital technology that people tend to prefer these days.
There are various robberies and looters present in the world and currency must be placed at the
safest place possible so as to ensure that their investment is safely present. Encrypted currency
helps in giving this type of assurance to people which makes it an important source of investment
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for people. Hence, it has been forecasted that this type of currency will play an important role in
the coming years as well. However, in contrast to this, as per the views of Narayanan, Miller and
Goldfeder, (2016) there is another reason present as well which makes encrypted currency an
important aspect. It is due their policies that has been framed by its authorities, due to which
majority of people makes a demand of investing in it. In this scenario, an individual, investing or
planning to invest in this type of currency, do not have to deal with any kind of third party.
However, they can directly deal with the parties from which investment related to crypto
currency have been made. It helps in giving the reassurance to the investors that their money is
safe with them and can also decide their investment portfolios individually as well. There are no
boundaries with respect to location as well. Hence, the investor or the individual who is planning
to invest can directly contact to the organization offering crypto currency rather than having any
type of third party in between. One has the right to gather all the cryptocurrencies in safe wallet
and store it in it. It gives an opportunity to safe the wallet which are available of two kinds. It can
help in transferring of money to the account. Further, there is no amount charged from the
investor with respect to the storage of digital currencies. The individual is the only person who is
involved in management of account and hence there is no involvement of third party in it.
2.2 Different kinds of cryptocurrencies
According to Herbert and Litchfield, (2015) Bitcoin is the new trend setter, which has been
able to decentralise peer to peer network of various investors. All the currencies that have
inspired by the Bitcoins are called as Altcoins and they have been trying to represent themselves
as the modified version of Bitcoin. There are certain currencies who have the capability to be
mined in comparison to that of Bitcoin. It can have greater risk, however, brought on lesser
liquidity, value retention and acceptance. Although the prices of Bitcoin are soaring high, there
are other types of cryptocurrencies as well that can help the investors to invest in them. However,
in contrast to this, as per the views of Li and Wang, (2017) there are various types of
cryptocurrency are available in the market, which can be used by the investors and other
payment initiators, to be used in a well-defined manner. It helps in making the overall payment
aspect easy in the way that people do not have to get involved with any third party and can have
direct contact to the merchant in case of any issue. Crypto currency have been widely used
aspects that has been able to gain popularity these days. However, it has not yet being adopted as
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a legal instrument in all the countries, some of them have managed to initiate the same as a legal
instrument of initiating transactions.
According to Evans-Pughe, Novikov and Vitaliev, (2014) Litecoin was actually introduced
in 2011 and was one of the cryptocurrencies of initial times after the introduction of Bitcoin. It is
often referred as “Silver to Bitcoin’s gold”. It was actually created by an MIT graduate and
former engineer in Google, named, Charlie Lee. Litecoin is based upon the strategy where it is
mentioned as an open source to the global network for payment aspects. It is not controlled by
any of the central authorities. It is indulged in using scrypt, as its proof of work. It can easily be
decoded with the help of basic CPU belonging to consumer grade. However, there are various
similarities between Litecoin and Bitcoin, but it is inclusive of certain better functions as well. It
has been able to enjoy faster block generation rate and hence is able to offer faster transaction
confirmation in comparison to that of other cryptocurrency aspects. There are various merchants
who have started accepting Litecoin as a basic payment aspect. However, in comparison to this,
as per the views of Narayanan and et.al., (2016) Ethereum is another type of cryptocurrency
which was launched in 2015. It is a decentralised platform of software which helps in allowing
Smart Contracts and Distributed Applications to be built and run without any type of downtime,
control, interference of the third party and fraud. This has been able to receive an overwhelming
response from the side of consumers. The applications, which tend o run on its platform, are able
to gain cryptographic token, which is known as Ether. Ethereum platform has been further
divided into two parts. These splits are, Ethereum (ETH) and Ethereum Classic (ETC). ETH has
been able to gain market capitalization of $41.4 billion, which stands on second after Bitcoin
among all the other cryptocurrencies available.
According to Hughes and Middlebrook, (2015) Zcash (ZEC) is also a decentralized and an
open source of cryptocurrency which was actually launched in the later months of 2016. It has
the ability to provide privacy and can also have selective amount of transparency to the
transactions. However, Zcash has been able to provide extra security and privacy to its
customers, where each and every transaction is checked, recoded and then published on a
blockchain. There are various aspects that are kept private, which includes, amount, sender and
recipient. The customers also have the choice to opt for shielded transactions which helps in
making the content encrypted with the help of zero knowledge proof construction, called as
SNARK. However, in comparison to this, as per the views of Abramaowicz, (2016) other type of
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cryptocurrency is Dash, which is originally called as, Darkcoin. It has been able to successfully
initiate anonymity in transactions. It is called as one of the most secretive versions of Bitcoin. It
works upon decentralised master code network that can help in initiating some untraceable
transactions. It was launched in January 2014, which has been able to experience a large number
of database in quite a short duration. It was basically developed by Evan Duffield which can
easily be mined with the help of CPU and GPU. In March 2015, Darkcoin wash rebranded to be
Dash and it was actually accepted by the people in more effective manner. However, it did not
bring any type of changes in the technological aspects while opening it to the public.
According to Brenig, Accorsi and Müller, (2015) Ripple is another type of cryptocurrency
which is called as, real-time global settlement network which helps in offering certain, instant
and low cost international payments. It helps in settling down cross border payments in real time
with adequate amount of transparency in the transactions at the maximum possible lower cost. It
was initially released in 2012. In its initial years, it was not able to gain adequate amount of
profits due to decreased use of crypto currency in the country. It has been able to gain adequate
amount of awareness, where its market capitalization happens to be $1.26 billion. Since, there is
no requirement of any type of mining in case of Ripple. It is believed that distributing value is a
powerful way to incentivize certain behaviour. It is able to increase the liquidity of consumers,
where, institutional buyers are allowed to make payments who are interested in investing this
type of cryptographic investment platform. However, in contrast to this as per the views of
Darlington III, (2014) Monero is another type of cryptocurrency, which is private, secure as well
as untraceable. It was launched in April 2014. It was able to enhance and develop cryptography
interest among various individuals at that time. It was able to grab the eyeballs of various
investors and payment drivers, about its existence. It is completely donation-based community
driven currency. The main focus of Monero, when it was launched was on scalability and
decentralization. It was enabling to complete privacy aspects with the help of various special
techniques called, “ring signatures”. The technique has helped in developing cryptographic
signature of at least on real participants and the aspect is quite validated as well.
According to Darlington III, (2014) the most common type of cryptography that is Bitcoin.
However, there are other cryptocurrencies as well which have been able to gain adequate amount
if popularity. Other virtual currencies such, as Ripple and Ethereum are widely popular among
individuals.
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2.3 Definition of monetary policies
According to Minor and Bitreserve Ltd, (2015) monetary policy is the essential process
which helps in controlling either the cost of very short term borrowing or the overall monetary
base. The authorities often target to alter inflation rate and interest rate so as to ensure price
stability in the market and ensure that appropriate exchange rate of the available currency. The
main objective of issuance of monetary policy is to contribute towards overall stability of Gross
Domestic Product (GDP) which ultimately helps in dealing with low unemployment rate,
achieve predictable exchange rates with other countries and maintain adequate amount of
revenues. There are various economists, who have been able to give their views regarding
crafting of policies, that can ultimately help in better development of optimal monetary policies.
In the developed countries, fiscal policies are framed separately to the monetary policies, which
is inclusive of government spending, taxation and associated borrowings. However, as per the
views of Dvorak and et.al., (2015) monetary policies can be framed so as to expand or contract
the policies either in the form of polices or through retrenchment aspects. Expansion policy are
taken into consideration by the authorities, when one uses to stimulate the economy. It is
important for the management to maintain short term interest rates in comparison to that of other
usual rates or in the form of increase in total supply of money which helps in overall expansion
of economy in comparison to that of the usual one. However, in case of contractionary policies,
it helps in reducing the overall supply of money in the economy in the manner that interest rates
can be increased which ultimately leads to availability of lesser money. Increase of decrease in
aggregate demand is the other factor that is taken into consideration so as to enhance short term
growth in the economy as it leads to bring enhancement in overall Gross Domestic Product
(GDP) of the country. Expansionary monetary policies usually lead to diminishing the overall
value of currency in comparison to the other currencies that are available in the market.
According to Dvorak and et.al., (2015) monetary policy generally consists of the actions
that are taken by the central bank with the help of other regulatory boards and committee that can
help in determining the size and overall growth rate linked to money supply which ultimately
have a greater impact on prevailing interest rates of the country. There are certain actions that are
taken by the authorities, such as, buying or selling of government bodies, bringing modifications
in interest rate, changing overall amounts of bank in the for m of bank reserves, etc. However, in
comparison to this, as per the views of Herbert and Litchfield, (2015) there are various tools that
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