Warren E. Weber, Research Consultant, Bank of Canada, has published a new working paper that envisions a world in which countries are on the Bitcoin standard, a monetary system in which all media of exchange are Bitcoin or are backed by it.

The paper, entitled “A Bitcoin Standard: Lessons from the Gold Standard”, explores the similarities and differences between the Bitcoin standard and the gold standard and describes the media of exchange that would exist under the Bitcoin standard.

Weber says that under the bitcoin standard there are two types of monetary policy to be considered:

• Interest rate policy: the ability to change interest rates to affect the domestic economy
• Ability to act as a lender of last resort by providing reserves to the banking system in times of financial crisis

“Central banks had greater ability to carry out monetary policy under the gold standard than they would have under the Bitcoin standard”, he said.

The paper argues that as there would be virtually no arbitrage costs for international transactions, countries could not follow independent interest rate policies under the Bitcoin standard. However, central banks would have some "limited ability" to act as lenders of last resort.

Weber further says that Bitcoin standard would have two major benefits over current fiat money standards:

• Greater price-level predictability due to the known, deterministic rate at which new Bitcoins are created
• Freeing of resources currently devoted to hedging against exchange rate fluctuations

However, he believes that it is unlikely that the Bitcoin standard will come into existence, as governments and central banks will take actions to prevent it. Weber adds that even if the Bitcoin standard were to come into existence, it would not last long, for two reasons:

• "The payments world is changing so rapidly that there will be a technological innovation that provides a potential medium of exchange with the same or greater benefits of Bitcoin or with lower costs. Such an innovation could come either from the private sector or from the government.
• There would be pressure to return to a fiat money system so that a more activist monetary policy could be pursued."