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Introduction
In the last decade, the value and significance of blockchain technology has gained recognition among entrepreneurs, policy makers and academics. What appeared to the casual observer to be simply a monetary phenomenon has been recognized as a new means of organizing social activity, particularly exchange and ownership (Davidson et al., 2016; Antonopoulos, 2016). Blockchain technology enables secure accounting and transactions on distributed networks with no single central controller, showing potential to reduce transaction costs and transform the structure of economic activity.
Although focus has begun to shift from cryptocurrency to other uses of blockchain technology, the following will show that the blockchain has only just begun to change our conception of money, banking and liquidity. In particular, I argue that blockchain technology can support a money stock that is responsive to fluctuations in demand for money. This can reduce the severity of aggregate-demand driven macroeconomic disequilibrium by provision of new money and liquidity to the market during periods where demand to hold money increases sharply (Yeager, 1956; Leijonhufvud and Clower, 1981; Horwitz, 2000). As has been proposed concerning monetary rules, cryptocurrencies may prevent extreme macroeconomic fluctuations that are produced by erratic macroeconomic policies, such as those observed during the Great Depression (Glasner, 1989; Hawtrey, 1947; Sumner, 2015a; Vedder and Galloway, 1997).
The purpose of this paper is to show how private cryptocurrencies, if widely adopted, can serve to alleviate monetary disequilibrium. I begin by describing money, the blockchain and the relationship between the two. I follow by showing:
how monetary theory informs our understanding of the benefits of rules governing money creation and the structure of good monetary rules;
how this theory informs our understanding of mechanisms governing the creation of cryptocurrency and its effects on markets; and
how regulatory and tax policies can either enable or inhibit these developments.
The argument builds from the existing literature on policy, rules and equilibrium (e.g. Friedman, 1961a; Laidler, 1973; see also above references), including a framing of the gold standard as a rule-based system (Bordo and Kydland, 1996; Selgin, 2016). A good monetary rule successfully confonts the lag problem (Friedman, 1961a) as well as the time-inconsistency problem (Johnson, 1968; Kydland and Prescott, 1977; Barro, 1984; Laidler, 1997). Insights from this literature inform our understanding of...