The Bank of Korea joins the growing list of central banks researching virtual currencies like bitcoin. The South Korean bank has just published a research paper that compares cryptocurrencies to traditional fiat currencies issued by governments.
South Korea’s Central Bank Researches the Relationship Between Bitcoin and Fiat
Researchers from Seoul’s Hongik University and members of the Bank of Korea (BOK) have released a paper called “Crowding out in a Dual Currency Regime.” The paper written by Kihoon Hong, Kyounghoon Park, and Jongmin Yu details how cryptocurrencies and fiat monetary systems could collaborate in the future in what the authors call a “dual currency regime.”
“The rise of cryptocurrencies could have a significant impact on our monetary system as they are privately issued currencies, thus not regulated by central banks,” explains the BOK research paper’s authors.
The recent emergence of digital currency opens up a new type of dual currency regime in which digital currency, which has no intrinsic value and a government-issued fiat currency coexist. One of the well-known examples of privately-issued digital currencies is Bitcoin.
The Dual Currency Regime
In essence, the report states that traditional fiat systems can coexist with privately issued digital currencies like bitcoin. The paper reports that the relationship between the use of fiat currency and that of digital currency demand can change with cost variances.
“High costs of using fiat currency increase the demand for digital currency,” details the BOK research paper. “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.”
Our results rather suggest that the threshold of equating the demand for fiat currency with that for digital currency will allow the co-existence of both currencies.
Cryptocurrency Interest Continues to Grow in South Korea
Bitcoin has made a significant impact in South Korea as the country captures the fifth-highest bitcoin trading volume worldwide. Last November the Korea Exchange launched its blockchain-based Korea Startup Market (KSM) while the Korean Financial Services Commission (FSC) has talked about regulating bitcoin this year.
The latest research paper from the BOK reveals the country’s officials are very interested in cryptocurrencies. The authors say they hope the research provided will help South Korean officials and regulators understand the new technology. The paper goes on to state that future research can theoretically and empirically observe the impact of digital currencies and the South Korean economy. Alongside this, the central bank’s researchers say they may work on a paper that covers three types of coexisting currencies in the near future.
“Further, we may attempt to extend our model to a triple currency regime with private-issued digital currency, central-bank-issued digital currency, and fiat currency,” the paper concludes.
What do you think about the Bank of Korea cryptocurrency research paper? Let us know in the comments below.
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