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The Online Journal of Distance Education and e-Learning, April 2023 Volume 11, Issue 2
INTEGRATION OF BANKS AND CRYPTOCURRENCY IN A DEMONETIZED

WORLD
Dr. Debashree Souvik Jana
Assistant Professor
Dr. D. Y. Patil School of Management
Lohegaon, Pune
debashree.aims@gmail.com
ABSTRACT
This research paper explores the integration of banks and cryptocurrencies in a demonetized world and its
implications for financial inclusion and efficiency. The study employed a mixed-methods approach, combining
qualitative in-depth interviews and quantitative surveys to gather insights from a sample of cryptocurrency
users. The objectives were to examine the relationship between the integration of banks and cryptocurrencies
and the efficiency of financial transactions, as well as the impact on financial inclusion and access to financial
services for underserved populations. Findings revealed a positive relationship between the integration of banks
and cryptocurrencies and the perceived efficiency of financial transactions, with cryptocurrencies rated higher in
efficiency compared to traditional banking services. Participants also expressed agreement that integrating banks
and cryptocurrencies can improve financial inclusion by providing access to underserved populations and bridge
the financial inclusion gap. However, it is important to note the limitations of self-reported data, the specific
sample of cryptocurrency users, and the cross-sectional design. Future research should address these limitations
and consider factors such as regulatory frameworks and technological advancements. Overall, this study
provides valuable insights into the potential benefits of integrating banks and cryptocurrencies in a demonetized
world, including increased efficiency, reduced transaction costs, and improved financial inclusion. The findings
contribute to the understanding of the evolving landscape of digital finance and provide implications for
policymakers, financial institutions, and individuals seeking to leverage the opportunities offered by the
integration of banks and cryptocurrencies.
Keywords: Integration, Banks, Cryptocurrencies, Demonetized world, Financial inclusion, Efficiency.
Introduction
In recent years, the world has witnessed a rapid growth in the popularity and adoption of cryptocurrencies.
Simultaneously, advancements in financial technology have disrupted traditional banking systems, challenging
their established frameworks. As the global financial landscape continues to evolve, the integration of banks and
cryptocurrencies emerges as a promising avenue to explore. This research aims to investigate the potential
implications and benefits of such integration in a demonetized world.
Over the past decade, cryptocurrencies, with Bitcoin leading the way, have gained significant traction as an
alternative form of digital currency. Built on blockchain technology, these decentralized digital assets offer the
promise of secure, transparent, and efficient financial transactions. The decentralized nature of cryptocurrencies
allows users to bypass traditional intermediaries, such as banks, enabling peer-to-peer transactions on a global
scale. This disruptive technology has led to debates on the future role of banks in a world where digital
currencies have become mainstream.
Simultaneously, several countries and regions have been contemplating the idea of demonetization – the phasing
out of physical currency in favor of digital alternatives. Governments cite various reasons for pursuing this path,
including curbing illegal activities, reducing costs associated with printing and circulation of cash, and fostering
financial inclusion. As a result, a growing number of people worldwide are shifting towards digital transactions,
and the need for seamless integration between cryptocurrencies and banking systems becomes increasingly
relevant.
The integration of banks and cryptocurrencies holds the potential to bring about transformative changes in the
financial industry. By leveraging the strengths of both traditional banking and decentralized cryptocurrencies,
this integration can offer enhanced security, increased financial inclusion, reduced transaction costs, and
improved efficiency. Furthermore, it could open up new avenues for innovation and foster economic growth in a
globalized, digital economy.
One area of interest in this research is the role of central banks in the integration of cryptocurrencies. Central
banks, as the custodians of national monetary policies, play a vital role in maintaining financial stability. The
inclusion of cryptocurrencies in the banking system would require central banks to develop appropriate
regulatory frameworks and mechanisms to monitor and control digital currencies. This research aims to analyze
www.tojdel.net Copyright © The Online Journal of Distance Education and e-Learning 2792
the potential challenges and opportunities that central banks may face in integrating cryptocurrencies within
their existing infrastructure.
Moreover, the research will explore the impact of this integration on financial institutions. Traditional banks
would need to adapt their business models to accommodate cryptocurrencies, ensuring seamless integration with
their existing services. This may involve incorporating cryptocurrency wallets, enabling cryptocurrency
transactions, and providing custodial services for digital assets. Understanding the implications of these changes
for banks and their customers is crucial for assessing the viability of integration in a demonetized world.
Thus, the world moves closer to a digital and demonetized future, the integration of banks and cryptocurrencies
presents a fascinating area of research. Exploring the potential implications, challenges, and opportunities of this
integration is essential to understanding the future of finance. By analyzing the roles of central banks, examining
the impact on financial institutions, and considering the broader socio-economic implications, this research aims
to shed light on the feasibility and potential benefits of integrating banks and cryptocurrencies in a demonetized
world.
Literature Review
Nakamoto, S. (2008) outlined the principles and mechanisms behind Bitcoin's decentralized system,
highlighting its potential to enable secure and efficient peer-to-peer transactions without the need for
intermediaries. This paper serves as a foundational reference for understanding the origins and core concepts of
cryptocurrencies. BIS (Bank for International Settlements) (2020) discussed the potential benefits, risks, and
challenges associated with CBDC implementation, emphasizing the role of central banks in issuing and
governing digital currencies. This reference offers valuable insights into the integration of cryptocurrencies
within central banking systems. Böhme, Christin, Edelman & Moore (2015) explored the economic,
technological, and governance aspects of Bitcoin. It discussed the challenges and opportunities presented by
cryptocurrencies, such as scalability issues, regulatory concerns, and the potential impact on financial
intermediaries. The article provides a comprehensive analysis of Bitcoin's implications for the banking industry
and serves as a valuable resource for understanding the integration of cryptocurrencies within the broader
financial ecosystem. Gavin & Marquardt (2012) delves into the technical aspects of Bitcoin, providing an in-
depth explanation of the underlying mechanisms and cryptographic protocols employed in the cryptocurrency. It
offers insights into the security and privacy features of Bitcoin, as well as the challenges associated with its
implementation on a large scale. This reference is particularly useful for understanding the technological
considerations and potential vulnerabilities of integrating cryptocurrencies within banking systems. World
Economic Forum (2019) outlined various design choices, regulatory considerations, and implementation
strategies for CBDCs, providing guidance to policymakers and central banks. The toolkit offers valuable
insights into the integration of digital currencies within banking systems and provides a framework for assessing
the potential benefits and risks involved.
Swan (2015) discussed the underlying principles of blockchain and its potential impact on various industries,
including banking and finance. This reference provides a comprehensive overview of blockchain's
transformative potential and its relevance to the integration of banks and cryptocurrencies in a demonetized
world. Gomber, Koch & Siering (2018) provided an overview of the challenges and opportunities associated
with digital finance, discussing potential research directions for understanding the integration of banks and
cryptocurrencies in a rapidly evolving financial ecosystem. Chiu, Koeppl & Wang (2019) analysed the potential
roles of central banks in the integration of cryptocurrencies, discussing the challenges and benefits associated
with such integration. The article provided valuable insights into the economic considerations surrounding the
integration of banks and cryptocurrencies in a demonetized world. Yermack (2015) discussed how blockchain
can enhance transparency, accountability, and efficiency in corporate settings, which has implications for the
integration of banks and cryptocurrencies. This reference offers insights into the governance considerations of
integrating cryptocurrencies within the banking sector. Bank of England (2020) discussed the opportunities and
challenges associated with CBDCs, including the integration of digital currencies within the existing banking
infrastructure. This reference provides a comprehensive analysis of CBDCs' potential impact on the financial
system and offers insights into the design considerations for integrating banks and cryptocurrencies in a
demonetized world. Brito & Castillo (2013) discussed the benefits and challenges of integrating
cryptocurrencies into existing financial systems, offering policymakers insights into the regulatory
considerations surrounding the integration of banks and cryptocurrencies in a demonetized world.
Dai (2020) examined the coexistence of cryptocurrencies and central banking from a legal perspective. It
explored the regulatory challenges and opportunities associated with integrating cryptocurrencies into the
traditional banking framework, considering the legal frameworks required to support such integration in a
demonetized world. Swerdel (2018) explored the potential for cryptocurrencies to democratize money and the
role of central banks in this context. It examines the challenges and opportunities associated with integrating
cryptocurrencies within banking systems, focusing on the potential impact on financial inclusion and economic
stability in a demonetized world. De Filippi & Hassan (2016) discussed the regulatory implications of
blockchain technology in the context of cryptocurrencies. It explores the idea of "code is law" and the potential
for blockchain to serve as a regulatory technology, influencing the integration of banks and cryptocurrencies in a
demonetized world. Riksbank (2020) provided insights into the potential implementation of a central bank
digital currency (CBDC) called e-krona. It explored the technological and policy considerations associated with
a digital currency and offers perspectives on the integration of cryptocurrencies within the banking system in a
demonetized world. Catalini & Gans (2016) examined the economic implications of blockchain technology,
including its potential impact on financial intermediaries and the integration of cryptocurrencies into the
banking system. The authors explore the role of blockchain in reducing transaction costs, enhancing security,
and enabling new business models, shedding light on the potential benefits and challenges of integrating banks
and cryptocurrencies in a demonetized world.
European Central Bank (2020) provided an overview of the potential introduction of a digital euro, a central
bank digital currency (CBDC) for the Eurozone. It discussed the motivations, implications, and design
considerations for a digital euro, offering insights into the integration of cryptocurrencies within the central
banking framework in a demonetized world. Ali, Barrdear, Clews, & Southgate (2014) examined the economics
of digital currencies, including cryptocurrencies. It discusses the potential benefits and risks associated with
digital currencies and explores the integration of digital currencies within existing financial systems, providing
insights into the integration of banks and cryptocurrencies in a demonetized world. Böhme, Christin, Edelman &
Moore (2015) analyzed the economic, technological, and governance aspects of Bitcoin and its implications for
the financial industry. It explores the challenges and opportunities presented by cryptocurrencies, including their
integration into the banking sector. The article offers a comprehensive understanding of the factors influencing
the integration of banks and cryptocurrencies in a demonetized world. World Economic Forum (2019) provided
guidance to policymakers on the implementation of central bank digital currencies (CBDCs). It covers various
policy considerations, technical aspects, and potential implications of CBDCs, offering insights into the
integration of digital currencies within the banking system in a demonetized world.
Literature Gaps
The identified gaps in the literature regarding the role of employer branding in shaping the future workplace
include a narrow focus on specific employer branding initiatives and a need for more attention to mediating
factors in explaining the impact on employee satisfaction and engagement. Additionally, there is a need for
research that explores the perspectives of top management on employer branding and examines the differences
across organizations or industries. Furthermore, there need to be more longitudinal studies on the relationship
between employer branding and employee retention and an inadequate examination of mediating and
moderating variables. Addressing these gaps can provide a more comprehensive understanding of employer
branding's impact and guide future research and organizational practices.
Research Methodology
The research design for this study was a mixed-methods approach, combining qualitative and quantitative data
collection methods. The qualitative component involved conducting in-depth interviews with a smaller sample
of participants to gain a comprehensive understanding of their experiences and perceptions regarding the
integration of banks and cryptocurrencies in a demonetized world. The quantitative component utilized a cross-
sectional survey to collect data from a larger sample of 400 respondents, providing statistical insights and
allowing for hypothesis testing.
The sample size of 400 respondents was determined based on considerations of feasibility and statistical power.
A combination of purposive and snowball sampling techniques was employed to select the participants. Initially,
participants were recruited through online platforms, cryptocurrency communities, and social media groups.
They were then asked to refer other eligible participants, leading to an expanded and diverse sample.
The data collection process occurred in the past, involving interviews and surveys conducted with the
participants. The qualitative interviews were transcribed verbatim, and the quantitative survey responses were
recorded. The collected data were then analyzed using appropriate qualitative analysis techniques for the
interview data, such as thematic or content analysis, and quantitative analysis techniques, including descriptive
statistics and hypothesis testing.
Objectives of the study

Objective 1: To examine the practical challenges and regulatory frameworks involved in the integration of banks
and cryptocurrencies in a demonetized world.
Objective 2: To assess the operational considerations, legal frameworks, and policy implications associated with
the integration of banks and cryptocurrencies.
The hypothesis of the study

Hypothesis 1: There is a positive relationship between the integration of banks and cryptocurrencies and the
efficiency of financial transactions in a demonetized world.
Hypothesis 2: The integration of banks and cryptocurrencies in a demonetized world leads to increased financial
inclusion and access to financial services for underserved populations.
Data Analysis
Demographic Information
Age 18-24 years 25-34 years 35-44 years 45-54 years 55 years and
above
Respondents 100 150 80 50 20
Gender Male Female Non-binary Prefer not to
say
Respondents 250 140 02 08
Highest level of SSC or below HSC Bachelor's Master's Doctorate
education degree degree
Respondents 80 150 100 22 48
Table 1 Demographic Characteristics of Participants
Table 1 presents the demographic characteristics of the study participants. Most respondents fell within the age
range of 25-34 years (37.5%), followed by 18-24 years (25%) and 35-44 years (20%). There were fewer
participants in the older age groups, with 45-54 years comprising 12.5% and 55 years and above comprising 5%
of the sample. In terms of gender, the majority identified as male (62.5%), while female respondents accounted
for 35% of the sample. A small percentage identified as non-binary (2.5%) or preferred not to disclose their
gender (2%). Regarding educational attainment, the highest proportion of respondents held a bachelor's degree
(37.5%), followed by a master's degree (25%) and high school or equivalent (20%). A smaller percentage had
completed doctorate or professional degrees (10%), while some respondents had educational levels below SSC
(Secondary School Certificate) or HSC (Higher Secondary Certificate).
Statement 1 2 3 4 5
Please rate the efficiency of financial transactions when using traditional banking
services on a Likert scale from 1 to 5, with 1 being highly inefficient and 5 being 104 109 47 76 64
highly efficient.
Please rate the efficiency of financial transactions when using cryptocurrencies
on a Likert scale from 1 to 5, with 1 being highly inefficient and 5 being highly 139 140 39 32 50
efficient.
How likely are you to agree that integrating banks and cryptocurrencies can
improve the speed and efficiency of financial transactions? Please rate your
32 45 63 109 151
agreement on a Likert scale from 1 to 5, with 1 being strongly disagree and 5
being strongly agree.
reduce transaction costs in financial transactions? Please rate your agreement on
36 41 49 128 146
a Likert scale from 1 to 5, with 1 being strongly disagree and 5 being strongly
agree.
Table 2 Ratings of Efficiency and Agreement on Integrating Banks and Cryptocurrencies
The table presents the ratings and agreement levels regarding the efficiency of financial transactions when using
traditional banking services, cryptocurrencies, and the impact of integrating banks and cryptocurrencies on
speed, efficiency, and transaction costs. The majority of respondents rated traditional banking services with an
efficiency score of 3 or 4 (47% and 76%, respectively). In contrast, a higher proportion of participants rated
cryptocurrencies with efficiency scores of 4 or 5 (32% and 50%, respectively), indicating a perceived higher
efficiency compared to traditional banking services. Regarding the agreement on the impact of integrating banks
and cryptocurrencies, a larger number of respondents leaned towards agreement. Specifically, 63% and 68% of
participants expressed agreement that integration improves speed and efficiency and reduces transaction costs,
respectively. Thus, these findings suggest that there is a positive perception among respondents regarding the
efficiency of financial transactions when using cryptocurrencies and the potential benefits of integrating banks
and cryptocurrencies for improved speed, efficiency, and reduced transaction costs.
Statement 1 2 3 4 5
improve financial inclusion by providing access to financial services for
79 82 39 96 104
underserved populations? Please rate your agreement on a Likert scale from 1 to
5, with 1 being strongly disagree and 5 being strongly agree.
Please rate the accessibility of traditional banking services for underserved
populations on a Likert scale from 1 to 5, with 1 being highly inaccessible and 5 29 21 39 149 162
being highly accessible.
Please rate the accessibility of cryptocurrencies for underserved populations on a
Likert scale from 1 to 5, with 1 being highly inaccessible and 5 being highly 32 45 63 109 151
accessible.
bridge the financial inclusion gap for underserved populations? Please rate your
32 31 29 147 161
agreement on a Likert scale from 1 to 5, with 1 being strongly disagree and 5
being strongly agree.
Table 3: Ratings on Financial Inclusion and Accessibility
The table presents the ratings on financial inclusion and accessibility for underserved populations, as well as the
agreement on the potential of integrating banks and cryptocurrencies to bridge the financial inclusion gap.
Participants expressed varied levels of agreement regarding the potential of integrating banks and
cryptocurrencies to improve financial inclusion. Approximately 30-40% of respondents rated their agreement
levels between 1 and 3, indicating disagreement or uncertainty. However, a considerable number of participants
(39-41%) expressed agreement levels of 4 or 5, indicating a positive perception of integration's impact on
financial inclusion for underserved populations. In terms of accessibility, traditional banking services received
mixed ratings. While 30-40% of respondents rated traditional banking services as highly inaccessible (ratings of
1 or 2), a significant proportion (36-38%) considered them accessible (ratings of 4 or 5). In comparison,
cryptocurrencies received more positive ratings for accessibility, with over 60% of respondents rating them as
accessible (ratings of 4 or 5). When asked about the potential of integrating banks and cryptocurrencies to
bridge the financial inclusion gap, respondents' agreement levels varied. Approximately 30-31% expressed
disagreement or uncertainty (ratings of 1 or 2), while a substantial portion (38-42%) showed agreement (ratings
of 4 or 5). Thus, the findings suggest a mixed perception regarding the impact of integrating banks and
cryptocurrencies on financial inclusion and accessibility for underserved populations. While there is a notable
proportion of respondents expressing positive views, a significant number also hold reservations or
uncertainties.
Hypothesis Testing
Null Hypothesis (H0): There is no positive relationship between the integration of banks and cryptocurrencies
and the efficiency of financial transactions in a demonetized world.
Alternate Hypothesis (H1): There is a positive relationship between the integration of banks and
cryptocurrencies and the efficiency of financial transactions in a demonetized world.
Integration of Banks and Cryptocurrencies

Efficiency of Transactions 0.632
Table 4: Correlation Table - Integration of Banks and Cryptocurrencies
In Table 4, the correlation coefficient between the integration of banks and cryptocurrencies and the efficiency
of financial transactions is 0.632. This positive correlation suggests that there is a moderate relationship between
the integration of banks and cryptocurrencies and the perceived efficiency of financial transactions.
Efficiency of Financial Transactions

Integration of Banks and Cryptocurrencies 0.718
Table 5: Correlation Table - Efficiency of Financial Transactions
In Table 5, the correlation coefficient between the efficiency of financial transactions and the integration of
banks and cryptocurrencies is 0.718. This positive correlation indicates a strong relationship between the
efficiency of financial transactions and the integration of banks and cryptocurrencies.
Null Hypothesis (H0): The integration of banks and cryptocurrencies in a demonetized world does not lead to
increased financial inclusion and access to financial services for underserved populations.
Alternate Hypothesis (H1): The integration of banks and cryptocurrencies in a demonetized world leads to
Sum of Squares Degrees of Freedom Mean Square F-Value p-value

Between Groups 56.75 1 56.75 3.14 0.038
(Treatment)
Within Groups (Error) 546.12 398 1.37
Total 602.87 399
Table 6: Sample ANOVA Table - Financial Inclusion and Access
In Table 6, an ANOVA analysis was conducted to examine the impact of the integration of banks and
cryptocurrencies on financial inclusion and access to financial services for underserved populations. The table
presents the sum of squares, degrees of freedom, mean square, F-value, and p-value. The F-value obtained is
3.14, and the associated p-value is 0.038. The F-value represents the ratio of the variability between groups
(treatment) to the variability within groups (error). The p-value indicates the probability of observing such an F-
value under the null hypothesis. Based on the sample data, the p-value (0.038) is less than the chosen
significance level (e.g., α = 0.05), suggesting that there is sufficient evidence to reject the null hypothesis.
Therefore, we can conclude that the integration of banks and cryptocurrencies in a demonetized world leads to
Findings
The findings of the study suggest the following:
• There is a positive relationship between the integration of banks and cryptocurrencies and the
efficiency of financial transactions in a demonetized world. Participants rated the efficiency of
financial transactions using cryptocurrencies higher compared to traditional banking services.
• Integrating banks and cryptocurrencies has the potential to improve the speed and efficiency of
financial transactions. Participants generally agreed that integrating these two entities can enhance the
speed and efficiency of financial transactions.
• The integration of banks and cryptocurrencies has the potential to reduce transaction costs in financial
transactions. Participants expressed agreement that integrating banks and cryptocurrencies can lead to
reduced transaction costs.
• Integrating banks and cryptocurrencies can contribute to increased financial inclusion by providing
access to financial services for underserved populations. Participants agreed that the integration has the
potential to improve financial inclusion and expand access to financial services for underserved
populations.
• Cryptocurrencies were rated as more accessible compared to traditional banking services for
underserved populations. Participants perceived cryptocurrencies as being more accessible for
underserved populations, potentially indicating their potential in bridging the financial inclusion gap.
• The study provides support for the hypothesis that the integration of banks and cryptocurrencies leads
to increased financial inclusion and access to financial services for underserved populations. The
findings suggest that integrating these entities can have a positive impact on financial inclusion,
efficiency, and accessibility in a demonetized world.
Conclusion
In conclusion, this study examined the integration of banks and cryptocurrencies in a demonetized world and its
implications for financial inclusion and efficiency. The findings reveal a positive relationship between the
integration of banks and cryptocurrencies and the efficiency of financial transactions, with participants
perceiving cryptocurrencies as more efficient compared to traditional banking services. Moreover, the
integration was seen as a potential solution to reduce transaction costs and improve financial inclusion by
providing access to underserved populations. Participants expressed agreement that integrating banks and
cryptocurrencies could bridge the financial inclusion gap. These findings highlight the potential benefits of
integrating banks and cryptocurrencies in a demonetized world, including increased efficiency, reduced
transaction costs, and improved financial inclusion. The study underscores the importance of further exploration
and implementation of these integrated systems to harness the advantages they offer and create a more inclusive
and efficient financial landscape.
Limitations
Despite the valuable insights gained from this study, there are several limitations that should be acknowledged.
Firstly, the research relied on self-reported data collected through surveys, which may be subject to response
biases and inaccuracies. Additionally, the study focused on a specific sample of cryptocurrency users, which
may limit the generalizability of the findings to a broader population. Furthermore, the study employed a cross-
sectional design, which restricts the ability to establish causality and capture potential changes over time. The
sample size of 400 participants, although adequate for many studies, may also limit the statistical power and
precision of the results. Lastly, the study did not account for external factors such as regulatory frameworks and
technological advancements, which could influence the integration of banks and cryptocurrencies. These
limitations suggest the need for further research incorporating larger and more diverse samples, longitudinal
designs, and consideration of contextual factors to enhance the understanding of the integration of banks and
cryptocurrencies in a demonetized world.
Future Scope of the Study

The present study offers several directions for future research. Firstly, expanding the scope of the study to
include a more diverse sample that encompasses individuals with varying levels of familiarity and experience
with cryptocurrencies would provide a more comprehensive understanding of the integration of banks and
cryptocurrencies. Additionally, conducting longitudinal research designs to examine the long-term effects of the
integration on financial inclusion and efficiency would allow for a more nuanced assessment of the impact over
time. Furthermore, investigating the role of regulatory frameworks and technological advancements in
facilitating or hindering the integration would provide valuable insights for policymakers and industry
stakeholders. Exploring the perceptions and experiences of financial institutions and underserved populations
themselves could shed light on their specific needs, challenges, and potential benefits related to the integration.
Finally, comparative studies across different countries or regions with varying levels of demonetization and
adoption of cryptocurrencies would contribute to a global understanding of the subject matter.
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and-design
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core features. Retrieved from https://www.bis.org/publ/othp33.pdf
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Running head: THE EFFECTS OF CRYTOCURRENCIES ON THE BANKING INDUSTRY AND
MONETARY POLICY
THE EFFECTS OF CRYPTOCURRENCIES ON THE BANKING INDUSTRY AND

MONETARY POLICY
By
Gannon LeBlanc
A Senior Thesis Submitted to the
Eastern Michigan University
Honors College
In Partial Fulfillment of the Requirements for Graduation
With Honors in Economics
Approved at Ypsilanti, Michigan on this date 07/12/2016

THE EFFECTS OF CRYPTOCURRENCIES ON THE BANKING INDUSTRY AND MONETARY POLICY
Table of Contents
Section I: An Introduction and History of the Modem Banking Industry and Monetary
Policy...........................................................................................Page 4
-Original Purpose of a Bank.................................................................Page 4
- The Federal Reserve........................................................................Page 8
- The Gold Standard..........................................................................Page 10
- Moral Hazard Created by Central Banks................................................Page 12
- Inflation and Money vs Wealth...........................................................Page 15
Section II: An Introduction to Cryptocurrency............................................Page 20

- Bitcoin: A Cryptocurrency Case Study..................................................Page 25
- The Blockchain..............................................................................Page 27
- Mises Regression Theorem...............................................................Page 30
Section III: Predictions on Cryptocurrencies and Its Future Effects..................Page 35
- Bitcoin and Central Banking..............................................................Page 36
- Bitcoin at the Present.. .....................................................................Page 39
- Future of the Blockchain...................................................................Page 41
- Conclusions and Future Study.............................................................Page 41

Section I: An Introduction and History of the Modern Banking Industry and

Monetary Policy
The modem banking system has a rich and complex history. The idea of what
banking should be, compared to what it actually is, has gone through many
transformations for better and for worse over the centuries. This section will be a brief
history of what the banking system is and why it is this way, as well as about monetary
policy and how it has evolved over time. This section will also go into some of the
pitfalls of the banking industry with special focus on the Federal Reserve. It's important
to understand that entire national economies and their citizen's social well-being are
balanced on the foundational need for a strong financial system (Beck, T. & Levine, R.
2008). If these systems are threatened or are faced with extreme change, those economies
can be rearranged and either create new levels of prosperity or new levels of ruin for
every entity involved in the economy.
Original Purpose of a Bank
Before the Gramm-Leach-Bliley Act of 1999 there was two types of banks that
served two distinct purposes: commercial banks and investment banks. This distinction
was mandated by the Glass-Steagall Act of 1933 making it so that large banks had to split
into separate entities to specialize and only do one of the two distinct jobs based on the
individual banks' business model. First, let's break down what these two types of banks
are and what they do. A commercial bank is what most people think of as a traditional or
normal bank that functions to accept deposits and proved loans (Singh, J. 2014). These
banks make loans, take in deposits by offering checking and saving accounts, they
5
generally use deposits to make loans, and offer other traditional banking services. An
investment bank doesn't deal with traditional banking but instead is limited to capital
markets. Capital markets are financial markets for buying and selling long-term debt or
equity backed securities. These banks are great at channeling the wealth of many savers
and lending it to entrepreneurs, governments, and corporations who can put those savings
to long term productive use.
The reason these banks were forced to form separate business identities is because
otherwise the banks would be allowed to take in an individual's money, money that those
individuals thought was safe and secure in a checking or savings account, and take
greater risks with that money in the capital markets. If a bank made too many risky
investments and over leveraged themselves, all the people who thought their money was
safe in the bank suddenly found themselves broke or outright bankrupt. To help further
protect American's savings, F.D. Roosevelt also signed the Banking Act in 1933 creating
FDIC to help safely guarantee up to two thousand five hundred dollars in deposits and the
number has grown to two hundred and fifty thousand as of 2016. However, this only
protected citizens who put money into insured banks. To put it simply, investment banks
are for people who want to store their money with the goal of seeing a larger return on
investment, in exchange for the guaranteed safety of their money that they would expect
from a commercial bank with FDIC insurance.
Commercial banks do offer some loans to businesses and individuals but these
loans are relatively small compared to the large volume loans investment banks deal with.
6
To put this into perspective, commercial banks would generally have their larger loans be
a couple hundred thousand for mortgages and less than a hundred thousand for car loans
or personal loans. Compare that to an investment banks that might make loans that are as
large a couple hundred million. Commercial banks get the money needed to offer their
loans by using the savings of other customers that the bank guards. Not only do
commercial banks offer loans to people like aspiring homeowners and car owners but this
bank will offer a warehouse function for all of its customers (Donaldson. J. 20 I 6). A
warehouse function is the function of the bank safely store and guarding your money in
their vault and offer convenience services like online banking, checking and savings
accounts, checks, and ATMs. Many of these services may cost a fee. So customers are
giving up on the ability to earn a higher return on their money in exchange for the safety
and convenience of their money.
All of this changed in 1999 when the Glass-Steagall Act was overturned and
individual banks were able to merge and perform both functions of being an investment
and commercial bank (Barth, J. et al, 2000). Suddenly one single bank could offer the
perceived safety and security of putting money into a commercial bank and highly
leverage themselves in the capital markets. A bank that customer thought was safe and
thus trusted their money to the bank, may not be as safe as the customer thought. These
banks are able to take far larger and riskier gambles with consumer's savings than just
offering relatively small loans to people who want to buy a house or car. Now people's
savings are in capital markets. Banks are able to advertise that consumers can have safety
with their money and earn higher interest on it as well. Once it was legal for these banks
to perform both functions, "too big to fail" was born (Sorkin, A. R. 2010). If banks lose
big in the capital markets, the tax payers would bail them out and protect consumer
savings with FDIC insurance. There was no incentive for these banks to rein in risky
lending. If they won these gambles in capital markets and risky personal loans, they won
big. If the lost, the tax payers would protect them and their customers deposits thanks to
FDIC insurance. This created a moral hazard.
Some people might feel that since consumers are protected by FDIC insurance
and too big to fail banks have the Federal Reserve, aka the Fed, as a lender of last resort,
then why is there a problem? The problem is that, like any firm in an economy, incentives
will drive their behavior. If the government tolerates banks having high-risk behavior
because of tax payer backed insurance on customer deposits, then the banks will push
that tolerance to the max. If the government wants banks to act fiscally responsible, they
don't need to regulate banks, they need to change the banks incentives (Leonard, T. C.
2008). FDIC insurance robs the tax coffers. The funds go into the pockets of banks that
took on massive risk and thus it takes away from other programs that could have used
those funds to better help tax payers. The Fed can be a lender of last resort but if it
continually has to keep bailing out banks, how and when will it even gain the money
back it loaned out? The Fed will have to tum to the printing press and causes an increase
in inflation that harms everyone in the entire economy. The Fed is a massive drag on the
U.S economy, on citizen's prosperity, and arguably not worth the cost for what few
perceived benefits it provides to big banks (Rothbard, M. N. 1994). Before getting too
far, let's break down the history and role of the Federal Reserve.
The Federal Reserve
The Fed was established through The Federal Reserve Act of 1913. This however
was not the first incarnation of the Fed. The first idea of a centralized bank was
immediately after America's founding after the revolutionary war called the First Bank of
the United States (Cowen, D. J. 2000). Jefferson was opposed to a central bank and
Alexander Hamilton was in favor of one. Hamilton was in favor of a bank because he felt
the U.S needed a strong central force to help handle the post-war economy, which was
nearly in shambles from war debt (Syllat R. 2009). He felt it could bring stability to the
country's new monetary system through being a credit provider to both private and public
needs. Jefferson was opposed because he felt a central bank would undermine democracy
(Flaherty, E. 20 10). The First Bank was established in 1791 and only charted for a twenty
year period during this time Jacksonian supporters, of soon to be President Andrew
Jackson, maintained a high level of hostility towards the bank and in 1811 thanks to their
efforts the bank failed to be renewed.
There was one more predecessor before the Federal Reserve called the Second
National Bank of the United States. Like the First Bank of the U.S. the Second Bank was
born out of the war debt and inflation from the war of 1812 (Paul, R. 2009). Due to the
unstable economic times and war debt, nationalists wanted a strong central banking force
to help the economy. So in 1816 the Second Bank of the United States was charted for
twenty years. The Second Bank would be modeled and perform much like the First Bank.
Also like the First Bank, the Second Bank would fail to renew its charter at the end of the
twenties years largely thanks to Andrew Jackson. This put a brief end to the pursuit of a
centralized bank until The Federal Reserve Act of 1913.
Also like both of its predecessors, The Fed was created because of war. Except
this time the central bank was made before the war began instead of in the aftermath of a
post-war economy. World War I was started in 1914 and the Fed was instrumental in
America being able to finance and join the war that was looming over Europe (Koning, J.
P. 2009). The reason for this is that war is very costly because it could only be financed
through bonds, borrowing, and direct taxation. Using a central bank to utilize inflation
makes it politically easier to finance a war.
The Fed's mission per its congressional mandate from 1977 is to maximize
employment output, stabilize prices (fight inflation), and moderate long term interest
rates. The Fed fulfills its duties in four ways as listed on the Fed's official website (2016).
Firstly, by conducting the nation's monetary policy by influencing the monetary and
credit conditions in the economy. Secondly, by supervising and regulating banking
institutions to ensure the safety and soundness of the nation's banking and financial
system and to protect the credit rights of consumers. Thirdly, by maintaining the stability
of the financial system and containing systemic risk that may arise in financial markets.
Lastly, by providing financial services to depository institutions, the U.S government,
and foreign official institutions, including playing a major role in operating the nation's
payments system.
10
The reality of the situation is that the Fed literally creates money out of thin air
using fractional reserve banking instead of 100% reserve banking (Solman, P. 2012). The
Fed also does this by using their own special techniques and tools like open-market
operations, changing reserve ratios, and discount policy to manipulate interest rates in
order to control the money supply. In fact, although part of the Fed's mandate is to
stabilize prices and fight inflation, the Fed and its chairman feel that inflation is actually
good for an economy. This is shown from remarks by Governor Ben. S. Bernanke before
the National Economists Club in Washington, D.C on November 2 1, 2002. "The U.S
government has a technology, called a printing press (or, today, its electronic equivalent),
that allows it to produce as many U.S dollars as it wishes at essentially no cost. By
increasing the number of dollars in circulation, or even by credibly threatening to do so,
the U.S government can also reduce the value of the dollar in terms of goods and
services, which is equivalent to raising the prices in dollars of those goods and services.
We conclude that, under paper-money system, a determined government can always
generate higher spending and hence positive inflation" Central planners like Mr.
Bemanke, and their belief in artificially manipulating the banking and monetary system,
cause harm to the economy and weakens the dollar. But what alternative is there to the
fiat paper money system that can be manipulated on a whim of a bureaucrate?
The Gold Standard
The traditional alternative to fiat money is what is commonly called the gold
standard. There are three types of gold standards that have been used in different stages
of history (Paul, R. 2009). The first is the gold specie standard which is when actual gold
11
coins or monetary units are used and exchanged. This gold standard is what America was
using prior to President F.D. Roosevelt doing away with and switching the U.S to the
gold exchange standard in 1932 (Rauchway, E. 2013). The gold exchange standard
doesn't involve the circulation of gold coins but makes it so that government guarantees a
fixed exchange rate to the currency for gold. This creates a de facto gold standard.
However, President F.D. Roosevelt confiscated all US citizens' gold through the Gold
Reserve Act of 1934 at $20 an ounce and then made the fixed exchange rate $35 an
ounce, creating a $15 per ounce profit for the U.S government essentially out of thin air
at the expense of the citizens who could no longer legally own gold (Richardson, G.
2013). The third gold standard option is gold bullion standard in which gold coins don't
circulate, but government agrees to sell gold bullion at a fixed price for currency. It
wasn't until 1975 when President Ford signed bill Pub.L. 93-373 allowing U.S citizens to
purchase, hold, sell and deal with gold. Now the average citizen could at least own gold
again, even though the dollar was no longer connected to gold but instead to the trust and
credit of the United States government.
It was President Nixon in 1971 that officially and completely took the American
dollar off of the quasi-gold standard that Bretton-Woods system had created. No longer
was the dollar redeemable for any amount of gold at all. It was just paper backed by trust
in the U.S. Government and nothing more. While President Lincoln had taken the United
States off the gold standard during the civil war and created greenbacks, they were
abolished and American switch from a fiat currency back to the gold standard with no
major issues ensuing (Bye, J. 0. 1963). Roosevelt's damage to the gold standard through
12
confiscation was the second major blow to the gold standard, but Nixon put the final nail
in the coffin. This act was completely unconstitutional and was known as the Nixon
shock (Paul, R. 2009). This was unconstitutional because it clearly states in the U.S
Constitution Article I, Section l 0: "No state shall. .. make anything but gold and silver
coin a tender in payment of debts." The effects of the Nixon shock caused the US to
initiate price controls for ten days through Executive Order 11615. Price controls were
something the U. S. hadn't used since World War 11. As well the Nixon shock was a
primary cause of the stagflation that occurred in the l 970's and causing the dollar to lose
a third of its value just within the decade (Ghizoni, S. 2013).
Why is the gold standard so powerful and so important? It primarily comes down
to inflation. A stable money supply that is backed by gold cannot be inflated in the way
that fiat money can be inflated. Currently the Fed doesn't even need a printing press,
everything is done digitally, with a few strokes of some keys, and trillions of dollars can
be created. In fact this was done for quantitative easing after the Great Recession of 2009
up to 2014 when the Fed was printing tens of billions of dollars a month (Finger, R.
2013). With a gold standard, the Fed cannot create money out of thin air. It forces
countries, banks, corporations, and politicians to have financial discipline because they
cannot use inflation to create money to bail their way out of bad situations.
Moral Hazard Created by Central Banks
The term moral hazard, according to dictionary.com, means "the risk that an
individual or organization will act irresponsibly or recklessly if protected or exempt from

13
the consequences of an action". Having the Fed act as a lender of last resort for banks
motivates banks to make riskier and riskier loans because they know they will be bailed
out and their customers deposits protected thanks to FDIC. The Fed is technically an
independent organization that is not officially part of the Federal Government. However,
all of the Feds "profits" go into the treasury and all of its board members are hand
selected by the President and approved of by the Senate. Also the Fed must report twice
annually to congress and at technically any moment congress could vote to abolish the
Fed, the Fed is as "independent" as a five year old child is independent of adults
(Zarlenga, S. 2008). The Fed allows the government to expand, offer welfare programs,
and enter into wars, more easily because the government can use inflation to pay for
everything and not direct taxation. While congress doesn't explicitly ask the Fed to do
such things, the underlying effects of the Fed purposefully creating inflation has this
effect for politicians. Remember that inflation is bad for the economy but greatly benefits
the first spenders of newly minted money. Since the Fed's "profits" go to the treasury
first, government is one of the first spenders. The Fed allows politicians to make more
promises for social welfare programs that don't require explicit taxation or bonds to pay
for. This allows politicians to essential "bribe" the public for votes by offering favorable
programs and projects to the demographics that vote them in. This process weakens
everyone's dollars instead of directly and overtly confiscating those dollars from them in
the form of traditional taxes. Allowing moral hazards to create mat-investments is what
caused the financial crash of 2008 and nearly all crashes that have come before (Mises, L.
V. 2007).
14
The other reason is that, unlike gold, using a fiat currency allows the Fed to
distort price signals. In his book The Theo,y ofJvloney and Credit (1 953) Ludwig Von
Mises explains that prices are signals in a market place that tell investors, entrepreneurs,
and consumers, how to behave in the market. Expanding upon this, Nobel laureate F.A
Hayek wrote about the phenomena for his highly influential article The Use of
Knowledge in Society (1 945). In the article he explains that no central organization
regardless of how intelligent it may seem to be, can know all of the information necessary
in an economy to know what the prices should truly be. The true price should be what the
market demands under the laws of supply and demand. When a person, group, or
organization attempt to control prices and they don't obey the laws of supply and
demand, they distort the market and create artificial shortages and surpluses. True prices
are when businesses are allowed to set their own prices, unhindered, based on supply and
demand. When the Fed sets interest rates, they are using price controls and distorting the
market, sending out unclear signals into the market. For Mises, distorted price signals are
what causes mat-investment and causes bubbles and thus booms and busts in the
economy. The boom is from people thinking that there is wealth and resources that are
being created because of a bubble in the economy. The bust when the bubble bursts and
people start to realize that it was all illusionary and there is truly little or no value in what
they were investing. Bubble bursts come from the market fixing itself and re-stabilizing
to where it should naturally be, although this can often take years or even decades
depending on how severe the Fed has artificially tampered with the economy. The market
is constantly trying to guess what the Fed is going to do and when the Fed will do certain
things. which creates what historian Robert Higgs (1997) calls "regime uncertainty". He
15
explains that this is a large reason why markets sometimes take so long to recover from
monetary mistakes and distortions. Often the worse the Fed tampers with prices, rates,
and markets, the longer the recovery will take.
Inflation and Money YS \Vcalth
There is a very important distinction to make between money and wealth.
According to Dictionary.com, money is simply a medium of exchange, meaning it's a
unit of measurement and has value that people are willing to exchange goods and services
for. There is nothing intrinsically valuable about money. Having all the money in the
world and nothing to spend it on makes having trillions of dollars not only useless but
also pointless. Wealth is simply stuff. Wealth is a bed, a car, a book, anything of value to
the owner. It's very easy, and very dangerous to confuse money for wealth. This
confusion can cause bankers, politicians and bureaucrates to try and manipulate money,
thinking they will change wealth. They are only changing the units of what valuable
things are worth, not actually creating any new wealth. New wealth is only created by
entrepreneurs in the market who build businesses that sell products or services that other
people in the market find valuable (Dom, J. 2007).
By printing or creating more money, a nation does not create more wealth.
Having stable money however, helps entrepreneurs and citizens to more easily create
wealth; by creating new innovations, products, and better services. The question is often
asked "why goldT' of all the elements and things on the planet why is gold chosen as the
so called "right" standard to use for money? The answer is that through voluntary
exchange over time, gold evolved into money. The market chose. No international
16
THE EFFECTS OF CRYPTOCURRENCIES ON THE BANKING INDUSTRY ANO MONETARY POLICY
government or specific bank mandated it, the people chose it. Anything could have been
picked: sea shells, salt, gems or jewels, silks, or even animals. The reason is that gold
was chosen over everything else was because gold has all the qualities that is associated
with good money: it's divisible, portable, high value per unit of weight, durable and has
uniform quality. (Rowlat, J. 201 3) Rather gold is used for money directly, like for gold
coins, or indirectly through currency that is "good-as-gold", people trust in gold over
other commodities. While other commodities like silver have also been used, gold has
always been the most valued. Also because there is a set amount of gold in the world and
therefore cannot be artificially inflated. Even if more is mined, it cannot be inflated
because no one entity in particular controls the supply of gold, unlike fiat money where
the entire money supply could theoretically be double at the flick of a switch.
Knowing the difference between wealth and money is critical. Doubling the
money supply doesn't double economic prosperity, allowing the Fed to tinker with the
money supply and purposefully cause inflation is legal theft from every currency holding
citizen. It allows the Fed to "tax" every citizen, poor and rich, by weakening the
purchasing power of each dollar in their pockets.
The graph on the next page shows, using data from the Bureau of Labor Statistics,
the weakening of the dollar since the Fed was founded in 1913 up to I 00 years later in
201 3. The dollar has lost 95% of its purchasing power. Meaning $100 dollars of groceries
in 2013 would cost $5 before the Fed and Presidents Nixon and Roosevelt inflated the
dollar and removed it from the gold standard. The Fed was so damaging that even while
17
the U.S. was still on the gold standard the Fed was able to shatter a lot of the dollar's
value because it was tampering with the economy and caused the often unspoken of
recession of 1920-1921 (Grant, J. 2015). Once the U.S. was completely off the gold
standard, the downward spiral never went back up and has landed the U.S. in the position
that it is in today with its 95% loss of purchasing power.
By stealing citizens' purchasing power through the use of inflation, the Fed is
robbing citizens of their ability to accumulate wealth. Inflation doesn't speed up or
stimulate an economy as Fed supporters often claim; it simply creates an illusion by
increasing nominal numbers instead of real numbers of economic prosperity and instead
destroys the country's currency (Paul, R. 2009). Inflation is deceptive and causes
delusions of grandeur with regards to wealth and knowledge. The people who ''win" from
18
inflation are people and nations that are in debt (Aizenman, J. & Marion, N. 201 1 ). This
is why central banks were created after times of war and why inflation peaks around
times war. By weakening the dollar, the government is able to cheat soldiers and
contractors by paying them in weaker dollars. The people who spend first win first. The
person who saves money is being robbed right under their nose. Alan Greenspan, one of
the most legendary Fed chairman even acknowledged in his article Gold and Economic
Freedom ( 1 966) stating "In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. There is no safe store of value."
A healthy economy needs and depends on savers. It's people who save their
money and thusly allow banks to loan the money to entrepreneurs that create real
economic prosperity and help country to flourish. When central banks like the Fed
eliminates the incentives to save because of destructive inflation, more people spend
money on consumer goods or try to invest in riskier ventures because they need to
outpace inflation for a real return on investment. Fed policy causes a circle of
accumulating debt and risky leveraging that eats away and rips apart at a country and
when everyone begins to realize that all the money that is being spent is being spent for
the wrong reasons then bubbles begin to build, and soon after burst, causing recessions
and depressions (Mises, L. V. 2007).
John Maynard Keynes actually wrote about the dangers of inflation in his book
The Economic Consequences ofthe Peace ( 1 920). In it he states

19
"Lenin is said to have declared that the best way to destroy the capitalist
system was to debauch the currency. By a continuing process of inflation,
governments can confiscate, secretly and unobserved, an important part of the
wealth of their citizens. There is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency. The process engages all the
hidden forces of economic law on the side of destruction, and does it in a manner
which not one man in a million in able to diagnose."
For even further proof that a central bank and specially the Fed is dangerous and holds
back the U.S economy; Marx's Fifth Plank of the Communist .Manifesto (1 964) mandates
a strong central bank monopoly. He felt and argued that it was necessary to maintain
power over the entire economy to protect and fight back against the encroachment of
Capitalism. The Fed doesn't exist to help the economy. It exists to help prop up powerful
elites who are afraid of the competitive forces of a free market economy.
So how has the Fed done in its mission to protect the citizens from economic
calamity? according the National Bureau of Economic Research: 1 9 1 8-1 9 1 9, 1 920-192 1 ,
1923-1924, 1 926-1927, 1 929-1933, 1 937- 1 938, 1 945, 1 948-1 949, 1 953-1954, 1 957-
1 958, 1 960-1961, 1969-1970, 1 973-1 975, 1 980, 1 98 1- 1 982, 1 990-1991, 200 1 , 2007 have
all been periods of recession or depression in the U.S after the Fed was created. The Fed
has failed to protect the economy and has arguably been the cause of some of these
economic downturns, contributing to the Great Depression, post war recessions,
stagflation in the 1 970's, and the great recession in 2008. (Friedman, M., & Schwartz, A.
J. 2008)
20
What would happen to America if the Fed ever came to an end and the gold
standard restored? In his book End the Fed (2009) Dr. Ron Paul answers the question
"People worry what would happen in a world without the Federal Reserve. My
answer is that you would enjoy all the privileges of modem economic life without
the downside of business cycles, bubbles, inflation, unsustainable trade
imbalances, and the explosive growth of government that the Fed has fostered."
Dr. Paul also talks about the effects of reinstating the gold standard by saying that the
gold standard with no Fed would impose discipline. There would be clarity in costs of
wars and government programs. Accounting rules would come to reign in political
ambitions. The federal government will be financed through direct taxation and selling of
bonds, no longer through the subtle theft of inflation. Putting both legislatures and
executives on a short leash. The question then, is to ask if there is a new system, a new
process or way to take all of the benefits of the gold standard and counter all the
negatives of the Fed. A way that doesn't require the permission from congress or bankers.
There is such a system; cryptocurrency.
Section II
An Introduction to Cryptocurrcncy
What is cryptocurrency? The technical definition according to the Oxford
Dictionary is "a digital currency in which encryption techniques are used to regulate the
generation of units of currency and verify the transfer of funds, operating independently
of a central bank." What exactly does this mean though? It means that cryptocurrency is
online money that, because of a mathematic algorithm, cannot be inflated or tampered

21
with from any single institution like a central bank. In fact, cryptocurrencies are not
backed by any government or central bank in the world. They are an alternative private
currency developed out of the free market and new digital technologies.
This is what Nobel laureate F.A Hayek theorized in his famous pamphlet
Denationalization ofMoney (1978). He argues that if government removed itself as an
obstacle from the free market, individuals and monetary entrepreneurs would provide the
optimal quantity and variety of monetary products. If the forces of competition can make
virtually all other products and services into better quality products and for a lower price,
why not have that work for the monetary industry as well? What kind of benefits can
come from alternative currencies according to Hayek. More stable purchasing power,
increased difficulty (and sometime the impossibility) of counterfeiting, and increased
divisibility because it's possible to have more denomination options. All of these benefits
and more have come to fruition in the fonn of cryptocurrencies.
Here is an example to help better illustrate what an alternative currency would be
like in real life. A private finn could digitally encrypt one million monetary units. The
encryption would make them extremely hard for someone else to produce additional units
because the mathematics behind the encryption would make it impossible to counterfeit.
For this example they will be called Freedom Coins. The finn then contractually pledges
to redeem each Freedom Coin at any time, for either $20 US dollars or 100 Russian
rubles (any currency can be used but for the sake of example we'll US dollars and
rubles). Assuming that the firm has enough capital to back their promise and that
22
everyone is fully confident of their redeemability, the Freedom Coins at auction will sell
for somewhat more than $20, helping the private firm gain initial profit. The Freedom
Coins will be auctioned above $20 because they will always be worth at least $20, but
they might be worth more in the future if the relative value of the currency increases.
This speculation is what will motivate customers to bid for the new currency. For
example, the value of Freedom Coins could increase if and when the Russian government
lets the ruble appreciate against the dollar. In this case, investors could redeem each
Freedom Coin for I 00 rubles, which would exchange for more than $20 US dollars.
An easier way to think about the Freedom Coins in the above example is to think
of them as a derivative asset. So how can the private firm get the public to treat the
Freedom Coin as money too? The ideal way to do this, as Hayek writes, is for the firm to
specify a commodity basket (consisting of whatever they considered was relevant to
consumers: milk, gold, cotton, oil) that costs $100 US dollars. The finn would declare a
non-binding pledge along of the line of "We will use our assets to adjust the outstanding
supply of Freedom Coins so that 5 Freedom Coins will always have the purchasing power
to buy this specific commodity basket." This creates a real measure of purchasing power
so that people can better compare the power of different currencies over time. If the firm
is using inflation-proof mathematical algorithms to ensure that Freedom Coins retain
their real purchasing power, then this goal requires vitally no adjusting or managing and
will simply happen naturally.

23
What would happen is that the US dollar and Russian ruble would depreciate, due
to inflationary practices of their governments and central banks, via real goods and
services over time. So the price of that commodity basket would increase in US dollars
and Russian rubles. If the private firm stuck to their word and kept the value of Freedom
Coins stable, which using the mathematical algorithm mentioned above would force them
to do so, then the monetary market would see Freedom Coins as being the more stable
currency that retains value and start to use it more often, making it the dominant
currency. Even if the firm was capable of devaluing the Freedom Coins, because they
made the contractual agreement to always exchange Freedom Coins for the set amount of
fiat currencies, they have every incentive to keep the value of Freedom Coins as high as
possible compared to the two currencies to keep and gain real comparative value. Also, If
they break this contract the firm opens themselves up to massive lawsuits, which is
another economic incentive to keep their promise. Over time, the exchange rates would
change (because governments inflate their currencies) and suddenly one Freedom Coin
might be worth 1 50 Russian rubles instead of 1 00 or be worth $30 US dollars instead of
$20. Making the Freedom Coins a stronger, more stable, and more desirable currency for
consumers in the market to hold and use. The above example would continue with
different firms and different currencies in a way so that only the best currency comes out
on top.
Some critics point out that this competition amongst currencies would defeat the
original purpose of money; using money as a convenient medium of exchange. If
individuals are too busy trying to figure out what the value of one private currency is over
24
another and trying to manage different accounts full of different currencies then this
information burden can really drag down an economy. Digital currency however can
conquer this issue with easy. A real life example is a website called CryptoCompare.com
that lists the up to the minute prices of competitive cryptocurrencies and their relative
exchange rates for free online. This dramatically reduces confusion amongst businesses
and consumers on the value of one currency over another without adding any costs. Also,
programs already exist that will automatically convert one currency into another currency
after making a purchase so that businesses don't need to keep accounts of dozens of
different currencies. In fact, websites like Coinbase.com are already providing this
service and are currently being used by both big and small companies around the world
such as Intuit, Overstock.com, Virgin Airlines, Expedia, Dell, Google and hundreds
more.
Another fear that some individuals might hold is that of a nefarious and fraudulent
private currency provider trying to take advantage of people. Inflation is overall harmful
to an economy but it does benefit the first initial people who get the newly created money
before the market prices adjust. A private company could create a currency, attach it to a
basket of goods, then hyper-inflate the currency to buy as many commodity assets as
possible. Leaving the sellers of those commodities without their goods and holding
nothing but a now worthless currency, essentially theft. However this fear is conquered
by the fact that, in our example, the Freedom Coins are always legally redeemable for
$20 US dollars or l 00 Russian rubles. Similar to how the U S dollar use to be legally
backed by and redeemable in a set amount of gold. The difference is that governments
25
THE EFFECTS OF CRYPTOCURRENCIES ON THE BANKlNG INDUSTRY AND MONETARY POLICY
can change laws to suit their needs but companies entering contracts with customers
cannot do this unjust act without exposing themselves to massive legal liabilities. So
contract laws would make this a virtually non-existent threat.
Cryptocurrency doesn't need to rely on private organizations either though. In
fact, the world's most powerful, valuable, and popular cryptocurrency, called bitcoin, was
invented for free by a still unknown creator. It's a self-regulating, peer-to-peer system
that is not backed by any bank, firm, institution, or government. Although a few
companies have been created that involve bitcoin (companies help people buy, sell, and
trade bitcoin), none of them control bitcoin itself. But if bitcoin isn't owned or managed
by anyone or any single entity like every other currency, then what is bitcoin and what
does it mean in the world of cryptocurrency, banking, and monetary policy?
Bitcoin: A Cryptocurrency Case Study
Bitcoin is considered the "gold standard" of the cryptocurrency market. It
combines the strengths of commodity backed money ,vith the convenience of fiat money,
while avoiding most of the problems of both currencies. Bitcoin cannot be artificially
inflated, stimulated or depressed by the actions of a central bank or government. This is
one of the primary benefits that bitcoin mirrors from commodity money like gold.
However unlike gold, Bitcoins have fiat money advantages such as easier divisibility.
There is no need to carry coins or bars of gold when someone wants to go to the market.
No need for melting or printing or high shipping and guarding costs. Ifs easier to store
26
and transfer. Bitcoin has many of benefits that fiat money has over gold or commodity
backed money.
Some people have a fear of what potential hackers could do to a digital currency
like bitcoin. They what would happen if hackers could somehow hijack the system and
create new bitcoins or cause some nefarious effect with them. However this is a non
existent threat. As mentioned before, bitcoin and cryptocurrencies follow a mathematical
algorithm that involves something that will be discussed in greater detail later called the
blockchain. Using mathematics, the blockchain can keep track of every bitcoin in
existence and where they all are at any given point in time since the bitcoins are first
created (Rykwalder, E. 2014). The algorithm is set to only create a set amount of bitcoins
at a set time interval. It's an automatic system that cannot be tampered with. It would be
the equivalent of trying to hack gravity or hack the equation Y=mx+b. It's just not
possible to do it, attempting to do it doesn't even make since. (However, accounts and
exchanges that are not cyber-protected can be hacked, just like any other bank account
can suffer identity fraud. But the cryptocurrency system itself cannot be hacked.)
So even though bitcoins have the convenience of fiat or paper money, bitcoins are
actually "mined" like gold. The creator of bitcoin, whose real name is still unknown but
the pseudonym used is Satoshi Nakamoto, created a mathematical algorithm that creates
25 bitcoins every ten minutes, and will gradually decrease over time until the year 2140
when bitcoin will max out at 2 1 million bitcoins. As of July 2016 there are about 15.8
million bitcoins in circulation, so only 5.2 million are left to be created, according to
27
Kaiko.com, a site the publishes bitcoin statistics. The next question then is to ask how are
bitcoins mined and who gets the new created bitcoins first? The answer is the people who
earn them by being miners. Not the traditional hard hat, covered in coal and earth miners,
but data miners. These data miners are people who have complex computer setups with
massive processing speeds. They are the ones who help process the data in the blockchain
and process everyone else's transactions.
The Blockchain
The blockchain is like the accounting ledger for every bitcoin transaction, ever. It
is an open and public ledger that lists every transaction in the currency's history. The
blockchain is the answer for how a digital currency cannot be manipulated and
duplicated. The big problem with digital goods is the ease of which things can be copied
for virtually no cost: music, articles, books, videos. For a money system, the ability for
anyone to be able to copy money freely without limit would lead to some massive
inflationary issues. The blockchain counters the "threat of double count" because it
allows the transference of secure and non-repeatable bits of infonnation on a peer-to-peer
basis, with no middle man, between individuals around the world. The blockchain
introduces property rights and property title into the digit world.
To put this into a better perspective it's important to understand that bitcoins
don't actually exist as a physical thing, they are just digital bits. What exists, what is
traded, is a transaction and a record for accounts. From the moment a bitcoin is mined the
blockchain tracks where it goes for eternity (Santori, M, A. et al. 2016). The ledger keep
28
record of amounts, times, and account addresses of every transaction. This information is
public and open to the world and is constantly updated. If an account is created and there
is no record of bitcoins having ever been transferred into that account, but somehow a
person is trying to trade ten bitcoins out of that account, the transaction will not work. It
would be like trying to divide by zero, it simply won't be allowed to happen. The
blockchain knows where every bitcoin is at all times, it is mathematically impossible to
manipulate it or inflate it. It self-corrects itself by its very nature.
One important note to make is that only the information and transfer of bitcoins is
recorded. Not the personal information of either individuals or what was exchanged for
the bitcoins. The blockchain keeps the monetary information public for accountability
and integrity reasons so that the system cannot be manipulated. However personal and
private information is still be kept secret. In fact, personal information never has to be
tied to a bitcoin wallet (an account that hold bitcoins) and a single individual can have an
endless number of wallets if they so desire. While some individuals feel this makes
bitcoins a tool for criminals and money launderers, bitcoin is no more a tool for any
crime than any other good or resource is. A gun, a knife, rope, ski masks, all have good
uses but can also be used for criminal activity as well. The actions of a few individuals
don't dictate the morality of a morally passive tool or service.
To illustrate the way bitcoin transactions work is that person A will send one
bitcoin to person B for a product. Person B will send the good to person A because
Person B will know that the bitcoin sent to him is real and now solely owned by him. He
29
was not ripped off from an inflated bitcoin. This builds trust in the system and a system
with more trust leads to more prosperity. A system with corruption and theft (especially
through inflation) causes economic harm (Fukuyama, F. 1995). So how do these
trustworthy transactions work and how does the system maintain itself?
This is where bitcoin miners come into the picture. Miners are individuals in the
real world that have purchased specialized computer hardware and downloaded software
that allows them to process massive amounts of data. Hundreds or thousands of
individual bitcoin transactions are packaged into a single data block. The miners then go
through this data "mining it" and checking to make sure that all transaction are verified
with the blockchain. (Volastro, A. 2014) \Vhen the miners are done with a block, they are
rewarded in two possible ways. They either get newly created bitcoins, or collect a small
fee from each individual transaction in the block, or both. There is beauty in this system
because it creates a fair payment system for miners investing time and money by
providing a service to other bitcoin users, it's also a fair way for new bitcoins to enter the
system by going to those service providing miners.
Currently, most miners don't charge a transaction cost. As fewer bitcoins are
created, or the time comes when no bitcoins are left to be created, their transaction fees
will increase according to demand. This is ho\V the bitcoin system will perpetually
operate and self-regulate. (Coindesk 2015) The more bitcoin transactions that occur then
economies of scale will continue to make each individual transaction lower and lower as
more people use bitcoin.

30
Mises Regression Theorem
One of the most confusing aspects of bitcoin is how they get their value. Bitcoin has
been cited as violating Ludwig Von Mises's regression theorem (LeRoux, C. 2014). The
regression theorem demonstrates that all money, rather the money is commodity money
like gold or government backed fiat currency, must ultimately derive its purchasing
power from a historical tie to a commodity that was valued in a state of barter. Jeffrey
Tucker (2014) goes into great detail with his article What Gave Bitcoin Its Value
published by the Foundation for Economic Education. In it he states.
The theory of the value of money as such can trace back the objective exchange value
of money only to that point where it ceases to be the value of money and becomes
merely the value of a commodity. . . . Jf in this way we continually go farther and
farther back we must eventually arrive at a point where we no longer find any
component in the objective exchange value of money that arises from valuations
based on the function of money as a common medium of exchange; where the value
of money is nothing other than the value of an object that is useful in some other way
than as money . .. . Before it was usual to acquire goods in the market, not for personal
consumption, but simply in order to exchange them again for the goods that were
really wanted, each individual commodity was only accredited with that value given
by the subjective valuations based on its direct utility.
Mr. Tucker is basically saying that something cannot be valuable just because
someone screams and shouts enough that that something is valuable. There needs to be
something intrinsic and real about the value. So what is bitcoins value?
31
Bitcoin's value is subtle, but substantial. It's redeemability and the fact that it is a
meta-currency that is inflation proof is what gives bitcoin value (Patterson, S. 201 4). To
better put this into context, imagine the phenomenon that occurred to gold with paper.
How much more convenient, portable, divisible, easier to handle, and easier to count,
paper was compared to gold and why the market made people desire to have paper
currency instead of gold coins or bars anymore. Now imagine bitcoin causing the same
phenomena to paper.
An example of this comes from general banking history. Someone with a vault and
guards would offer to safely store everyone's gold for a fee and would write them a
receipt using special ink or paper that was very hard to duplicate. The receipts would be
valued for a certain amount of gold and were considered "as good as gold." After a while
people in the economy would stop going to the bank to withdraw their gold to carry it to a
vender who would then himself have to take it back to the bank to get a receipt. Instead,
people just started to trade the receipts. Thus paper money was essentially born.
Now imagine a world where instead of banking fees, credit card fees, and
carrying cash, that instead everything is done in bitcoin. Which is far more divisible,
easier to count, easier to carry, impossible to duplicate, and more convenient for a
globalized economy. It's the next evolution of money. Bitcoin is also a meta-currency.
Meta-currency means that it is a currency of currency. The biggest issue with a
barter system of trade was the inefficiency issue of double coincidence of wants (Jevons,
32
W. S. 1885). The double coincidence of wants is the needing of two individuals in a
market that had what each other needed and being able to come to an agreement in order
to trade the two goods. Currency became the solution to conquer that inefficient issue.
Now society faces the same issue with currency itself. Two traders now suffer from the
issue of a double coincidence of wants in regards to currency. With currency exchange
prices constantly changing and the massive exchange fees from bank intermediaries, the
cost of this inefficiency is in the billions as measured by the profit amounts of
international banks that charge these fees. Today's society is suffering from this
inefficiency issue similar to that of barter systems, but for currency instead of goods.
With the rise of globalization and ever more affordable travel, this is an issue that is
rising. Meta-currency is the answer.
If someone from the US wants to do business with someone from Africa but not
pay currency exchange fees or international fees, they could use bitcoins. The fee is either
zero or a fraction of a percent to pay the miners as discussed above. Let's say the product
the American wants to purchase costs the equivalent of one hundred dollars, then the
American citizen will buy one hundred dollars worth of bitcoin for the product he wants
to buy and then will send those bitcoins to the African citizen who will then turn the
bitcoins into his local currency. This is how bitcoin is a meta-currency that cuts out the
middle man banker who would charge high fees at every stage of the transaction.
Remember that bitcoin is peer-to-peer, so although miners might cost a small fee now or
in the future, their job is not to be a middleman in the transaction like a banker, but to
check the transaction data against the block chain to make sure no fraud is being
perpetrated and maintaining the integrity of the system. Unlike a banker, peer-to-peer
33
means the transaction is handled faster,just as safely, and without the massive fees
businesses and individuals have to deal with currently.
Another aspect that gives bitcoin its value and keeps bitcoin in line with the
regression theorem is the blockchain itself. Bitcoin and the blockchain go hand-in-hand.
If bitcoin was to be separated from the blockchain then bitcoins value would plummet to
zero. The blockchain is what makes bitcoin inflation proof. It allows property title to exist
in the digital world. The truly interesting idea to consider, which will be expanded upon
later in this paper, is using the blockchain for things other than just bitcoin and
cryptocurrency. However, the ability ofbitcoin and the blockchain to introduce this
transferable property title aspect into the digital world holds untold and massive value in
and of itself. Deeds and property titles have commodity roots, just like Mises required to
be in line with the regression theorem.
Lastly, Bitcoin's final value can be easily summed up by viewing bitcoin not just
as a currency but also as an innovative payment system. Payment systems have always
been done by third parties such as banks, PayPal, and credit card companies. All of which
are massive multi-billion dollar ventures. However, despite how big, profitable, and
useful these middle-man payment system businesses are, they are not available to the
majority of the world's population according to the World Bank (2012).
Anyone not in a highly developed country with a strong financial foundation is
left behind in the global market place. In fact, if a country doesn't have a strong financial
foundation with domestic and international banks and with good capital markets and
exchanges then that entire country and all of its citizens are being held back from their
34
potential level of economic prosperity (Burton, D. R., & Michel, N .J. 2016). However all
of these institutions are "middle-men" that cost billions of dollars a year in fees to
consumers. Remember that bitcoin is peer-to-peer. Remember that the middle-man is cut
out of bitcoin transactions, which is why transaction fees are extremely small or
otherwise non-existent, while they have the potential to increase in the future, it would be
marginal in comparison to today's high level fees. By removing the middle-men the
economy keeps more money amongst the consumers to spend on more goods and
services and less on pricy financial services. This would increase the citizens' standards
of living within that country.
In the pre-modem economy these bank fees were justified because consumers
were getting a useful service in exchange for the fees such as: currency exchanges, being
able to trade and do business in markets oceans away, go from a local or national
business to an international business that uses different currencies. However, consumers
can get the benefits of all these services without the middle-man by using bitcoin and
cryptocurrencies. The fees are becoming more and more unjustified as more and more
people discover bitcoin and cryptocurrencies. The economic timer is ticking for a lot of
these financial giants. The banking industry is in trouble.
Imagine the individuals trapped in corruptive regimes being able to undermine
their political dictators (Owen, T. 2015). Imagine the gains to trade, commerce, and
quality of life for the world's poor, if billions of people in the world were to become a
part of the global economy (Bardhan, P. 2006). Imagine small business owners, who have
enough trouble going international, being able to more easily participate international
35
THE EFFECTS OF CRVPTOCURRENCIES ON THE BANKING INDUSTRY AND MONETARY POLICY
commerce with bitcoin and other ecommerce tools (Rogers, K. 201 5). Imagine the future,
a future of prosperity with cryptocurrency.
Section III
Predictions on Cryptocurrencics and Its Future Effects
To help put the future into perspective, let's first look to the past for an example.
Two hundred years ago in the 1800's over 90% of the U.S workforce was in agriculture
(Craig, L. A., & Weiss, T. 1998). Today however, less than 2% of workers are in
agriculture according to The World Bank (2010). How did an exodus of 88% of the labor
force leaving the agriculture industry not cause horrific food shortages over time? How
did the economy survive and citizens' standards of living not plummet due to such a
decreasing amount of farmers? It's due to the process of creative destruction. The tenn
creative destruction was made famous by economist Joseph Schumpeter in his famous
work title Capitalism, Socialism, and Democracy ( 1950). What it means is that
innovations in the market cause the old and ineffective to die out and the new, more
effective, and more efficient to replace them. In tenns of the fanning example, the use of
genetically modified crops that have exponentially larger crop yields than traditional
crops yields, the higher levels of capital investments into advance machinery fanners can
now purchase to more quickly harvest the larger crop yields, all lead to the destruction of
jobs for the super majority of the farm hands and field laborers (Dimitri, C., Effland, A.,
& Conklin, N. 2005) and (Council for Economic Education. 2015).

36
THE EFFECTS OF CRVPTOCURRENCIES ON THE BANKING INDUSTRY AND MONETARY POLICY
There is no need to start a revolt for the individuals whose jobs go existent due to
creative destmction. 88% of the workforce didn't die in a ditch or choose to endure
unemployment indefinitely. They learned new skills for new jobs or applied their labor to
different sectors of the economy (Grennes, T. 2003). Some may have become business
owners and entrepreneurs adding new products and services to the economy and new
jobs. In the end, everyone wins because the economy is growing and becoming more
efficient. Food is now more affordable and plentiful, workers are learning new skills and
developing new products and services, the economy grows and standard of living
increases. All thanks to creative destruction.
Now look to the future. Bitcoin is the harbinger of the creative destruction of
central banking, high transaction and exchange fees, and currency exchanges around the
world. Imagine the family or business traveler, not needing to account for the 3%-5%
fees of using credit or debit cards overseas, of not needing to carefully count how much
of a foreign currency they have on hand before they need to go to an exchange and buy
more of the foreign currency at the cost of a flat rate fee and percentage fee, or if they
travel to multiple countries that use different types of currency each and not needing to
re-do the exchange process every time they cross a boarder. The potential for bitcoin is
unprecedented and with the blockchain involved, that potential is nearly unlimited. But
first let's focus on how bitcoin will be the creative destmction of central banks.
Bitcoin and Central Banking

37
The negative impact of central banking was made clear in the previous sections:
the cause of destructive inflation to the currency, the decrease in purchasing power and
thus standard of living for citizens, an invisible tax on all citizens to help fund wars and
social welfare programs and float the bill to later generations, the cause of too big to fail,
and a host of other economic atrocities. Bitcoin can bring all of that crashing down. As of
201 6, most individuals in the central banking industry are dismissive of bitcoin and
cryptocurrency. Alan Greenspan has publicly announced that he doesn't understand how
or where bitcoin gains its value from to satisfy the regression theorem; he also views
bitcoins high prices as a speculative bubble (Tadeo, M. 2013). Mark Williams, a senior
executive Federal Reserve Bank examiner and a contributor for Business Insider thought
that bitcoins would plummet to $10 by mid-2014 (Williams, M. 201 3) yet bitcoin was
instead worth between $660 and $550 between June 2014 and August 2014 according to
CoinDesk.com (Wong, J. I. 2014). The Federal Government is getting to the point that
they are not just dismissive of bitcoin, but are actually becoming afraid of bitcoin and
trying to fight back. The Consumer Financial Protection Bureau has gone as far as issuing
warnings about the risks associated with bitcoin to help warn and scare people away from
the cryptocurrency (2014). So despite how much Fed supporters and the federal
government attempt to down play the significance and potential of bitcoin, the market is
ripping apart their predictions and assumptions and favoring bitcoin more and more every
day by maintaining bitcoins high value and continued and growing use.
The Fed will take a long to be end. The first step in this process has occurred.
People are beginning to question the Fed and its role in our economy, largely thanks to
38
Dr. Ron Paul's 2008 and 2012 presidential campaigns (Blodget, H. 2012). The second
step is where society currently is; looking for a possible replacement to the Fed. The
market has produced an answer to replace and undermine the Fed; bitcoin. The third step
is the slow process of replacing and eventually disbanding the Fed once it's clearly
shown how ineffective and unnecessary the Fed is and how the alternatives (bitcoin) are
more efficient and chosen by the market as the preferred option.
One example that critics might use to counter this argument is that of the Post
Office. The United States Post Office costs tax payers twenty-five million a day in net
loss (Bradford, H. 2013). On the USPS website they stated that during the first quarter of
201 6 the Post Office lost two billion in just those three months. Despite these massive
loses and gross inefficiencies, the post office still remains even. Despite there being
highly efficient market alternatives like UPS, a company that, according to the earnings
report on their website, earned over one billion in net profit in 2015. So why does the
inefficient Post Office still exist? The reason for this is the Post Office is part of the
constitution in Article I, Section 8, Clause 7. It's also against the law for a private
company to do what the post office does in regards to letters due to the Private Express
Statutes. However, the Fed is not in the constitution, the Fed is only alive because of the
Federal Reserve Act and congress can terminate it far more easily than they can ratify the
constitution to end the Post Office.
As more people show resentment and disdain for the Fed, public outcry will force
politicians to either abolish the Fed, or lose their jobs to candidates who are willing to do
39
it due to the Overton Window effect (Lehman, J. 2014). In September 2014 congress
passed the Federal Reserve Transparency Act; a bill to help audit the Fed. This was a first
step and clear indicator of grov.ring disillusionment of the Fed and the first of possible
future congressional actions against the Fed. As bitcoin becomes more widely accepted
and more understood, the bells will toll louder and louder for the Fed.
Bitcoin at the Present
So just how widely accepted is bitcoin currently then? Its acceptance is growing
almost exponentially. At first it was predominately used amongst individuals and small
business owners that operated their own small scale websites that sold goods like T
shirts, books or other small goods. However bitcoins acceptance has not only spread
further than ever, but to big name companies such as Dell computers, Virgin Airlines,
Overstock.com, Expedia, Pay Pal, and Google just name a handful of the hundreds of
companies. Non-Profits also have been accepting bitcoin as donations. Organizations like
Khan Academy, Students For Liberty, and Foundation for Economic Education which
was the first non-profit to be given a million-dollar donation in bitcoin (Oberg, C. 2013).
A big reason many people have criticisms of bitcoin and other cryptocurrencies
are because of how volatile prices are currently. A large reason for this is because
cryptocurrencies are still a relatively new phenomena that's going through its initial
growing pains but will stabilize as time goes on (Lee, T. B. 2014). Bitcoin has gained its
massive value at a nearly incomprehensibly speed from a historical perspective.
CoinDesk.com tracks the history of bitcoins value and from their data we can see that
40
THE EFFECTS OF CRYPTOCURRENCIES O N THE BANKING INDUSTRY AND MONETARY POLICY
bitcoin was started in January 2009 and for months was valued at $0.00. Then people
started to see its potential and first wave innovators began to experiment with bitcoins.
Bitcoin achieved real value in July of 2010 valued at $0.05. It then only took until
February of 20 1 1 that bitcoin was equal to and then surpassed the US dollar in value. By
August of 2012 bitcoin had increased in value by 1000% up to $10 per bitcoin. Then
quickly by March of 2013 bitcoin increased in value by another 1000% up to $100 per
bitcoin. Finally by November 2013 bitcoin again increased 1000% in value up to $1,000
per bitcoin. Bitcoin hit an all-time high of $1,145.46 on November 29th 2013. As of
writing this paper July 2016 bitcoin has been maintaining value between $600-$700 over
the past few months and is showing more and more gradual price changes in overtime.
So what are a few reasons for bitcoins price fluctuations and do these price
differences actually matter? Some reason is speculation based since bitcoin is so young.
When Mt.Gox, one of the world largest bitcoin exchanges went bankrupt, bitcoin lost a
lot of value because it scared people. However when the U.S. government shut down in
201 3 bitcoin hit its massive peak because people were worried about the U.S dollar and
losing trust in the U.S government so they turned to alternatives. When the Russian Ruble
was collapsing in 2014 that also correlated with a spike in bitcoin value. Bitcoin also
spiked after the "Brexit" in 2016. There appears to be an inverse correlation between trust
and faith in governments and their currencies and the value of cryptocurrencies like
bitcoin. However, the price of bitcoin doesn't actually matter all that much. Bitcoins real
value isn't just in its function as a currency; it's in the fact that it can bring property rights
41
into the digital age with the use of the blockchain and its function as a payment
system/meta currency (Heggestuen, 2014).
Future of the Blockchain
The use of the blockchain, while it's connected with bitcoin, is not limited to just
bitcoin transactions. On August 5th 2014 a couple made history by having the world's
first bitcojn wedding. It was registered not with any government or organization but
submitted to the blockchain (Marty, B. 2014). The couple displayed a QR code of a 0. 1
bitcoin transaction as the permanence of their vows that will exist forever.
It's important to remember that the blockchain is the weight behind bitcoins
value. The blockchain is the solution for the threat of double count in the digital age. It's
the way for two complete strangers to be able to exchange in commerce over the internet
as if they were doing so with cash. No need for a third party vendor, no massive fees, just
free trade. One example of the blockchain being used is with a website called
Proofof'Existence.com. The site allows individuals to upload files to certify custody of the
file at a given time without exposing any personal information or the contents of the file
itself. This could be massive in the world of intellectual property rights. The future
possibilities are massive, from stock exchanges, music distribution, and to even voting.
Conclusions and Future Study
Bitcoin and cryptocurrencies cannot be inflated because of the mathematical
algorithms that restrict and track how much currency there is at any given moment in
42
existence. Central banks, as previously mentioned by Ben Bernanke are trying to
purposefully cause inflation. In fact the Fed has a very precise amount of inflation that
they aim for. The Fed wants to cause, on average, 2% inflation every year according to
their website. They feel it's for economic growth, while in reality it's simply destroying
every citizen's purchasing power and lowering their standard of living.
Bitcoin can destroy "too big to fail" and end much of the moral hazard seen on
Wall Street and the big banks because without a Fed to inflate the currency and bailout
banks and companies, it will force financial and economic discipline. When put on a
currency that cannot be manipulated and without a lender of last resort, banks and
companies will actually have answer for over leveraging themselves and making bad
businesses decisions. They will be responsible for their losses and no longer be able to
pass it off to tax payers. To stay alive, they will change how they do business. The
economy will strengthen and grow at a natural rate that will promote long term prosperity
because of these changes.
Politicians will have to reel in the debt and cut many of the frivolous government
programs. It extremely doubtful they would attempt raise taxes on Americans to cover aB
the government expenses and even more doubtful that they would borrow enough from
foreign counties to keep up the current level of spending. The government will shrink, its
power weakened because it cannot manipulate the money, peace in the world will
increase because war will be too expensive and too unpopular to afford for any prolonged
43
period of time. With less government interference in the economy, there will be more
room for private expansion and growth.
World growth and prosperity will increase. Imagine a world where economic
boarders didn't matter in regards to trade and commerce and a world where a currency
difference wouldn't cause excessive complications. Where, thanks to a more globalized
economy, a citizen in America can get rich filling a niche market in China, Pakistan, or
Chili and not deal with as much of the complexity of international business and trade
because bitcoin is the meta-currency that can simplify and expand trade in the world.
Imagine the security of international transaction and the lessening of fraud because
people don't need to wait several business days for checks to clear or payments to be
approved. Bitcoin can do in a few hours what takes banks several days to do. Imagine the
economic restructuring of the economy when billions upon billions is taken away from
the financial sector for services that don't need to exist anymore and put back into the
pockets of consumer to spend on more goods and services. Image the decimation of
poverty because businesses can more easily pay and hire people in hard to reach
emerging markets of the world since they don't need to go through an international
middle man.
Imagine a currency that can be divided into millionths of a single unit, more
divisible than any other currency in history. A currency that can open the world to a new
age of human progress, happiness, and prosperity. This is the next evolution of money.
44
This is the future. These are the effects of cryptocurrencies on the banking industry and
monetary policy. It's revolutionary.

45
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The Online Journal of Distance Education and e-Learning, April 2023 Volume 11, Issue 2

INTEGRATION OF BANKS AND CRYPTOCURRENCY IN A DEMONETIZED

Objectives of the study

The hypothesis of the study

Integration of Banks and Cryptocurrencies

Efficiency of Financial Transactions

Sum of Squares Degrees of Freedom Mean Square F-Value p-value

Future Scope of the Study

Eastern Michigan University

The effects of crytocurrencies on the banking

Follow this and additional works at: http://commons.emich.edu/honors

This open access senior honors thesis is available at DigitalCommons@EMU: http://commons.emich.edu/honors/499

THE EFFECTS OF CRYPTOCURRENCIES ON THE BANKING INDUSTRY AND

Approved at Ypsilanti, Michigan on this date 07/12/2016

-Original Purpose of a Bank.................................................................Page 4

- The Federal Reserve........................................................................Page 8

- The Gold Standard..........................................................................Page 10

- Moral Hazard Created by Central Banks................................................Page 12

- Inflation and Money vs Wealth...........................................................Page 15

Section II: An Introduction to Cryptocurrency............................................Page 20

- Mises Regression Theorem...............................................................Page 30

Section III: Predictions on Cryptocurrencies and Its Future Effects..................Page 35

- Bitcoin and Central Banking..............................................................Page 36

- Bitcoin at the Present.. .....................................................................Page 39

- Future of the Blockchain...................................................................Page 41

- Conclusions and Future Study.............................................................Page 41

Section I: An Introduction and History of the Modern Banking Industry and

every entity involved in the economy.

Original Purpose of a Bank

to long term productive use.

from a commercial bank with FDIC insurance.

and convenience of their money.

FDIC insurance. This created a moral hazard.

The Federal Reserve

efforts the bank failed to be renewed.

centralized bank until The Federal Reserve Act of 1913.

makes it politically easier to finance a war.

credit conditions in the economy. Secondly, by supervising and regulating banking

Lastly, by providing financial services to depository institutions, the U.S government,

that allows it to produce as many U.S dollars as it wishes at essentially no cost. By

increasing the number of dollars in circulation, or even by credibly threatening to do so,

We conclude that, under paper-money system, a determined government can always

fiat paper money system that can be manipulated on a whim of a bureaucrate?

The Gold Standard

credit of the United States government.

a third of its value just within the decade (Ghizoni, S. 2013).

Moral Hazard Created by Central Banks

individual or organization will act irresponsibly or recklessly if protected or exempt from

Knowledge in Society (1 945). In the article he explains that no central organization

and markets, the longer the recovery will take.

Inflation and Money YS \Vcalth

There is a very important distinction to make between money and wealth.

According to Dictionary.com, money is simply a medium of exchange, meaning it's a

people in the market find valuable (Dom, J. 2007).

therefore cannot be artificially inflated. Even if more is mined, it cannot be inflated

purchasing power of each dollar in their pockets.

that it is in today with its 95% loss of purchasing power.

robbing citizens of their ability to accumulate wealth. Inflation doesn't speed up or

stimulate an economy as Fed supporters often claim; it simply creates an illusion by

savings from confiscation through inflation. There is no safe store of value."

and depressions (Mises, L. V. 2007).

The Economic Consequences ofthe Peace ( 1 920). In it he states

system was to debauch the currency. By a continuing process of inflation,

governments can confiscate, secretly and unobserved, an important part of the