Are virtual currencies widening the debate on reforming the monetary system?

In Switzerland, a campaign for monetary reform – the Swiss Vollgeld Initiative – started in 2014, culminating in a referendum in 2018. The initiators are convinced that today’s fractional-reserve system allows commercial banks to create money nearly without limits, and is responsible for instabilities and crises in the economy. Therefore, they require a monetary system where only the central bank is the money creator and has perfect control over money supply. Similar initiatives can be found in the UK and Iceland (Positive Money), Germany (Vollgeld-Initiative) and some other countries. At the latest since the financial crisis, such private, social and political movements have been starting to discuss problems of today’s monetary system even more intensively.

Monetary theory presents various alternatives for designing monetary systems. The spectrum ranges from centrally controlled public money in a full reserve banking system, some kind of gold standard or the like, to private money competition. This paper asks whether or not virtual currencies like Bitcoin or Ripple can be integrated into the different monetary system designs, and whether or not virtual currencies open up additional possibilities. To give but one example, with regard to Bitcoin, one can think of a system with decentralized private money competition.

I first describe the various theoretically possible monetary systems and give a short overview of virtual currencies with regard to their set-up as well as their functioning and spreading in the economy. Second, I combine this information and examine which monetary systems can be implemented using virtual currencies, and which new designs are conceivable.

One of the main results is the fact that in general every monetary system can be realized with virtual currencies. The technology is in place. An example is the already existing so-called Freicoin, a virtual demurrage currency similar to the one proposed by Silvio Gesell in his Freiwirtschaft theory. Another result is the problem that arises when implementing virtual currencies in today’s fractional-reserve system. Depending on the concrete design, the implementation might allow commercial banks and perhaps even private economic agents to create money without any control of central banks.

Overall, the results of this paper lead to a definite answer to the title question: “Yes”.