The impact of cryptocurrencies on monetary policy transmission

Abstract

In recent years, digital currencies have dominated headlines due to the fast growth in its nominal value. While it remains unclear whether mass adoption of digital currencies by consumers and businesses will occur, the increasing investments by households into cryptocurrencies as risky asset warrants research into the impact of digital currencies. Additionally, digital currencies have a significant impact on money supply and fiat currencies, banking and payments systems, and consequently monetary policy transmission. In recent years, banks have also started leveraging digital assets for crucial functions such as liquidity operations. Additionally, major central banks around the world have started projects to research into Central Bank Digital Currencies (CBDC), as a potential replacement for fiat currencies. This matters for small-open economies such as Singapore, which are highly dependent on open capital flows and trade to grow the economy. This paper, utilising a Structural VAR model, examines the impact of cryptocurrencies on the business cycle in Singapore and whether the adoption of digital currencies into financial markets in past years and in the years to come, could have an impact on the business cycle and monetary policy transmission. Our results show that cryptocurrency has some impact on output when compared to our counterfactual model; these results remain robust even when re-ordered.