<p>In order to increase use of a cryptocurrency it could be suggested that the developers making this currency should not seek to develop a medium of exchange which would work separately from the country's currency as an independent currency, <em>but rather seek to work together with it</em>.</p>
<p>Though having a cryptocurrency working with an already existing currency would seemingly result in this cryptocurrency being backed on the by the country's pre-existing currency (which in return would give the same reliability),
nonetheless, to attempt to establish a new method of payment which would be reliable, <em><strong>it is necessary to create a relationship with the country's previously existing currency, regardless of the previous currency's basis</strong></em></p>
<p>W.J. Luther writes in his paper <a href="https://www.peter-boettke.com/app/download/7114251938/luther_paper.pdf" rel="nofollow noreferrer">&quot;Cryptocurrencies, Network Effects, and Switching costs&quot;</a> (Contemporary Economic Policy, 34, 2016, 553-571)</p>
<blockquote>
<p>&quot;By anchoring expectations- perhaps by committing to (or refusing to) accept a currency for payment of taxes- a government can effectively determine the medium of exchange&quot;</p>
</blockquote>
<p>Hope this helps.</p>

CC BY-SA 3.0
2017-11-09T23:05:25.040Z
+1 I would agree with this simply because the forces of economics has always proven to be stronger than any laws or regulations can hold back.
Michael Lai
CC BY-SA 3.0
2017-11-09T05:06:28.283Z
2017-11-09T05:06:28.283Z
2020-06-17T09:40:54.643Z
Bensstats
<p>Governments and financial institutions usually don’t like anything that is not under their control. The same applies to cryptocurrencies. In this case, however, it seems that such careful policy (so-called risk-based approach) is justified.</p>

<p>To sum it shortly, I think most central banks and governments view cryptocurrencies as a means of exchange, rather than as a means of payment. As a result, state administrations accepts usage of  cryptocurrencies between private entities, but will not accept cryptocurrency as a mean to pay taxes, just as it will not accept a payment of taxes in eggs.</p>

<p>See comprehensive <a href="http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf" rel="nofollow noreferrer">examples of countries’ risk-based approach to virtual currency payments</a>, prepared by Financial Action Task Force (2015).</p>

<p>Also, please see below citations from some institutions in this regard:</p>

<h2><a href="https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf" rel="nofollow noreferrer">International Monetary Fund (2016)</a></h2>

<blockquote>
  <p>VCs [virtual currencies] offer many potential benefits, including greater speed and
  efficiency in making payments and transfers—particularly across
  borders––and ultimately promoting financial inclusion. The distributed
  ledger technology underlying some VC schemes—an innovative
  decentralized means of keeping track of transactions in a large
  network––offers potential benefits that go far beyond VCs themselves.</p>
  
  <p>At the same time, VCs pose considerable risks as potential vehicles
  for money laundering, terrorist financing, tax evasion and fraud.
  While risks to the conduct of monetary policy seem less likely to
  arise at this stage given the very small scale of VCs, risks to
  financial stability may eventually emerge as the new technologies
  become more widely used. </p>
  
  <p>The development of effective regulatory
  responses to VCs is still at an early stage. VCs are difficult to
  regulate as they cut across the responsibilities of different agencies
  at the national level, and operate on a global scale. Many are opaque
  and operate outside of the conventional financial system, making it
  difficult to monitor their operations. </p>
  
  <p>Regulators have begun to
  address these challenges, with a variety of approaches across
  countries. Responses have included clarifying the applicability of
  existing legislation to VCs, issuing warnings to consumers, imposing
  licensing requirements on certain VC market participants, prohibiting
  financial institutions from dealing in VCs, completely banning the use
  of VCs, and prosecuting violators. These approaches represent an
  initial policy response to the challenges that VCs pose, but further
  development is needed. In particular, national authorities will need
  to calibrate regulation in a manner that appropriately addresses the
  risks without stifling innovation.</p>
</blockquote>

<h2><a href="https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf" rel="nofollow noreferrer">European Central Bank (2015)</a></h2>

<blockquote>
  <p>A number of international authorities have developed an interest in
  VCS [Virtual currency schemes], including the Financial Action Task Force (FATF), given the
  potential risks for the integrity of the international financial
  system. Several central banks and financial and supervisory
  authorities around the world have warned users of the risks related to
  holding and transacting virtual currencies, provided clarifications on
  the legal status, started regulating certain activities or issued an
  outright ban. However, the responses vary, depending to some degree on
  the part of the world from which they originate and on the type of
  authority. </p>
  
  <p>[...]</p>
  
  <p>For the tasks of the ECB as regards monetary policy
  and price stability, financial stability, promoting the smooth
  operation of payment systems, and prudential supervision, the
  materialisation of these risks depends on the volume of VCS issued,
  their connection to the real economy – including through supervised
  institutions involved with VCS – their traded volume and user
  acceptance. For the moment, all these risk drivers have remained low,
  which implies that there is no material risk for any of the central
  bank’s tasks as yet. Nevertheless, a major incident involving VCS and
  a subsequent loss of trust in them could also undermine users’
  confidence in electronic payment instruments, in e-money and/or in
  specific payment solutions, such as those in place for e-commerce.
  Therefore, the Eurosystem intends to continue to monitor
  payments-related developments in virtual currency schemes.</p>
</blockquote>

<p>Please also be aware of two issues while researching this topic:</p>

<ol>
<li>financial institutions often concentrate on virtual currencies as a whole rather than on a cryptocurrencies, which are type of virtual currencies without supervision of some central authority (so if Japan, Russia or Estonia issues virtual currency under their central bank, technically it will not ba a cryptocurrency); this means that while saying positive things about virtual currencies they often don’t think about eq. bitcoin, but rather new form of virtual currency under supervision of a central bank,</li>
<li>the people most interested in cryptocurrencies are those, who own cryptocurrencies; thus,  the information is usually presented more positive than the source of information intended.</li>
</ol>

CC BY-SA 3.0
2017-11-18T21:38:52.123Z
2017-11-18T21:38:52.123Z
Pawel Kam
<p>Governments have had very varied reactions to cryptocurrencies in the past years. Some forbid them based on the fact that they're mainly used for criminal activity such as drug dealing, human traficking and tax evasion. Others embrace the idea, as you mentioned. There is no 'typical government' way of dealing with this so far.</p>

CC BY-SA 3.0
2017-11-08T04:57:05.073Z
So for the countries that are embracing it like Japan and Estonia, how do they treat fiat and cryptocurrency differently in their fiscal policies?
Michael Lai
CC BY-SA 3.0
2017-11-07T22:59:11.390Z
2017-11-07T22:59:11.390Z
python_enthusiast
<p>Given the decentralized nature of cryptocurrencies like bitcoin and ethereum, how can centralized organisations like banks and the government create policies around it without changing the way traditional economies work?</p>

<p>I have read a little bit about Japan accepting bitcoin as legitimate payments, and also countries like Japan, Russia and Estonia wanting to create their own cryptocurrency so it definitely appears to be something that is going into mainstream finances soon.</p>

<p>Can someone explain how a typical government would deal with this?</p>

<macroeconomics><currency><finance><cryptocurrency>
How do economic and financial policies in government deal with cryptocurrencies?
Michael Lai
# How do economic and financial policies in government deal with cryptocurrencies?

(Asked by: username_0 on 2017-11-07)

Given the decentralized nature of cryptocurrencies like bitcoin and ethereum, how can centralized organisations like banks and the government create policies around it without changing the way traditional economies work?

I have read a little bit about Japan accepting bitcoin as legitimate payments, and also countries like Japan, Russia and Estonia wanting to create their own cryptocurrency so it definitely appears to be something that is going into mainstream finances soon.

Can someone explain how a typical government would deal with this?

**Tags:** macroeconomics, currency, finance, cryptocurrency

---

## 3 answers

### Answer by username_1 on 2017-11-09. Score: 3

In order to increase use of a cryptocurrency it could be suggested that the developers making this currency should not seek to develop a medium of exchange which would work separately from the country's currency as an independent currency, *but rather seek to work together with it*.

Though having a cryptocurrency working with an already existing currency would seemingly result in this cryptocurrency being backed on the by the country's pre-existing currency (which in return would give the same reliability),
nonetheless, to attempt to establish a new method of payment which would be reliable, ***it is necessary to create a relationship with the country's previously existing currency, regardless of the previous currency's basis***

W.J. Luther writes in his paper ["Cryptocurrencies, Network Effects, and Switching costs"](https://www.peter-boettke.com/app/download/7114251938/luther_paper.pdf) (Contemporary Economic Policy, 34, 2016, 553-571)

> "By anchoring expectations- perhaps by committing to (or refusing to) accept a currency for payment of taxes- a government can effectively determine the medium of exchange"

Hope this helps.

> **Comments:**
> **username_0**: +1 I would agree with this simply because the forces of economics has always proven to be stronger than any laws or regulations can hold back.  

---

### Answer by username_2 on 2017-11-18. Score: 2

Governments and financial institutions usually don’t like anything that is not under their control. The same applies to cryptocurrencies. In this case, however, it seems that such careful policy (so-called risk-based approach) is justified.

To sum it shortly, I think most central banks and governments view cryptocurrencies as a means of exchange, rather than as a means of payment. As a result, state administrations accepts usage of cryptocurrencies between private entities, but will not accept cryptocurrency as a mean to pay taxes, just as it will not accept a payment of taxes in eggs.

See comprehensive [examples of countries’ risk-based approach to virtual currency payments](http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf), prepared by Financial Action Task Force (2015).

Also, please see below citations from some institutions in this regard:

## [International Monetary Fund (2016)](https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf)

> VCs [virtual currencies] offer many potential benefits, including greater speed and
> efficiency in making payments and transfers—particularly across
> borders––and ultimately promoting financial inclusion. The distributed
> ledger technology underlying some VC schemes—an innovative
> decentralized means of keeping track of transactions in a large
> network––offers potential benefits that go far beyond VCs themselves.
>
> At the same time, VCs pose considerable risks as potential vehicles
> for money laundering, terrorist financing, tax evasion and fraud.
> While risks to the conduct of monetary policy seem less likely to
> arise at this stage given the very small scale of VCs, risks to
> financial stability may eventually emerge as the new technologies
> become more widely used.
>
> The development of effective regulatory
> responses to VCs is still at an early stage. VCs are difficult to
> regulate as they cut across the responsibilities of different agencies
> at the national level, and operate on a global scale. Many are opaque
> and operate outside of the conventional financial system, making it
> difficult to monitor their operations.
>
> Regulators have begun to
> address these challenges, with a variety of approaches across
> countries. Responses have included clarifying the applicability of
> existing legislation to VCs, issuing warnings to consumers, imposing
> licensing requirements on certain VC market participants, prohibiting
> financial institutions from dealing in VCs, completely banning the use
> of VCs, and prosecuting violators. These approaches represent an
> initial policy response to the challenges that VCs pose, but further
> development is needed. In particular, national authorities will need
> to calibrate regulation in a manner that appropriately addresses the
> risks without stifling innovation.

## [European Central Bank (2015)](https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf)

> A number of international authorities have developed an interest in
> VCS [Virtual currency schemes], including the Financial Action Task Force (FATF), given the
> potential risks for the integrity of the international financial
> system. Several central banks and financial and supervisory
> authorities around the world have warned users of the risks related to
> holding and transacting virtual currencies, provided clarifications on
> the legal status, started regulating certain activities or issued an
> outright ban. However, the responses vary, depending to some degree on
> the part of the world from which they originate and on the type of
> authority.
>
> [...]
>
> For the tasks of the ECB as regards monetary policy
> and price stability, financial stability, promoting the smooth
> operation of payment systems, and prudential supervision, the
> materialisation of these risks depends on the volume of VCS issued,
> their connection to the real economy – including through supervised
> institutions involved with VCS – their traded volume and user
> acceptance. For the moment, all these risk drivers have remained low,
> which implies that there is no material risk for any of the central
> bank’s tasks as yet. Nevertheless, a major incident involving VCS and
> a subsequent loss of trust in them could also undermine users’
> confidence in electronic payment instruments, in e-money and/or in
> specific payment solutions, such as those in place for e-commerce.
> Therefore, the Eurosystem intends to continue to monitor
> payments-related developments in virtual currency schemes.

Please also be aware of two issues while researching this topic:

1. financial institutions often concentrate on virtual currencies as a whole rather than on a cryptocurrencies, which are type of virtual currencies without supervision of some central authority (so if Japan, Russia or Estonia issues virtual currency under their central bank, technically it will not ba a cryptocurrency); this means that while saying positive things about virtual currencies they often don’t think about eq. bitcoin, but rather new form of virtual currency under supervision of a central bank,
2. the people most interested in cryptocurrencies are those, who own cryptocurrencies; thus, the information is usually presented more positive than the source of information intended.


---

### Answer by username_3 on 2017-11-07. Score: 0

Governments have had very varied reactions to cryptocurrencies in the past years. Some forbid them based on the fact that they're mainly used for criminal activity such as drug dealing, human traficking and tax evasion. Others embrace the idea, as you mentioned. There is no 'typical government' way of dealing with this so far.

> **Comments:**
> **username_0**: So for the countries that are embracing it like Japan and Estonia, how do they treat fiat and cryptocurrency differently in their fiscal policies?  

---

