What is Monetary Policy?

Monetary policy refers to the rules and regulations used by national financial institutions or centralized regional organizations, such as the European Union, to manage the supply of money. Monetary policies are used to manage the inflation rates and rising prices, as well as create an environment capable of maximizing employment.

Monetary policies can have an impact on a domestic and global level and are continuously revised, particularly by financially powerful countries. The goal of establishing monetary policies is to ensure the economy is working properly and the inflation rates are under control.

Central banks can increase interest rates on borrowing to discourage spending in certain circumstances. Financial authorities may leverage monetary policies to increase employment rates, stabilize prices, and establish long-term interest rates. Monetary policies can improve economic growth and stability as they expand consumer activities.

Monetary policies can also play a role in the increase of export and decrease of import rates, which in turn can increase the valuation of legal tender in a country or region. Central banks have developed various tools to help implement monetary policies:

• Central banks can create new bank reserves that are used for trading short-term bonds in open markets. The banks can increase the money supply by buying assets and decrease it by selling;
• Central banks can adjust interest rates of loans;
• Central banks can impact the market movements by leveraging public announcements discussing future monetary policies.

While each country or region has its own regulations regarding when changes to monetary policy should be made, countries with more stable economies typically set a duration after which policy changes are made.

Monetary Policy and Cryptocurrencies

Central banks act as the central authority of monetary policy and hold the monopoly of money issuance which they are granted by the national or regional law.

Cryptocurrency was developed based on the principles of decentralization, meaning that it is not controlled by one central entity. Cryptocurrencies are not issued by central banks by design. An increase in cryptocurrency use could significantly affect central banks and even possibly cause them to lose their monopoly.

Bitcoin (BTC), the first cryptocurrency, was developed in 2009, right after the global financial crisis which was caused by monetary policies set in place by central banks. The genesis block of Bitcoin contained a message referencing the central bank system.

Some institutions have established national regulations on the use and taxation of cryptocurrencies. The possibility of cryptocurrencies having monetary policies implemented by central regulatory organizations is frequently discussed and criticized in various crypto communities.