How do private digital currencies affect government policy?

Abstract

We provide a systematic classification and evaluation of the different types of digital currencies. We express skepticism regarding centralized digital currencies and focus our economic analysis on private digital currencies. We specifically highlight the potential for private digital currencies to improve welfare within an emerging market with a selfish government. In that setting, we demonstrate that a private digital currency not only improves citizen welfare but also encourages local investment and enhances government welfare. The fact that a private digital currency enhances government welfare implies a permissive regulatory policy which enables citizens to realize the previously referenced welfare gains.