Bank of Korea: Costs determine the rise and fall of cryptocurrencies and fiat currencies

South Korea’s central bank has released a new working paper on cryptocurrencies . Drafted by researchers from the Bank of Korea and Hongik University in Seoul, the report seeks to identify factors that drive adoption of blockchain-based currencies over national fiat currencies. According to the authors, a symbiotic relationship could exist between the two economies as digital currencies become more widely used. That is, when the cost of using one currency rises, the cost of another may fall. This could increase the attractiveness of other options, they speculate. However, they believe that costs will keep the system in balance. The report reads:

“The high cost of using fiat money increases the demand for digital money . Similarly, if the cost of using digital money is high relative to fiat money, this will increase the demand for fiat money. If money is imperfect and the costs associated with using money are uncertain, the relative cost of using digital money will be low enough to crowd out fiat money.”

The study fits into a broader trend among central banks, as well as other groups or organizations, to deploy digital currencies . In fact, the authors posit that their research could give financial regulators more insight into these dynamics as such systems become more common. “Our findings may be helpful to policymakers and regulators seeking insight into this new system where privately issued digital currencies coexist with central bank-issued fiat currencies,” the authors wrote. The report is the latest from the Bank of Korea, which has been working to advance and become more vocal on blockchain technology.