Continuing the dystopian theme – at least dystopian from the perspective of the fiat currency issuer – a partial take-over by a borderless cryptocurrency will pose interesting questions for central bank monetary policy.

For starters, it will introduce a motive to care about fluctuations in the real exchange rate – and thus fluctuations in the nominal exchange rate – between the vestigial zone covered by the old fiat currency and the new crypto-region.  This must surely mean worse macroeconomic performance overall for both regions.

Another way of interpreting this is that it will lead to pressure for the protocol governing the issuance of central bank currency to move closer to the – probably inferior – protocol governing the issuance of the cryptocurrency.

Past decades have seen much hope for, and occasional outbreaks of, enlightened cross-currency monetary policy coordination.  But just as there would be nobody for a centralised polity to negotiate with in the face of a partial anarchist takeover, so there would be no-one with whom to discuss modifying a decentralized, hard-coded and damaging cryptocurrency issue-protocol.

In this way, the reach of the apparently partially victorious cryptocurrency would have extended further than is at first apparent, much like in the case of the reach of the old Deutschemark in the former Eurozone, or of the dollar with the countries who adopt currency boards, fixed or managed exchange rates.