In a research discussion paper titled “Monopoly without a monopolist: an economic analysis of the bitcoin payment system”, the Bank of Finland clarified its view on Bitcoin and expressed optimism about the potential for a genuinely decentralized financial system.
Authored by Gur Huberman, Jacob Leshno, and Ciamac Moallemi, the paper examines the technical, algorithmic, and mathematical foundations of Bitcoin. It evaluates Bitcoin’s capacity to support its own economy and a peer-to-peer payment settlement system that is secure and efficient for users.
As the paper’s title indicates, the Bank of Finland characterizes Bitcoin as a monopoly governed by a protocol rather than by a central authority. The Bitcoin network is maintained by a decentralized community contributing to an open-source ecosystem. The researchers praised Bitcoin’s distributed nature, which prevents the existence of a central managing organization that could manipulate market value, prices, offerings, or rules.
“Bitcoin is a monopoly run by a protocol, not by a managing organization. Familiar monopolies are run by managing organizations with discretion to determine and then change prices, offerings and rules. Monopolies are often regulated to prevent or at least mitigate their abuse of power,” the paper explains.
In traditional finance, offerings and rules can be changed by a small number of managing entities or through government intervention. For example, changes to the U.S. dollar’s inflation rate are effectively decided by the Federal Reserve through policies such as quantitative easing, reflecting centralized control over the currency supply. In Bitcoin, no equivalent central authority exists. Changes to offerings or protocol rules require network and community consensus and are implemented via forks.
In software development, a fork is the creation of an independent line of development from a copy of a codebase. If developers, miners, and node operators in the Bitcoin network reach agreement on modifications to the protocol, they can propose and implement a fork—either soft or hard—to update the codebase.
Executing a fork requires long-term consensus among all relevant parties. Miners, developers, and node operators must agree in advance and meet activation thresholds for changes to take effect. Bitcoin’s decentralized governance can make development slower and sometimes inefficient, but this is a trade-off between decentralization and the efficiency of centralized decision-making. While centralized institutions like the Fed can more readily alter a currency’s behavior, such centralized systems are more susceptible to censorship, instability, and security concerns.
Although several central banks, including the People’s Bank of China, have expressed opposition to an unregulated system like Bitcoin, the Bank of Finland highlights that Bitcoin’s resistance to regulation is an advantage. The paper emphasizes that Bitcoin’s decentralized design is revolutionary and deserves close study by economists.
“Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts. Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure,” the paper adds.
As Bitcoin matures both as a technology and as a financial system, an increasing number of financial institutions and central banks, including the Bank of Finland, are likely to recognize and acknowledge its innovative structure and technical complexities.