This paper develops an overlapping generations model to analyse the inflationary consequences of introducing cryptocurrency alongside fiat money in an economy with fixed real resources. We demonstrate that cryptocurrency introduction acts as a transfer mechanism from existing fiat holders to cryptocurrency creators, with inflation serving as the implicit tax that facilitates this transfer. Critically, we show that this welfare loss depends on institutional quality: while cryptocurrency imposes deadweight costs in strong-institution economies, it can provide genuine insurance value in jurisdictions experiencing hyperinflation or institutional failure. The paper then formalises Fischer Black’s (1970) uncontrolled banking model and demonstrates how it can deliver all purported benefits of cryptocurrency without creating inflationary transfers through private seigniorage. We show that any genuine technological advantages of cryptocurrency can be achieved through competitive financial intermediation using existing units of account, eliminating the wealth transfer from fiat holders to cryptocurrency creators identified in the OLG cryptocurrency model. The analysis reveals cryptocurrency’s dual nature: unnecessary rent extraction in high-quality institutional environments where superior alternatives exist, yet potentially welfare-improving in low-quality institutional settings where it serves as second-best protection against government predation.
