An independent Scotland that carried on using the pound without the permission of the rest of the UK would have a stronger economy than it does now, a free-market thinktank said on Thursday.

The Adam Smith Institute said the country would not only survive but thrive outside of a formal currency union provided there were changes to the banking system to inject competition and reduce risk-taking.

Adding to the political debate between the yes and no camps about the currency regime for a post-independent Scotland, the ASI said the nationalist leader Alex Salmond should follow the example of Panama, which uses the US dollar as its currency and does not have its own central bank.

Sam Bowman, the ASI's research director, said Scotland should adopt a two-pronged approach – unilateral use of the pound together with the removal of protections for banks that allow them to engage in risky behaviour without suffering the consequences.

He added that the thinktank's proposal for "adaptive sterlingisation" would allow Scottish commercial banks to issue promissory notes in unlimited quantities provided they were backed by reserves of pounds, dollars, gold, or even cryptocurrencies such as Bitcoin. The report, called Quids In, said this approach chimed with Scotland's own banking history in the 18th and 19th centuries.

The currency question has been at the heart of the independence debate. The yes camp has said it would continue using the pound after independence while the no side has said Scotland will not be allowed to remain part of a currency union.

The report said London's "obstinacy" provided an opportunity for Scotland to return to a freer and more stable banking system.

Bowman said: "The examples of Panama and other dollarised Latin American economies are proof that countries can thrive when they unilaterally adopt another country's currency. Combined with a flexible, adaptive banking system, the unilateral use of another country's currency can instill a discipline in a country's financial sector that neither a national currency nor a currency union can provide.

He added: "Scotland's banking system is almost uniquely primed for such a system of 'adaptive sterlingisation'. The path outlined in this paper would go almost unnoticed by the average Scot – until the next big economic shock, when they might just wonder why their system was so much more stable than that of the country they'd left behind."

Under "sterlingisation", Scotland would not be able to print its own currency and would lack a lender of last resort. But the ASI report said the experience of Panama pointed to this being an advantage because it would force lenders to be more prudent.

Suggested reforms of the financial system would include the removal of government help for banks with severe cash flow problems; mechanisms that would put the onus on shareholders to foot the bill for insolvent banks; and shifting the cost of deposit insurance onto banks and account holders rather than taxpayers. These would improve standards and competitiveness in banking, while significantly reducing the prospect of large-scale bank panics and financial crises, the thinktank said.