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What Does Bitcoin Need to Succeed as a Currency? [POLICYbrief]

December 4, 2019


Cryptocurrency is on the cutting edge of the
divide between liberty and the State, between a centralized coercive order and a decentralized
voluntary one, and that divide here comes in that most important matter of money. Modern fiat currency, like the dollars in your
pocket and bank accounts, is quintessentially a creature of the State. In 1924, Georg Friedrich Knapp, the father
of modern monetary theory, wrote, “The soul of currency is not in the material of the
pieces, but in the legal ordinances which regulate their use.” Knapp argued that currency must be constituted
by law, since only governments can confer the requisite legitimacy to gain acceptance and
public trust; thus, the underlying value of a currency is intrinsically tied to a public’s
trust in that legal system. Nation-states can manipulate the currency,
printing more money to fund projects for their favorite supporters. Savings then lose their value as prices are
driven up by inflation, citizens become less certain of money as a store value, and economic
growth suffers. Government control over money thus can be
a form of oppression, no less than the denial of civil liberties. The recent advent of cryptocurrencies, Bitcoin
chief among them, poses both a practical challenge to such monetarily oppressive regimes and
a theoretical challenge to the view that the public law of currency is the necessary foundation
of money. Thus, although the creation of Bitcoin and
other cryptocurrency is impressive as a technological innovation, Bitcoin’s central
innovation is in trust. Bitcoin has the potential to out-perform the
currencies produced by legal regimes as a store value precisely because it requires
no trust in political process, but rather trust in a transparent set of rules and transactions
that follow those rules. For most people, Bitcoin is not yet a good
enough store of value. It’s simply too volatile compared to the dollar,
and risk-averse people don’t want to hold their cash or assets in a unit of a count
so volatile. To be clear, to become more successful and
widely used, it does not need to become less volatile and more accepted than the dollar. There are many less successful currencies
against which it can compete, and it would gain much value simply by replacing or indeed
complementing gold as the basic hedge against currency devaluation. I think there are two important conditions
for this to happen. One is the easiest. There have to be monetarily oppressive currencies
to give substantial impetus to the use of Bitcoin as a currency. I have to say, given the renewed enthusiasm
about socialism throughout the world, I’m not at all concerned about the fulfillment
of this condition. When Socialists run out of other people’s
money, they print more of it for themselves. The second condition is more open-ended. There has to be continued strength in what
I would call the Bitcoin Ecosystem. Most people don’t have the skills to use Bitcoin
directly. Permitting ETFs, permitting funds that invest
in Bitcoin and other cryptocurrencies, will allow more people to hold it as part of their
portfolio. That will also thicken the market and have
a stabilizing effect. Now note that these wallets, future markets,
and ETFs, are not order without law. They are institutions regulated by our law
and by our administrators, thus paradoxically, the success of Bitcoin may depend on the State’s
willingness to apply the neutral principles of its laws to an innovation that may itself
turn out to be a competitor to one of the greatest powers of the State: It’s ability
to print fiat money. And that again, I think, shows why cryptocurrency,
its success depends ultimately on the rule of law and the constitutional respect for
a new form of property.

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