30 October 2020: Cryptocurrencies represent the real-world implementation of Nobel Prize-winning economist Friedrich Hayek’s thesis for monetary systems, writes Stephen Lynch.
The theoretical concept of digital currencies has been examined long before the inception of Satoshi Nakamoto’s pioneering Bitcoin cryptocurrency. Early proponents of ‘crypto’ foresaw the benefits of applying revolutionary principles from the fields of computer science and mathematics to address the shortcomings of sovereign currencies.
Cryptocurrency enthusiasts had been working for decades on earlier iterations of digital currencies, which paved the way for the launch of Bitcoin in 2009. Its meteoric rise in popularity meant Bitcoin became the first publicly used means of exchange, combining decentralised control with user anonymity and record-keeping via a blockchain.
More than 2,000 cryptocurrencies in existence today and their exponential growth has accumulated more than 100 million unique users worldwide. However, as early as the 70s, several classical economists were already highlighting the flaws of traditional monetary policies and proposing the idea of a competitively driven medium of exchange.
The most prominent among them was F.A. Hayek, the Nobel Prize-winning economist from Austria, who believed a state’s monopoly over the issuance of currency should be extended to private companies – in order to foster competition and give people the freedom to choose their own currencies.
A primary advocate of classical liberalism, Hayek believed it was markets, not states, that guaranteed individual liberty. For Hayek, liberty is “a policy which deliberately adopts competition, markets and prices as its ordering principles”. Furthering this idea in his polemic ‘The Road to Serfdom’, he argued Germany and the Soviet Union’s mistakes were in their state planning because it interfered in the natural operation of markets, disrupted liberty and set society down a one-way street towards slavery.
The modern libertarians today – from Steve Baker in the British Conservative Party to US Republican Senator Rand Paul – could argue crypto is the antithesis of state bureaucracy, by breaking its monopoly on the volume of money in circulation, as well as on credit and interest rates.
Hayek today would resent any ‘market’ environment where one apparatchik in Whitehall or state actor must decide an action each time, so much so they ultimately must be deferred to repeatedly over time. No one individual can make rational choices about economic problems without the information to base their decisions upon.
Anyone can now securely open a Bitcoin account from their mobile device, offering the potential to democratise monetary systems like never before. What is more, the market-driven price of cryptocurrencies aligns with Hayek’s vision where the free market acts as a constant referendum on the value of goods and services within an economy. In other words, the market represents a form of collective agreement, voluntarily made amongst all people operating in it.
Markets are extremely complex networks with millions of transactions going on all the time –precisely what cryptocurrencies have become.
The principles underpinning Bitcoin’s design also align with Hayek’s proposal of establishing a decentralised currency or “privately issued money” – explored in his revolutionary work ‘The Denationalisation of Money.’ For Hayek, established currency systems lead to social inequality as the government monopoly on them prevents the discovery of a better method of fulfilling the market’s needs.
In this, Hayek argues centralised economic planning is not the key to economic stability, rather market signals from independent actors. The lack of in-depth information available to a centrally regulated entity means regular boom and bust cycles of supply and demand are artificially created and are wrongly perceived to be relatively stable. Hayek’s theory advocates for a decentralised, “permissionless” network of nodes, much like those observed in the decentralised network of actors in a blockchain ledger.
Since there is no single point of failure or control of their underlying system, cryptocurrencies contain robust bulwarks against external manipulation, geopolitical influence or censorship. The collectively maintained Bitcoin ledger includes a snapshot of which transactions have been approved by the community, and consequently, provides an indication of how much Bitcoin is owned by each account (which in turn belongs to end-users). Users are prudently paid for keeping and maintaining this ledger through ‘mining blocks’.
Cryptocurrencies, therefore, represent the real-world implementation of Hayek’s thesis for monetary systems.
Despite their benefits, these technologies will continue to face resistance from governments before being more widely accepted. Primary among the criticisms of cryptocurrencies are their market volatility, issues of privacy and the interoperability of different types of currencies, all of which have hindered their adoption and all criticisms which Hayek himself would have shared.
Another issue with the widespread adoption of “privatised currency” is that the objectives of private issuers may conflict with providing an indispensable commodity like money – especially if they are only focused on maximising profits. In this case, a digital currency with central bank backing could be a credible alternative to deliver some of the benefits of cryptocurrencies to potential users.
The Governor of the Bank of England, however, is a sceptic. Andrew Bailey described the digital asset as a “volatile” and “odd commodity” and told Members of Parliament earlier this year: “If you want to buy Bitcoin, be prepared to lose all your money… [Bitcoin] has no intrinsic value.”
Billionaire investor Warren Buffett has also said he’ll never own any cryptocurrency, acknowledging Bitcoin’s choice role for money launderers and terrorists to move money around.
All these factors and more have hindered the growth of cryptocurrencies. That said, it is undeniable they have the potential to enable a paradigm shift in the way our monetary systems operate.
Speaking about sound money in 1984 Hayek said presciently: “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can’t stop.”
His predictions will be tested further in the future as cryptocurrencies continue their journey towards formal recognition and acceptance. For the moment, crypto is here to stay.
Stephen Lynch is a public affairs, corporate comms and PR consultant, and writes regularly online for The Times, Daily Telegraph and Spectator magazine,
ICAEW Insights opinion pieces are intended to be thought-provoking and stimulate debate. Views expressed in these opinion pieces are not necessarily shared by ICAEW.