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.