When we speak of bitcoin as money, Satoshi Nakamoto simply recreated the metallic standard with expanded capabilities—peer-to-peer payments and other conveniences. He did not invent something entirely new; he created a product free of fiat currencies’ disadvantages, and this is what makes it valuable. Like gold’s emission, bitcoin’s emission is decentralized. Just as with gold, no one owns the monetary system as a whole—states actually own fiat monetary systems—but each monetary unit has its own explicit owner.
It is obvious that banks are not needed for bitcoin. Every user can manage their own funds and make instant payments to any point in the world. The functions of banks as financial intermediaries could, in the bitcoin context, be replaced by ordinary classified boards, where users offer each other loans and pool financial resources for specific projects. Accordingly, fractional reserve banking and the fiduciary media it creates are impossible within bitcoin itself.
However, bitcoin’s widespread adoption is hindered by falling into Gresham’s law trap. As we recall, some money exchanges for other money in the market, gradually spreading across the price system. For instance, people gradually realize that using copper is more convenient than hoes, which manifests in prices being expressed in units of copper weight, and copper displacing hoes once the entire price system operates in copper-denominated prices. We witnessed this process vividly during the hyperinflation of the 90s, when the dollar occupied nearly the entire price system, becoming the de facto real money and relegating the coupon-karbovanets to mere unit of account status.
Bitcoin began its career on state-criminalized markets and is now spreading across fiat currency price grids. For this process to continue, people need to transact in bitcoin, but Gresham’s law interferes (“bad money drives out good”)—people prefer to hold bitcoin for better times, anticipating its price will rise against other currencies. This is natural and healthy behavior, and it can only shift—become less common—with the expansion of bitcoin’s usability.
There are two threats here. The first threat is the state’s attempts to directly combat bitcoin. Clearly, at the input and output—meaning the stages of exchanging fiat for bitcoin and bitcoin for fiat—the state can control the process. The second is the attempts by the same state and various do-gooders to “legalize” bitcoin, to bring it into the “legal framework,” and so on. The second is much more dangerous. We may end up with a “legal” system where the only advantage would be fast payments, but state control over operations would remain, and so on. Moreover, some sort of “bitcoin receipts” may emerge, through which a semblance of fractional reserves could already be arranged. Admittedly, bringing all this to a full fiat equivalent is difficult for two reasons. First, bitcoin cannot be “banned” or confiscated as gold was; at any level of integration with the “legal” system, the possibility of using its core remains, so to speak. Second—and this is the main point—as long as the fiat system’s shortcomings persist and grow, there will be demand for core-bitcoin.
The do-gooders’ efforts to “legalize bitcoin” are somewhat understandable, but, as usual, they’re aimed in the wrong direction. “Legalizing” something that already exists and functions—already “legalized” by human practices—is always a limitation. Perhaps legalization will help more people start using bitcoin, but they’ll use it within the old vicious system—the very shortcomings that gave birth to bitcoin.
If the goal is to help more people start using bitcoin, it can be achieved by a completely different path. The real problem is not legalization, but business reporting. The state treats modern businesses as branches of its ministries and departments; enterprise activity is controlled in virtually every direction, from pricing to profit distribution. Put simply, a business cannot operate in bitcoin because it doesn’t know how to painlessly shoehorn it into its reporting. The “legalizers’” solution is to make bitcoin part of the reporting; the libertarian solution is to radically reduce and eliminate reporting altogether.
And finally, let me simply enumerate in theses some of the consequences of eliminating the monetary monopoly. These consequences are quite often not recognized, so it’s worth mentioning them.
Economic Consequences
Ownership of money transfers fully to economic entities;
Economic crises become a thing of the past; the manic-depressive nature of the modern economy gives way to the long-desired “sustainable growth”;
The fight against crises—which generates abundant regulation, currency exchange restrictions, restrictions on the volume and nature of transactions, and so on—also becomes a thing of the past; we no longer pay for the mistakes of the state and individual enterprises, as constantly happens under forced monetary monopoly;
Economic growth will be financed by real savings. That is, banks (or other institutions) will lend only funds they’ve received on credit. This means that projects the market considers necessary will be financed to a greater extent;
The end of inflation means an increase in business “time horizons.” Long-term projects become profitable. This makes it possible to create capital goods, to “accumulate time” in society;
“Honest money” greatly expands the spectrum of opportunities for entrepreneurs. Low-margin businesses become viable;
The “seller’s market” gives way to the “buyer’s market”; the chances of mediocrity and wretchedness diminish;
Systemic risks inherent in today’s private entrepreneurship and cooperatives disappear. The systemic advantages of corporations diminish
Political Consequences
The government is deprived of the main source of its power and the instrument of financial and political manipulation. Among other things, such elements of manipulation as “trade balances,” “exchange rates,” and all the hysteria they cause—for example, around protectionism—become a thing of the past;
Budget deficits and state debt become a thing of the past. Since a budget deficit can be financed only by increasing taxes on citizens, this tool will be resorted to only in very extreme cases. Again, a state that doesn’t own a printing press will be extremely reluctant to borrow money;
The state will be forced to drastically reduce the scope of its activities, for which it simply won’t have the means;
Social Consequences
Honest money creates a stable financial base for civil society. “Pooled” social services become realistic—mutual aid funds, mutual insurance, and so on;
Now savings make sense. They become the main source of financing people’s own projects, savings “for old age,” and the like. The pension system becomes unnecessary;
Honest money dramatically expands people’s opportunities to do business (more precisely, more people gain the opportunity to provide paid services to each other);
The buyer’s market means that everyone receives according to their talents and abilities, not according to proximity to power or “financial resources.” Self-realization restores to us a sense of dignity and self-confidence.
Still Using State Money? Then We’re Coming for You
On the “League of Business Inform” website, I came across a wonderful infographic. It’s wonderful because currency devaluation is compared across the conditions of one country, rather than—as is usual—against the conditions of the issuing state. That is, it shows how prices changed in three currencies under Ukrainian conditions.
For those too lazy to read the entire table, I will quote its final part here. In total, over 10 years in Ukraine, prices grew as follows:
currency bread meat 20 liters of A-95 gasoline sq.m of housing Metro ride
hryvnia 326.00% 479.00% 434.00% 452.00% 300.00% dollar 181.00% 285.00% 256.00% 268.00% 178.00% euro 119.00% 204.00% 180.00% 189.00% 122.00%
I should note immediately that these figures are, rather, qualitative than quantitative—illustration rather than specific content. Therefore, I ask commenters to refrain from debating the correctness of the choice of goods for comparison, and so on. Within the framework of this topic, we’re interested only in qualitative changes—namely, the fact that over 10 years, the hryvnia inflated more than the dollar, and the dollar more than the euro.
Beyond the obvious thought about whether your hryvnia income grew fourfold during this period, this table speaks of more interesting things.
Suppose we live in a free society where there is no state monopoly on money. I should say immediately that “free society” is not some “model” or hypothesis. A “free society” is a situation where voluntary interaction among people is not punished by some external party. That is, a “free society” exists always and everywhere, just in different proportions. For example, there’s still quite a lot of it in Hong Kong, and not so much in North Korea. Nevertheless, universal regularities exist precisely in these relationships; external influence—which is most often the state—only distorts them, sometimes leading to surprising effects.
Suppose we have three main money issuers that “print” money at different speeds. I think it’s clear that in a free society—meaning free issuance of money and free pricing in any currency—the producer of the hryvnia would most likely go bankrupt. And more likely than not, it wouldn’t even be the euro that would win, but the producer of some “deflationary” commodity money—although I quite allow that inflating currencies would also be used for certain purposes.
It’s telling that Ukrainians also prefer the dollar to the hryvnia and often prefer the euro to the dollar. However, the state fights Ukrainians by forbidding them the choice of means of exchange. As is known, pricing is permitted only in the “national currency” (hence these “y.e.”), taxation and settlements with the state—only in the “national currency”—the state regularly prohibits banks from certain operations with “foreign currency” (lending, and so on). Recently it prohibited indicating “y.e.” in advertising and is seriously planning to introduce a 16% tax on currency sales.
It’s clear that all other states act the same way, and against their background Ukrainians still enjoy relative freedom in choosing money, but this “freedom” on the state’s part was rather a forced measure. At least, it can be said with certainty that without the “ukrodollar” we wouldn’t have survived the 90s.
However, whatever the case, the table—together with our knowledge of people’s preferences and state practice, and also taking into account that it’s unlikely most readers’ incomes grew fourfold in absolute terms over 10 years—perfectly illustrates that state monopoly on money is nothing other than robbery. And thank it—the table, of course—for this.