Cryptocurrencies and the Denationalisation of Money

Hayek CoinIn Denationalisation of Money (1976), Hayek put forward the idea of currency competition. The money supply should be determined through a competitive market process rather than by experts in charge of central banks. Hayek’s proposal would have private banks issue their own fiat currencies, competing to provide the currency with the most stable purchasing power. This, Hayek argued, would provide a more stable money supply than experts at central banks can.

A number of problems with respect to Hayek’s proposal have been raised. For instance, since banks issue fiat (i.e., nonconvertible) currency, a time-inconsistency problem arises. A bank manager who discounts future revenue at a high rate may be tempted to increase the quantity of his bank’s currency and buy assets with it before the currency loses purchasing power and the bank loses its clients. Another problem is that since money is a network good, it is highly unlikely we would see a number of currencies competing with each other. And if there is only one currency, then its purchasing power may not be as stable as Hayek predicted (see Will Luther’s discussion here).

Hayek’s proposal dates to the 1970s. Do cryptocurrencies in the 21st century manifest Hayekian currency competition? Certainly, there is a case to be made. A number of different independently issued nonconvertible cryptocurrencies (Bitcoin, Litecoin, Ethereum, etc.) compete with each other. Bitcoin in particular has brought to the public’s attention a means of payment independent of the government.

There are, however, two important differences from what Hayek had envisioned. In the first place, cryptocurrencies are not issued by banks. The banks Hayek proposed were intended to be discretionary (though, competitively constrained) issuers of fiat money. Cryptocurrencies are typically issued in a predetermined fashion. Related, cryptocurrency issuers do not take deposits as a Hayekian bank would.

The second difference is more substantial. In Hayek’s proposal, banks would aim at fixing the purchasing power of their currencies. But most cryptocurrencies fix the supply, making their prices highly volatile. As I note in a recent short paper, this fact makes it questionable that cryptocurrencies follow the right monetary rule.


By Nicolás Cachanosky