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Weekend read – The crypto frontier of financialisation

Summary:
From Maria Alejandra Madi and WEA Pedagogy Blog Hayek proposed the abolition of the government’s monopoly on the issuance of fiat money in his book “Denationalisation of Money: The Argument Refined” (1976). In reality, his support for a complete privatization of the money supply stemmed from his dissatisfaction with the management of central banks, which, in his opinion, had been heavily influenced by political considerations. As a result, the ultimate goal of Hayek’s denationalisation of money was to prevent political interference in the conduct of monetary policy, and therefore, price instability. As a result, the denationalization of money would be accomplished through the complete abolition of the government’s monopoly on the issuance of fiat money. In the context of a free market

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from Maria Alejandra Madi and WEA Pedagogy Blog

Hayek proposed the abolition of the government’s monopoly on the issuance of fiat money in his book “Denationalisation of Money: The Argument Refined” (1976). In reality, his support for a complete privatization of the money supply stemmed from his dissatisfaction with the management of central banks, which, in his opinion, had been heavily influenced by political considerations. As a result, the ultimate goal of Hayek’s denationalisation of money was to prevent political interference in the conduct of monetary policy, and therefore, price instability.

As a result, the denationalization of money would be accomplished through the complete abolition of the government’s monopoly on the issuance of fiat money. In the context of a free market monetary regime, only currencies with stable purchasing power would be able to survive and prosper. The underlying assumption is that different currencies will lead to increasing market competition. Using their own distinct registered trademark, banks would be able to issue non-interest-bearing certificates and deposit accounts, and the currencies of different banks would be traded at variable exchange rates.

Hayek pointed out that the most important advantage of the free market competitive order is that prices will convey to the individuals who are acting the necessary information for them to make decisions about how to adjust their activities in the face of the competition of currencies. He emphasized the uses of money that would have the greatest impact on the choice among various types of currencies: i) cash purchases of commodities and services, ii) reserves for future needs, iii) deferred payments, and iv) unit of account. In the long-run, those banks that provide their customers with a competitive return on liabilities would be able to survive.

Because any currency corresponds to non-interest-bearing certificates, the preservation of the currency’s value is a critical requirement for its continued existence. According to Hayek’s theoretical framework, market forces would determine the relative values of the various competing currencies in question. In other words, the exchange rates between the competing currencies would be free to fluctuate at their own discretion. As a result, only currencies that guarantee stable purchasing power would exist in an equilibrium state. It is understandable that people would not want to hold on to the currency of an issuer whose currency was expected to depreciate in comparison to a currency that was expected to retain its purchasing power in terms of goods and services purchased. It is estimated that the marginal costs of producing and issuing currency (notes and coins) are low (close to zero), and that the nominal rate of interest would be driven close to zero as a result of these factors. Banks that fail to establish a stable value for their currencies will lose customers and will be forced out of the financial services business.

Considering this proposal, the following question arises are cryptocurrencies bringing to reality Hayek’s ideas?

In the last ten years, mainly after the 2008 global crisis, the global monetary landscape has been reshaped by financial innovations. Moreover, the COVID-19 pandemic accelerated the digitalization of economies and societies.

Cryptocurrencies such as Ethereum and Ripple are examples of those that have emerged since the creation of the original Bitcoin in the late 2000s. So far, cryptocurrencies have gone public and are now valued in the billions of dollars, according to estimates. Since their inception, cryptocurrencies have been administered completely independently of any external party since their inception. Indeed, this currency network is a system in which transactions are carried out directly between participants. Depending on the cryptocurrency, the maximum number of coins that can be mined may be limited, and the number of new coins generated per verified block affects the value of a cryptocurrency. Additionally, one of the most notable differences between cryptocurrencies is their potential to be utilized outside of their own trading networks (1).

Ethereum is the second most valued cryptocurrency in the world, behind Bitcoin. Not only does the system generate its own money, Ether, but it also makes cryptocurrency mining easier by removing barriers to entry. Despite the fact that Ethereum was only launched in 2015, its blockchain has already grown to be significantly larger than that of Bitcoin.

In addition to being extremely popular, the cryptocurrency Dogecoin also has one of the lowest transaction fees of any cryptocurrency. However, its technology may become obsolete in a short period of time. Moreover, the cryptocurrency Ripple supports financial institutions in lowering transaction costs. The cryptocurrency is not, however, a decentralized cryptocurrency in the traditional sense.

Bitcoin is the most well-known and largest cryptocurrency on the market. It was launched in 2009 and is the most valuable cryptocurrency in the world. If we compare it to other currencies, the financial interest in security and stability is the greatest in this one.

Many organizations and businesses now accept Bitcoin as payment for their goods and services, and there are many more on the way. A number of corporations are partnering, including Microsoft, Dell, Mozilla, and WordPress. Additionally, an increasing number of airlines are now accepting Bitcoin as a form of payment, which is encouraging. In any case, acceptance is primarily centered in urban areas. In order to make payment easier in a company, the recipient’s program generates a QR code including the invoice details. It is then possible to scan this code using the camera on the cell phone. Following that, the matching amount is credited to the recipient’s bitcoin account, and the transaction is complete.

The increasing market value of cryptocurrencies is changing the competitive environment. As a result of the advance of the cryptocurrency market, central banks’ patterns of policy and regulation have been challenged. Central banks have closely followed the recent expansion of cryptocurrencies as well. Moreover, the World Economic Forum (WEF) launched a project on central bank digital currencies. Over a dozen central banks, financial institutions, academics, and other international organizations have been consulted to create a WEF kit that includes worksheets, information guides, and analysis projects. Indeed, central banks’ interest in state-backed digital currencies already exists, and some state-backed digital currencies exist, such as Senegal’s CFA Franc and the Venezuelan Petro. On the horizon, there are also other initiatives, like China’s own digital yuan. Moreover, the Bank of Thailand announced it had completed trials with Hong Kong for a prototype.

So far, it seems like the competition scenario for cryptocurrencies already includes central banks. Considering this complex scenario, some questions should be addressed to students of economics:

  • What would be the main consequences of free competition and profit maximisation on monetary markets?
  • What should be the scope of the central banks’ and other financial regulators’ when considering the cryptocurrency market?
  • Should central banks issue state-backed digital currencies? Why?
  • Which currencies (crypto or not) would survive?
  • Which currencies could be considered money?

What is at stake? In short, the current frontier of financialisation is leaving the way open for a global and comprehensive privatisation of money. Indeed, the global challenges posed by the pandemic and the inflationary pressures are calling into question the trust in central bank fiat money and it role as a public good.

Notes

(1) The market cryptocurrency information is based on https://cryptwerk.com/post/cryptocurrency-a-brief-of-the-cryptocurrency-landscape/

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