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Weekend read – The crypto frontier of financialisation

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/

  1. January 28, 2022 at 6:32 am

    There are a few issues that are easily overlooked:
    – Frauds and scams are abundant in unregulated financial markets (crypto being a prime example).
    – It is (has been) the prerogative of governments to issue legal tender. A few percent inflation will not harm this role.
    – Cryptocurrency advocates promise that cryptocurrencies can eliminate banks from the financial system. The capitalist economy depends on credit, so eliminating banks is likely to harm the economy. Money in bank accounts performs a productive function.
    – Cryptocurrencies usually do not come with inflation or a holding fee. If the interest rate in the market is close to zero or negative, this can cause currency hoarding and economic depression.
    – The role of central banks is to stabilise the financial system. The economy benefits from the low risk premium because central banks do ‘whatever it takes’ to keep the system afloat.

    Cryptocurrency and a ‘free’ (not really free of course, but more likely Google and Facebook dominated) markets for currencies can be recipe for disaster. Crypto can be a store of ‘value’ like gold, but building a financial system or an economy on them is a completely different ballgame.

    • Maria Alejandra Madi
      February 6, 2022 at 2:49 pm

      Hi, Thanks for your comments.

      Goid points to be emphasized.

      Maria

  2. Charlie Thomas aKa Cacciato
    January 28, 2022 at 11:50 pm

    What nonsense .. a currency for the rich to isolate them and their wealth from the rest of us.
    more economist obsequity to the absurd inequality that has pushed us to the edge of existence.

    • Meta Capitalism
      January 29, 2022 at 12:09 pm

      Nobel Prize-winning economist Paul Krugman has given an ominous warning about the volatile cryptocurrency market, comparing it to the subprime mortgage crisis of the late 2000s. (CNBC)

      Cypherpunk and Digital Cash

      One precursor of Bitcoin that’s worth discussing is cypherpunk, a movement that brought together two viewpoints. First was libertarianism and in particular the idea that society would be better off with either no or minimal government. Second, the movement coupled that libertarian (or perhaps even anarchist) notion with the idea of strong cryptography and in particular public-key cryptography, which started in the late 1970s. The cypherpunk movement consisted of people who believed that with strong online privacy and strong cryptography, they could redesign the architecture of the way people interact. In this world, cypherpunks believed, people could protect themselves and their interests more effectively and with much less activity by (or, as they would say, interference from) government. (Narayanan, Arvind; Bonneau, Joseph; Felten, Edward; Miller, Andrew; Goldfeder, Steven. Bitcoin and Cryptocurrency Technologies (p. 175). Princeton University Press. Kindle Edition. https://a.co/enqrDNF)

      Krugman compared crypto to a Ponzi scheme and in some ways it most certainly is just that. It may well have its uses in certain contexts, but cryptocurrency is a very volatile speculative investment at best and and at worst Ponzi scheme making the rich richer at the average Joe’s expense.

      We live in the age of conspiracism and a paranoid techno-libertarian dystopian view of the world and government that spews nonsense on stilts daily on social media platforms misleading millions of fools with the con that cryptocurrency is going to be the way to utopia free form government control, You can hear the load of bull for yourself. For starters, he says, “No one would ever voluntarily hold a fiat currency. Why would you ever choose to hold money that someone can arbitrarily diminish?”

      I chuckle how stupid this comment is. How empirically wrong he is proven by one counterfactual event. Crypto currencies are speculative investing instruments and are highly volatile and vulnerable to arbitrary value diminishment as Elon Musk’s joke on SNL proves. Crypto is one of the most volatile speculative investments in the market today. Elon Musk makes an arbitrary comment about Dogecoin in a comedy sketch in SNL and it loses more than a third of its value-price in a very short timeframe. If that is not arbitrary than nothing is!

      There are a lot of so-called experts on social media. They sound convincing. But the empirical evidence doesn’t always back up their claims. Bottom line, crypto currencies are speculative investment vehicles providing get rich quick motivated investors a place to put their bets. Powerful rich people like Elon Musk are able to manipulate the value of a crypto currency by influencing the masses of the little investors by merely making a joke. He followed with positive comments and walla, the crypto value increases. The argument that crypto currency protects one from inflation is also bogus. Any investment that increases in value faster than inflation can do this, including investment in traditional currency trading of government backed currencies. Some investments are riskier and increase faster but the flip side they can decrease just as fast in the face of arbitrary events.

      The problem with highly speculative investing is that it is always the small investor without access to inside information, like for example that Musk is about to go on national TV and make a joke that will cause a substantial decline in the value of a crypto currency, who ends up without a seat when the music stops.

      There are generally speaking two kinds of investing; value investing and speculative investing. Crypto falls into the later at this time in history.

      One of the poor fools who laps up Joe Rogan and ilk on social media like him sent me the
      Tom Bilyeu link and like a mindless intellectual parrot regurgitated this pretzel logic word salad of nonsense on stilts [my comments in brackets]

      I don’t think the central government has our best interest in heart when it comes to the money.

      [So what? Irrelevant to the issue at hand.]

      Crypto is base on a decentralized finance that no one power can control and monopolize their wealth.

      [Government is already regulating crypto and there is no doubt more regulation to come. Like any other speculative investment that turns out to be a wrecking ball to the economy government eventually regulates it. Only a fool things cryptocurrency is beyond government regulation.]

      Breedlove states, “Statism is state marginalized capitalism with communist institution at the core called the central bank”.

      [What a word salad of nonsense on stilts.]

      You’ve seen what the federal gov is doing to our economy especially when there’s a pandemic going on. Our inflation rate hit its all time high and last time we did saw that there was that financial industry crash early 2000s.

      [The fool spewing this nonsense voted for Trump, had voters remorse, and well, enough said.]

      Crypto currencies (bitcoin) in my opinion isn’t a bubble but a asset class that is going to coexist side by side with fiat currency. You’re seeing it play out with alt coins in their adoptions in 3rd world countries. It’s out performed gold and will continue to do some for the next decade. I invested early into crypto and I’m doing good!

      [The definition of a Ponzi scheme.]

      Don’t look at the hype with all these other alt coins, like musk giving out publicity over dodge coin. That’s all bs, but look at the beautiful generated system to create socialism at its truest.

      There is a sucker on every corner and now with the advent of social media a new sucker is born every second.

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