The emergence of Bitcoin and other crypto-currencies has raised concerns in many countries around the world. A parliamentary committee is about to report its recommendations in India. There are fears that Bitcoin is a Ponzi scheme, or that it could replace domestic currency and then the government will lose its control over money supply. The champions of Bitcoin claim that it is not controlled by any government. That its mysterious originator has guaranteed that its quantity will never exceed a limit. The creation of each Bitcoin token is an elaborate process worked on blockchain technology which involves many ‘miners’ who solve a mathematical puzzle each time. All current holders of Bitcoin have to be informed about the emission of new currency and have to approve. Bitcoins have come into the news after years of existence only because their monetary value has been going up. It is a fast appreciating asset. As such, it is helpful not to consider them as money but mainly as a commodity which is a store of value. As of the last two years, there is a bubble in Bitcoins. People buy them for commercial reasons. Indeed, if the half-word coin did not appear in its name, and if it was called ‘zen token’, no one would have noticed. If grown-up people want to buy and sell things which they want to profit from, it is their business. It is a form of gambling. There is a great use of blockchain as a tool for record-keeping. That is not in dispute. There are issues with Bitcoins because of the mysterious way in which they have been propagated. The libertarian cloak in which they have been dressed has generated fear among governments that the Bitcoin may replace national currencies.
My own view is that the libertarian facade is nonsense. The producer (one or many) of Bitcoin are human. And as a human institution, Bitcoin production is a monopoly operation which promises strictly limited supply as an enticement. It may not be a government, but is a private human agency. Being a secretive, most probably, private monopoly, it is just a version of a government which has a monopoly of currency issue. In as much as there are other crypto-currencies emerging, the monopoly element is modified. But thinking of it not as money but as commodity simplifies analysis. A crypto-currency (CC) has no use value, but has exchange value. In this, it resembles fiat currency. It is not a means of payment (though it is used in blockchain systems to incentivise the ‘miners’) and has to be translated back into currency to be able to spend it. It is, however, a store of value. As such, its characteristic opacity makes it safe from thieves (though it not clear what happens with hackers). Unlike currency, it is not anonymous. It is just that the owner’s identity is cryptic.
Given the limited scope for the use of CC as means of payment, to say nothing about the elaborate process of generating each new unit (one estimate is it takes 24 hours before the newly issued token is approved though faster computing may reduce this time ), it is unlikely that CC will replace national currencies. If it is helpful, think of CC token as gold, a store of value with limited use as means of payment but not likely to replace money. The fear that CC will replace money is a result of the libertarian rhetoric surrounding Bitcoin. This is just hot air. If one were to be truly libertarian, it is not enough for the issuers of Bitcoin or other CC to be non-state actors. They still represent a monopoly or, at best, an oligopoly. This is just one industry like any other, producing a money-like token which commands a market as a store of value. The product by its secretive cryptographic and small group production process, restricts output. But that is what oligopolies aspire to do. There is nothing libertarian about this.
An ideal libertarian ‘money’ would allow free entry by any producer who can issue. These tokens would compete with other tokens to command trust. If they command trust, they could become acceptable as means of payment. That is rather utopian, but it is truly libertarian because it relies on unfettered entry and competition. This process may converge to a few currencies or just one currency surviving but it would be the result of a competitive process among privately issued currencies with freedom of entry. The movement for ‘free banking’ had elements of this process except that private unregulated banks were issuers of money rather than individuals. There is no need for governments to fear Bitcoin or any other CC. Yet, in as much as these are commodities with no use value, there ought to be some rules to protect consumers. The government ought to make sure that issuers of CC are bona fide. That is all.
The writer is an Economist and Labour peer