Denationalization of Money: Hayek's Vision is not Bitcoin

Rate this post

Friedrich Hayek is a Nobel Laureate and in 1976 he published the paper “The Denationalization of Money”.

The paper is often quoted by many bitcoin lovers and it’s often cited as to why Bitcoin should exist and replace fiat. What the bitcoin lovers often neglect to mention is that Hayek’s original idea looks far less like the modern Bitcoin, and way more like the modern stablecoins.

Hayek’s vision saw a world with both banking a money being denationalized. According to him, money was not allowed to evolve due to sovereign influences who surpassed the competition. If governments had no say in the matter, currencies would naturally find ways to evolve and compete on increased stability.

Needless to say, governments did not think too fondly of the idea of opening the free trade of and issuance of independent money. When the paper was published back in 1976, both of these seemed absolutely impossible and well within the realms of sci-fi. Hayek believed that with time, circumstance would force governments to adapt and allow for the evolution of money to take place. He stated that in all else fails, the change must happen without government support. 40 years later, digital assets are moving towards denationalization.

If we think logically, the Bitcoin protocol is a roundabout way of introducing the above mentioned independent money, which no authority can control. Bitcoin’s creators decided to trade technical scalability for social scalability, which is why Bitcoin’s approach towards decentralization was exactly what Hayek wanted.

Hayek however, was strictly against a fixed currency supply. His main reasoning was his knowledge on the economic history behind precious metals and their scarcity. Additionally, the Bretton Woods collapse being hot news, he was vigilant in his belief that a fixed supply could not be the right solution.

Denationalization forward

The huge interest in Bitcoin was a huge wake-up call to the many inefficiencies of the current monetary and banking systems. More importantly, Bitcoin showed people that the right idea can change the financial world for the better. This brings us back to stablecoins. The majority we have today are collateralized. In 2015, unbanked crypto exchanges required a fiat pegged token to enable traders to move in and out of speculative positions on assets like Bitcoin.

Tether (USDT), rose up to fill this need, collateralizing $1 for every USDT token minted. The new token quickly managed to form partnerships with all major exchanges. This effectively meant that non-US citizens can now sell a tokenized representation of the US dollar without any form of restrictions. Tether managed to fulfil 1 part of Hayek’s vision, which he referred to as the practical approach to denationalization.

Hayek thought that opening the free trade of money would increase monetary quality and pressure weak currencies to execute monetary policies at a higher level. If Argentinian and Venezuelan citizens could freely buy in and out of USD, there would be absolutely no excuse for extended abuses of monetary policy.

That being said, Tether needed to have competition. Recently, alternatives like the Paxus Standard Token (PAX), the Gemini Dollar (GUSD) and TrueUSD (TUSD) have appeared. The new competitors are rapidly picking up steam as they are putting pressure into older stablecoins to work on their issues and provide quick results for their shortcomings. The alternative? Extinction. This is precisely what Hayek dreamed of in terms of open competition.

Unfortunately, these tokens remain centralized and their use is permissioned. At all points a banking partner can be restricted, forcing the tokens to evade authority or cease operation. Additionally, the continued adoption of fiat collateralized stablecoins is only advancing the dominance of existing sovereign currencies.

This means that fewer stablecoins can actually be called independent. Despite that, this is where the greatest hope is placed and where the most venture capital has been committed. Some of the projects that fall within that category are Reserve, Ampleforth and MakerDao.

Algorithmic stablecoins can offer true denationalization

These algorithmic stablecoins are market driven, resistant to regulation and have very strictly enforced supply policies which cannot be changed by central authorities. Unlike Bitcoin however, they will be functional units of account, which allow them to compete with sovereign currencies on stability.

Independent money is only able to exist if they are better at issuing and regulating the supply than already existing alternatives. If there was a truly independent cryptocurrency which was fairer and more stable than everything available today, Central Banks would without a doubt feel the pressure to improve their monetary policy.

A huge amount of time must pass before algorithmic stablecoins are used on exchanges the way fiat collateralized coins are today. Algorithmic stablecoins do have the potential to change money, but they’ll take a long time to execute and currently introduce risks, which will be diminished with time and scale.

That’s why for the time being, fiat collaterialized stablecoins will continue to dominate the base trading pair use case on exchanges. Their success will unfortunately be driven by their relationship with regulators and exchanges, rather than community and ideology.

In the end, only algorithmic stablecoins are able to provide a realistic way for Hayek’s dream to see the light of day. He would without a doubt have asked for many concurrent denationalized currencies which will constantly have to prove their worth.

You can also check out: