Cryptocurrency is a contentious topic even among die-hard anarchists. Fans of gold argue that a return to the gold standard is key. Others argue that crypto has no commodity value and is therefore worthless. Crypto enthusiasts argue about which particular coin or coins are best, and even adherents to a single coin’s philosophy disagree about how its transactions should be handled.
Despite these disagreements, and despite recent drops in the crypto market, the topic of cryptocurrency as potential money is still interesting. Mises’s Theory of Money and Credit provides ample reason to grapple with this subject and to try to understand why crypto has become so significant. From a theoretical perspective, crypto exhibits many characteristics demanded by the function of money. The digital nature of cryptocurrency does not preclude its rise as a medium of exchange, and there are even some aspects of a good money where crypto may be superior to metallic standards.
Mises described five major characteristics vital to the function of money. They are: marketability [1], durability [2], fungibility [3], trustworthiness [4], and convenience [5]. By the time the market had arrived at an optimal solution of gold with notes and token coins as money-substitutes, the seeds for the state takeover and retrogression of the money system had already been sown.
In many cases, the state was able to gradually convert money from a gold-backed system to completely unbacked fiat. The inertia of regression theory, paired with the ability of the state to first create fiat notes similar to money-certificates [6], and then to impose legal tender laws on the public, allowed it to pull the rug out from under us. When Mises wrote The Theory of Money and Credit, he was not sure that a pure fiat system could even be stable [7]. But, during his lifetime, the world saw many rich countries convert to pure fiat without inducing a crack-up boom. The relentless debasement of money continues to this day.
In a world of pure fiat, one might assume that the state would maintain a hold on the money system until a collapse was imminent, but the advent of cryptocurrency created a new player in the game. While it can be argued that crypto has a commodity value as a novelty item or a technological oddity [8], it is reasonable to say that cryptocurrency has almost no direct commodity value. If we were attempting to predict what a primitive society without a clear money would adopt as money, this would be a point against crypto, compared to gold. However, as we are already in the firm grip of an unbacked fiat system, the regression to commodity value problem does not apply [9]. Insofar as crypto exhibits the qualities of good money, it can gain traction as a medium of exchange and could eventually supplant the existing money. The question is: can cryptocurrency serve as money better than the existing fiat system, even considering the state’s efforts against it?
From a Misesian perspective, we can critically assess crypto as a potential medium of exchange, using the five criteria above. Crypto satisfies the requirements of a good money quite well–comparable to a noble metal. As a digital good, its durability is even better than gold’s–it is intangible and cannot be clipped or sweated, and it does not depend on potentially erroneous measurements of mass. In addition, the storage costs of crypto are virtually zero–much less than gold. In the narrow sense, units of a particular cryptocurrency are perfectly fungible, although some have better anonymity than others. The same is true of divisibility, whose limits are software-defined and can be changed to address market needs without necessarily creating new units.
One of the major advantages crypto has over fiat is its trustworthiness, at least for certain types of coins, which are moved and created by solution of difficult and unique mathematical problems by decentralized networks–a system far less susceptible to fraud and counterfeiting than the current system (especially if we consider printing of new notes by the state as counterfeiting [10]), and potentially even more trustworthy than physical and electronic accounting of noble metal reserves, which are its strongest competitor.
Where cryptocurrencies fail right now are in convenience and marketability. The use of crypto generally requires access to the internet, some coins are limited in how quickly they can process transactions, and the use of digital wallets, whether hardware or software, requires some technical skill. However, the convenience problem is the subject of significant efforts, and the marketability problem would be solved as crypto was adopted as a common medium of exchange. It is worth noting that current versions of cryptocurrency all may exhibit certain problems and issues, including inflationism in some coins, but the technology and ingenuity behind crypto are still in their infancy, and significant advances are still possible.
One major point in favor of crypto is that the next step in the evolution of fiat appears to be a corruption of the cryptocurrency idea, except twisted in the service of state control and surveillance [11]. The central bank digital currency (CBDC) eliminates banknotes and digitizes all aspects of the monetary system. The changes that are implied by CBDCs include the ability of the issuing authority to impose taxation, fines, and negative interest rates to holders without any ability to resist or avoid these penalties. The CBDC ledger is further intended to make surveillance of all transactions by the state easy, including the ability of the state to disallow certain transactions, between certain individuals, involving certain goods, etc., at the whims of state agents and before the transactions even happen.
It seems clear that the move from a note-based fiat system that still uses decentralized, nominally private electronic transfers, to one that operates almost entirely via CBDC reduces the quality of the money from the perspective of the market. This is just one more step in the destruction of money administered by the state. This gives crypto a further foothold.
To summarize, Mises was conscious of several fairly objective criteria to compare the quality of money candidates. Left to its own devices, the market chose a largely gold-based system. However, as the state monopolized the administration of money, that gold standard has deteriorated into unbacked fiat, and now we are faced with the institution of CBDCs which give the state even more power. Cryptocurrency, while still in its infancy, offers an alternative to this state usurpation which gives it a chance at becoming a new form of money. Assuming that the state monopoly on money does not continue forever, it seems that Mises would acknowledge that cryptocurrency might compete with gold in the reestablishment of a market standard.
References
[1] Ludwig von Mises, The Theory of Money and Credit, 2009 Edition, pp. 31-32
[2] ibid., p. 35
[3] ibid., p. 35
[4] ibid., pp. 60-66
[5] ibid., p. 99
[6] Louis Cammarosano, “JFK vs. the Federal Reserve System?” https://smaulgld.com/silver-certificates-federal-reserve-notes-united-states-notes/, Accessed 2022-11-24.
[7] Ludwig von Mises, The Theory of Money and Credit, 2009 Edition, p. 61
[8] Joakim Book, “I Have Doubts About Bitcoin,” https://mises.org/wire/i-have-doubts-about-bitcoin, Accessed 2022-11-24.
[9] Robert P. Murphy, “On Bitcoin and Ludwig von Mises’ Regression Theorem,” https://consultingbyrpm.com/blog/2014/03/on-bitcoin-and-ludwig-von-mises-regression-theorem.html, Accessed 2022-12-07.
[10] Walter Block, Defending the Undefendable, pp. 99-110
[11] Kristoffer Mousten Hansen, “Central Bank Digital Currencies and the War on (Physical) Cash,” https://mises.org/wire/central-bank-digital-currencies-and-war-physical-cash, Accessed 2022-11-24.