Edited by Advait Kandiyoor and Akshay Purandare
Dhairyah C. Shroff is a third-year law student at Jindal Global Law School with interests in public policy, cryptocurrency, intersectional economics and intersections of law & economics. They are a member of the editorial department of the Arthaniti Society.
Credit: Beck & Stone
The notions of decentralised money in the day and age of cryptocurrencies seems like a novel one; for long money, naturally assumed to be fiat, has been considered to be the exclusive domain of the government. The very economic institution of money has been so etched with state regimes that to think of money originating from any place other than the government almost seemed like an absurd taboo. Over the course of time and with additions to the plethora of economic thought, various economists came up with the idea of money that doesn’t trace either its origin or its currency from the government and is maintained and governed solely by the market. The first thinker to ever propose this idea was Nobel Laureate Friedrich August von Hayek, who, in his 1976 work ‘The Denationalization of Money’ proposed defining and treating money like any other commodity in an open market. Inspired in part by Adam Smith’s principle of self-interest being a better motive than benevolence in producing economic results, Hayek believed money could sustain and in fact be more productive if in private hands not limited by the impediments of government control, creating a money which, contrary to his counterparts’ claims of collapse, is held up by monetary agencies which will supply good money which is stable and dependable in the face of succumbing to the market pressures of competition. [Hayek, 1976]
Modern day proponents of the idea also hold a similar view and find such a realisation in the form of blockchain-enabled cryptocurrencies. Blockchain, both in the literal and metaphorical sense, is a chain of blocks, where each block represents a particular record and contains certain information which is classified into three categories: Data, Hash and Previous Hash. Data is the relevant information of that block which defines its utility. In the case of a cryptocurrency, say a Bitcoin, the Data will include the names of the transferer and the transferee along with the date of such a transfer -. Hash is a unique code which serves as the unique identity of the block and therefore prevents duplication even if another block is entered with the same data. The third element is the Previous Hash, or the hash of the previous block, which serves as an identifier of the location of the block. In case of an enquiry into block history, the Previous Hash leads the user to the block; this, combined with the whole structure of each block makes the blockchain nearly impossible to tamper with. Take for instance the case of bitcoin theft, wherein the thief decides to change the ownership record of a BTC at the blockchain level. When a block’s Data is altered, the Hash changes as well. This renders the next blocks’ Previous Hash erroneous hence breaking the blockchain, since an alteration or change in the Data, Hash or Previous Hash of one block does not have any impact on that of the succeeding block one and each block following the block that has been tampered with now has an erroneous and inconsistent Previous Hash. While it is technically possible to correct these errors successfully altering a blockchain, it is an unfeasibly time-consuming process. The fastest a block can be modified is ten minutes; if for instance, there exist a million blocks, it will take nineteen years to successfully change the ownership of a BTC at that level. Every member within a blockchain network possesses a copy of it; only after each altered block is approved by a majority of the members will the smallest of changes be held valid under the consensus rule.
Money in the form of cryptocurrencies hence stands decentralised as it is now safeguarded not through the legal tender of the government or through the central bank/s but through a communally administered blockchain, tampering with which is even more difficult than with fiat money. It is this decentralisation that FA Hayek envisioned and is celebrated by proponents of decentralisation. There is, however, a very valid critique of this system that seeks to dismantle the idea that cryptocurrencies are truly decentralised and hence different from corruption-laden lobbyist-controlled fiat money. One of the many evident advantages of cryptocurrency is that it is, in theory, relatively free from private actors having the potential to influence the whole system. Government backed money is a complex jargon of Foreign Exchange and the Petro-Dollar Trade, consequently being extremely volatile, something which cryptocurrency claims superiority because of. The cryptocurrency market is relatively very young and hence lacks regulation, especially in countries like India, which presents a unique case of a high numbers of traders and next to no regulation. This leads to a breeding ground for bad actors who attempt to artificially influence a currency’s value through market behaviour. This leads the ‘free market’ of cryptocurrency to not being so ‘free’ of unnatural influence of private actors. There has long been the looming spectre of the crypto manipulation lobby which consists of powerful persons with huge influence in crypto circles who employ various techniques to manipulate prices of cryptocurrencies in their favour. One of which is the vastly popular ‘pump and dump’, which follows buying up most low-market cap coins pumping the price and selling off en masse when the coin is inflated enough in synchrony. South African entrepreneur Elon Reef Musk was recently accused of the same irregularity with regard to the doge coin and was labelled as being one of the largest instances of market manipulation in the cryptocurrency industry. There are other methods of market manipulationtoo, in the likes of spoofing, wash trading and stop hunting. This leads to an interesting critique of cryptocurrencies which strikes at the very point of conflict between traditional money and decentralised money; susceptibility to manipulation. If decentralised money is also susceptible to private manipulation, then it loses its biggest advantage over government backed money.
Hayek hence proposes and propounds a system in which financial institutions, not a sovereign government, bring into existence currencies which contend for adoption by constituent persons of the economy, the decisive factor for which is stability. This is, given the postulation that competition between currencies will economically approbate currencies which are most stable; a movement either upward or downward is bound to cause a loss to stakeholders in the economy, debtors and creditors respectively. These institutions, which now will buy and sell using these private currencies, would regulate and issue them mainly through lending and subsequently through buying and selling these currencies, very similar to what we see in the case of cryptocurrencies, the only difference being that one currency would be bought and sold in return for the other currency, having adjusted their respective values in place of fiat money. [Ferris & Galbraith, 2006]
Such a radical proposition did have its fair share of critique too, especially at a time when, due to technological restraints, thinkers could not fathom a change this absolute. In addition to suggesting allowing only banks to issue and regulate these new currencies, economist Lawrence White pointed out that the entirety of Hayek’s theory rests on the assumption that the most stable currencies would be preferred by the economy and that wealth may be generated by trading those currencies together. White argues that in a system where fiat money issued by the central bank exists, people trade other currencies using that fiat currency/s and hence the stability. In a system with no centralised currency/s stability will be hard to achieve. [Lawrence, 2010]
The various critiques of Hayek’s theory of denationalisation of money have incorporated their own nuances into it presenting a more complete, attuned product. Despite its radical and seemingly implausible nature Hayek’s theory brings to light an important economic position on the state’s control over monetary institutions and the possibilities/restraints of private money.
REFERENCES
Hayek, Friedreich A. (1976) “The Denationalization of Money” (1st ed.) Institute of Economic Affairs.
Ferris, J. Stephen; John A. Galbraith (2006). "On Hayek's denationalization of money, free banking and inflation targeting". European Journal of the History of Economic Thought. doi:10.1080/09672560600708359
White, Lawrence. (2010) "Larry White on Hayek and Money". Library of Economics and Liberty.
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