Abstract
This chapter sets out a proposal for fundamental reform of monetary arrangements, using the technology of cryptocurrencies to move all bank and fiat money off balance sheet onto a single state sponsored mutual distributed ledger. This helps achieve monetary outcomes desired by the Austrian school of economics: allowing an almost complete withdrawal of the state from the provision of money and credit and reducing the need for bank regulation, lender of last resort and bank bail-out.
On being invited to write this chapter, I first wrote a lengthier and more technical discussion of cryptocurrency technologies and their use to reduce the role of both the state and banks in money creation. That paper is available on SSRN at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2946160. My intention is, eventually, to write a book length treatment of the issues raised by this investigation. I am indebted to the support of the Department of Banking and Finance at Monash University Business School during a period of study leave when this chapter was written and for comments from Denys Firth, Charles Goodhart, David Mayes and George Selgin and from a number of seminar presentations.
Citation: Milne, Alistair, Cryptocurrencies from an Austrian Perspective (April 17, 2017). https://ssrn.com/abstract=2946160 or https://doi.org/10.2139/ssrn.2946160
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Notes
- 1.
Some flavour of the reaction of the Austrian economists and their criticisms of government bailouts at the time of the 2008 crisis can be found at https://mises.org/library/bailout-reader.
- 2.
Heterodox post-Keynsian economics in the Minskian tradition provide another critique of the mainstream policy consensus, agreeing with Austrian school thinking that current policies will lead to an eventual and even more serious global economic crisis. This analysis though is predicated on the assumptions of inherent flaws in the market economy and therefore advocates an even more radical replacement by the state of market mechanisms and market allocations of resources than has already taken place to date.
- 3.
For example (Koenig 2015), an entertaining but rather proselytising introduction to Bitcoin and its supporting Blockchain ledger explicitly invokes the link to Austrian economics in both title and text. His book—as well as describing the technology for non-specialists and documenting some of the viewpoints of those involved in the ‘Bitcoin movement’—espouses the radical position that these technologies will prove to be a more profound technological development than even the internet, replacing the malign role of the nation state in both economics and politics. A wealth of websites and internet forums share similar viewpoints.
- 4.
‘Mutual distributed ledger’ is a coinage of my co-author Michael Mainelli. Describing distributed ledgers as mutual highlights a key feature, the absence of any trusted central authority, which is both a strength (supporting resilience, immutability) and a weaknesses (creating challenges of governance).
- 5.
Central banks have naturally been paying close attention to the technologies of virtual money; see, for example, Ali et al. (2014b, a). The central issue in these discussions has been whether there is demand for holding a central bank issued cryptocurrency, i.e. something like the suggested Fedcoin outlined by Koning (2014) and Andolfatto (2015). Demand is uncertain; users may prefer the guaranteed anonymity of notes and coin, and there are already effective means for carrying out most online monetary transfers using bank money. For further discussion, see Fung & Halaburda (2016). Bank of Canada and Bank of England research on this topic can be accessed through their webpages, various postings on http://www.bankofcanada.ca and http://www.bankofengland.co.uk/research/Pages/onebank/cbdc.aspx. Sveriges Riksbank has also announced they are investigating possible issue of digital currency (Skingsley 2016).
- 6.
Such as the Utility Settlement Coin or Tibado described above, or the Monetary Authority of Singapore project working with R3 and a consortium of banks to develop a fully centrally backed virtual currency on distributed ledger that can be used in securities settlement and cross-border payments (on this see Monetary Authority of Singpore 2017).
- 7.
See also Schwartz (1989) for a succinct review of these controversies.
- 8.
A fuller discussion of the points made in this subsection can be found in the supporting working paper.
- 9.
The original white paper describing the Bitcoin protocol (Nakamoto 2008) contains a strong statement of the desirability of having money whose supply is not controlled by the state, but instead determined by a peer-to-peer network. This white paper is also the source of the term ‘mining’ for proof of work rewarded by issue of cryptocurrency.
- 10.
As an example of a synthetic commodity money, Selgin describes the case of the so-called Kurdish Swiss Dinar, which circulated in Iraqi Kurdistan from 1993 to the US coalition invasion of Iraq in 2003. It had value in exchange even though it was governed by no monetary authority, was not legal tender and was not accepted as payment by Iraqi public institutions. Unlike the official Iraqi dinar, the Kurdish Swiss Dinar proved immune from the large-scale loss of value through inflation under the Saddam Hussein regime; its exchange rate against the dollar was stable and supported by the absolute fixity of its supply (unlike the official Iraqi dinar no new Kurdish Swiss Dinars could be printed).
- 11.
This relates to the long standing discussion in Austrian monetary economics of difference between the perceived stability of the gold standard proper and the evident instability of the gold-exchange standards established in the 1920s and then again under Bretton-Woods. The stability of gold standard proper is seen by many Austrian economists as resting on the widespread use of gold in direct exchange, e.g. through circulation of gold coin, suggesting that a prerequisite for the use of cryptocurrency as a monetary standard is the widespread use of the cryptocurrency in exchange.
- 12.
See (Dowd 2014) for discussion of the demand for holding and using cryptocurrencies and other alternative private currencies.
- 13.
See (Dowd 2014) for discussion of the closure of both the Liberty dollar and e-gold by US authorities.
- 14.
- 15.
For discussion of the competition implications of new payments technologies, see (Milne 2016).
- 16.
Appendix B to the supporting working paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2946160 provides a fuller review of Austrian views on monetary arrangements.
- 17.
Hayek (1978, 1979) proposes removing government monopoly on the supply of money and having instead only private produced currencies, competing for the trust of the public and each trading at different market determined values; but this was a relatively late contribution within the Austrian School, a consequence in part of Hayek coming round to the view that restoration of the Gold standard was not possible.
- 18.
Von Mises and Hayek were not slow to recognise the costs and disadvantages of using gold as a monetary standard. For example, Hayek writes: ‘In a securely established world state with a government immune to the temptations of inflation it might be absurd to spend enormous effort in extracting gold out of the earth if cheap tokens would render the same service as gold with equal or greater efficiency’. (Hayek 1937, p 405).
- 19.
One early example described by De Roover (1942) is that of the money changers operating in Bruges from the late thirteenth century, whose activities are recorded by the preservation of two of their account books. As De Roober, page 63, describes, oral instructions for bank-to-bank payments could be financed by a corresponding debit or credit to a clearing account held by one bank with the other.
- 20.
For example, in the UK, a bank-to-bank payment can be made using the traditional paper instrument the cheque using the cheque and credit clearing scheme (CCCS); through a variety of instructions (direct debit, standing order, bulk payment instructions) via the bank automated clearing system (BACS), a card payment via either the Visa or Mastercard systems; an immediate direct online or telephone instruction via the faster payments scheme (FPS) or using the large value real time scheme (CHAPS).
- 21.
Settlement can be either at the same time the payment is made, i.e. when the payer’s account is debited and the payee’s account credited (‘gross settlement’) or later (‘deferred settlement’). If settlement is deferred then until it takes place, the payer’s bank has a liability for subsequent settlement to the payee’s bank.
- 22.
What about international transactions? Again, provided the exchange rate is freely floating, there can be no liquidity shortage for the banking system operating within a single currency area.
- 23.
Technically, it would be possible to trace back the history of transactions on the ledger to determine the proportions of fiat and bank money of any particular holding of cryptocurrency, but there is no economic reason for this making any difference in the acceptability of money in exchange or technical advantage of using this information in payment processing. To fully enforce the equivalence of money on the ledger, a legal prohibition might also be imposed on using information on the proportion of fiat origin as a criteria for acceptance in payment or simply by making all ledger money legal tender.
- 24.
See (Stein 2012) for discussion of the loan externality, related to the realisation of loan collateral in a crisis.
- 25.
For example, the research and lobbying material of the institute for international finance https://www.iif.com
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Milne, A. (2018). Cryptocurrencies from an Austrian Perspective. In: Godart-van der Kroon, A., Vonlanthen, P. (eds) Banking and Monetary Policy from the Perspective of Austrian Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-75817-6_12
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