When we talk about Bitcoin, probably, the most original and innovative feature that pops up in mind is its decentralization. Basing itself on a peer-to-peer network, the Bitcoin system is not controlled or managed by a central authority: each node of the network contributes to the functioning of the protocol. Such a characteristic surely makes many people turn up their noses, or give them perplexity. Our economy, and in particular our financial system, is highly regulated, there are countless authorities which supervise market dynamics, constantly updating the existent guideline to stay on the cutting edge of the financial innovation. Since financial markets are far from perfect, there is the necessity of a public mediation, in the form of (questionably) independent authorities, to guarantee stability, efficiency and transparency. This argument is even more compelling when talking about money and currencies. The money we use is, per se, worthless. However, the authority of the State and of the central bank behind each currency gives it official recognition and the power to extinguish debts and obligations (the so-called status of legal tender and fiat money). Nowadays, Bitcoin entered in this messy scenario as a currency that has no central bank to guarantee its value, but simply the trust and the value its users attribute to it. We could look at Bitcoin as denationalized money (please allow me the use of the term money, even though the debate on whether Bitcoin performs all the three functions of money is still open).
Despite this seeming an extremely new concept, actually, one of the first people to talk about denationalized money is F.A. Hayek, in its 1976 work, “Denationalization of Money”.
The famous economist had been searching for years a solution to one of the greatest and simplest problem afflicting monetary theories, how could we stop inflation?
In his opinion, the management of monetary policy by governments and central bank, in particular all the manoeuvres meant to be a stimulus to the economy, do nothing but fuel inflation, sending the supply side of the economy misleading signals about the demand, bringing the economy to crises and recessions. To Hayek, the cure to this dilemma can be only one: taking away from the governments the monopoly of issuing money, allowing in each country the coexistence of different currencies, even privately issued ones. In this way, each minting institution would be forced to issue reliable money, with a stable value, for it to be used and preferred to the others. Competition, in the end, would lead to the survival of the best, in the sense of inflation-free, currencies, ending once and for all the deleterious mechanism enforced by a centralized monetary policy.
All of this was proposed in 1976. Now, in 2014, there is Bitcoin, a privately issued currency, which is beginning to compete with traditional ones. Could it be the answer Hayek was hoping for? More importantly, is that the right one?
It’s still too early to state that, but we can look at Bitcoin decentralized system also under this prospective.
The last financial crisis has been the proof of how flawed our financial system is, not to mention of the huge difficulties central banks have been facing to deal with the crisis consequences, like fuelling back the economy.
Shouldn’t we retrieve and readapt what Hayek pictured at first?