Digital Money: Political Economy of Cryptocurrencies

Abstract

Since the advent of Bitcoin in 2009, cryptocurrencies have become prominent in financial markets. Their introduction relates to development of a currency that is free from government control. The creation of cryptocurrencies seems to be related to Fredrick August von Hayek’s concepts of denationalisation of money. But, it is not clear that there is a direct linkage with Hayek’s concepts. Hayek (1944, 1945, 1982) has stated that free markets are preferred to the government monopoly on issuing money as it provides for free transfer of information and competitive pricing of money. However, Rothbard (1982) states that managing money provides governments a strong grip on the economic activities of a country. As a result, it is hard for the government to give that power away as it intertwines its political and fiscal responsibilities. Central banks are now developing digital currencies in order to restrict the use of cryptocurrencies. Therefore, this thesis asks the question: Can Central Bank Digital Currency and Private Cryptocurrency Co-exist? As per Mises’ (1998) Regression Theorem, a currency needs to be backed by a commodity in order to keep a stable value and private cryptocurrencies cannot be a valid currency. It is unlikely that cryptocurrencies will replace fiat currencies or central bank digital currencies within local jurisdictions. At present, cryptocurrencies like Bitcoin act more as assets than currencies and an increase in demand has led to significant price volatility. However, these cryptocurrencies can exist for cross border transactions, developing a two-tiered system. Additionally, new cryptocurrencies can be developed that could support the existence of private cryptocurrencies within local jurisdiction that can compete with central bank digital currencies. Finally, this thesis provides forms in which this co-existence can occur.