IEA - Bitcoin will open the floodgates to a tidal wave of private money
18 Jun 2014 09:42 AM
Government action has driven the
market for private money
Demand for alternative
currencies will lead to a wave of private monies, new research from the
Institute of Economic Affairs predicts.
The innovation of
non-conventional types of money – such as Bitcoin - has been fuelled by
mounting restrictions on financial freedom. Constraints on commerce, the
erosion of financial privacy and a wish for greater quality have been the
driving forces in the emerging market for private money.
New Private Monies: A Bit-Part Player? by
Kevin Dowd, argues that states must allow a level playing field as far as
private money is concerned. For too long the government has stifled competition
between state-backed and private currencies. Instead, central banks should
welcome competition as it forces them to offer consumers greater choice and
improved quality.
A weakened ability to store
value, growing restrictions on finance, oppressive taxes and a lack of
financial privacy have resulted in growing frustration at state controlled
money. The superior nature of private currencies combined with the financial
freedom they offer has led to their increasing attraction.
Bitcoin enables its owners,
among other things, to protect their wealth, make investments free from
government control and retain a level of privacy, making it increasingly
attractive. The price of Bitcoin rose from 3 cents in April 2010 when
first traded, to over $900 in January 2014.
The relationship between
restrictions on individual freedom and demand for private money is also
identified in the paper. The increasing constraints on personal freedom have
led to private money becoming more and more popular as it enables people to do
what would otherwise be illegal. The market for private monies will continue to
thrive as long as states restrict and prohibit various forms of
commerce.
Prof Dowd identifies
four Reasons for Bitcoin’s
success:
- Bitcoin has enjoyed widespread
acceptance because of the low transaction costs associated with using it. For
retailers, the cost of using bitcoin is lower compared to that of a credit
card.
- The Bitcoin market is
self-regulating, making it free from threats of government coercion. Its nature
also means that the market avoids sweeping regulation similar to that imposed
by central banks.
- Bitcoin restores a level of
anonymity to financial transactions. In an age where financial freedom is being
increasingly eroded by governments, this has resulted in Bitcoin and other
forms of private money becoming an attractive alternative.
- Bitcoin represents a departure
from the status quo. The novelty of the currency is in its ability to
facilitate certain activities prohibited by the state. As long as governments
continue to restrict and constrain commerce, demand for private monies will
grow.
Despite this success, Dowd
predicts that Bitcoin will likely be displaced by superior and more imaginative
forms of exchange. New competitors such as Litecoin, Namecoin and PPCoin are
already in existence.
Commenting on the
report, Mark Littlewood, Director General at the Institute of Economic Affairs,
said:
“If government were to
embrace private monies rather than suppress them, there would be profound
implications for individual freedom. Bitcoin has proved widely successful as an
alternative form of exchange and as way of restoring financial freedom. It is
just the beginning however. Fierce demand for private money will drive
innovation, creating a tidal wave of new and superior forms of
exchange.”
Notes to
Editors:
To arrange an interview about
the report please contact Camilla Goodwin, Communications Officer:cgoodwin@iea.org.uk or
0207 799 8920/ 01821 971 443.
The full report, New Private Monies. A Bit-Part Player? by
Kevin Dowd , can be downloaded here.
Kevin Dowd is professor of
finance and economics at Durham University and a partner in Cobden Partners. A
lifelong classical liberal, his main interests are in private money and free
banking, but he is also interested in general political economy, monetary and
financial economics, regulation, risk management and pensions. He has published
widely in academic journals and is an adjunct scholar at the Cato Institute and
a member of the Academic Advisory Council of the Institute of Economic
Affairs.
The mission of the Institute of
Economic Affairs is to improve understanding of the fundamental institutions of
a free society by analysing and expounding the role of markets in solving
economic and social problems.
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