Free Banking and Cryptocurrency is next in my series of looking at the problem and solution for cryptocurrency. Previously in the series is The Protocol Layer and Cryptocurrency and Market Valuation II.
The U.S. Free Banking Era
It is not feasible to have thousands of currencies within a common jurisdiction. This is what the crypto space consists of today. It is inefficient to carry out the exchange of goods and services, to write contracts, to build enterprises, and enact payrolls on thousands of different currencies of varying value. Governments control a national currency by edict of legal tender law. You have no choice except to use the national currency. In countries with exceptionally bad currency, a parallel system of trading in black market currencies may exist. Even without government intervention by legal tender law that delegates a currency by edict, currencies will always devolve to the one that is the most stable in value. That is because a currency of stable value is the only one that defines the three roles of currency—a means of exchange, a store of value, and a unit of account. Venezuelans shun the hyperinflation of their bolivar for U.S. dollars. Workers desire to earn, pensioners desire to save, and merchants desire to trade in a currency with the most stable value. Given a choice, people will abandon by any means possible a currency of unstable value.
Before the creation of the Federal Reserve in 1913, the U.S. had a free banking system. Any bank at the state level could create its own currency. The National Banking Act of 1863 refined the free banking system and put note-issuing banks under the control of the Treasury. While there were hundreds of banks that issued notes under free banking, legitimate banks issued their notes linked to gold at the fixed rate of $20.67/oz. The gold link means that despite the multiple issuers of notes, there was, in essence, a single currency whose value was defined by a fixed price with gold. When Congress created the Fed in 1913, all it did was put the free banking system under a single monolithic banking entity. As long as the Fed maintained the dollar’s fixed link with gold, nothing changed. Free banking and the creation of the Fed were in effect, the same system. The dollar’s value remained equal to 1/20.67th of an ounce of gold.
Cryptocurrency as Free Banking
It is entirely inefficient to have thousands of different cryptocurrencies. One can’t compare the cryptocurrency space with the U.S. free banking era. None of the thousands of cryptocurrencies have a defined value. Their supply and limited utility relative to demand determine their value. Therefore, they do not meet the three roles of a currency. The only thing that is common to most cryptocurrencies is fixed supply. This is a monetary anomaly unique to cryptocurrency with no historical reference.
Why do bitcoin and all its derivatives exist in its present form? The main reason is for their speculative value based on limited utility as a means to transfer money. When you create something with zero value backed by nothing physical and attain value for it, that initial value is created out of thin air. There’s a lot of money to be made off the early mania for the revolutionary promise of cryptocurrency and the blockchain, while the actual use case remains elusive. The hundreds of cryptocurrencies with no apparent use case will not sustain their value. There is no widespread adoption of cryptocurrency for enterprise use or the transaction of goods and services.
Developers are rolling out the solutions and technology to scale blockchains and create the foundation for enterprise adoption and the transaction of goods and services. In the forefront to realize the crypto promise is Bitcoin SV, led by nChain’s Chief Scientist Craig Wright. Bitcoin SV has unlimited block sizes and all the solutions required for enterprise and merchants—scaling, simplified payment verification SPV, the blockchain as the metanet, contracts, wallets, applications, tax and regulatory compliance. Bitcoin SV has it all. The only thing missing is the adoption of its use case. This will not happen as long as the fixed currency flaw remains, and there is no conceivable solution within the Bitcoin protocol to address the flaw. The solution will have to come from outside.
If the Fed ended its monopoly on issuing currency and we went back to a free banking system, we wouldn’t have thousands of fiat currencies. A currency with the most stable value would drive out all other currencies. That currency would be linked to gold. If this is true for currency defined by paper, it is also true for cryptocurrency.