Crypto Assets sixteen years

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On March 6 this year, Trump signed an executive order announcing the establishment of a “strategic Bitcoin reserve,” stating that the U.S. government would not sell the approximately 200,000 Bitcoins it already holds and would continue to increase its holdings in a “budget-neutral” manner. On July 18, he signed the “Genius Act,” establishing regulatory rules for stablecoins pegged to the dollar. Meanwhile, Hong Kong's “Stablecoin Regulation” officially came into effect on August 1, establishing a framework for licensing, reserve supervision, and redemption guarantees.

The cryptocurrency industry, which has been around for 16 years, has quietly grown into a massive industry with a total market value of over $3.5 trillion due to its decentralized characteristics, long residing in the “Wild West” beyond the reach of state power. Now, with intensive regulations being introduced, it marks that this industry is being integrated into the mainstream financial order.

There are two threads running through the ideology of cryptocurrency: one stems from the “cypherpunk movement” of the 1990s, which defends privacy and freedom through encryption technology. The other originates from the history of economic thought, tracing back to Hayek's 1976 work “The Denationalization of Money.” This article revisits this book at this moment, reflecting on the origins of money, the monopoly of minting rights, and the grassroots minting experiments in cyberspace, following Hayek's line of thought.

“The Denationalization of Money”

[English] Friedrich von Hayek | Author

Yao Zhongqiu | Translate

Hainan Publishing House

Monopoly of the Minting Rights in May 2019

The earliest currency was not invented by the state, but was a tool gradually agreed upon by people through countless exchanges; it is the fruit of spontaneous order.

Before 4000 BC, people lived in villages of hundreds, relying on farming, hunting, and gathering for survival, with most people's living radius not exceeding a few dozen kilometers. At this time, the medium of exchange between people could only be considered the prototype of money, or what we call “natural currency,” such as livestock, salt blocks, shells, and grains. The common characteristic of these “currencies” is that they have the function of basic trading and store value, yet are not easy to carry or divide.

With the popularization of metallurgy and the rise of city-states, gold, silver, and copper, due to their durability, divisibility, and portability, gradually came to be used as mediums of exchange. This is the “weighed currency” stage, where transactions were valued based on weight and purity.

In the 6th century BC, the Kingdom of Lydia, located in western Anatolia (now inland of the western coast of Turkey), was the first to mint metal currency on behalf of the state. This is closely related to its unique geographical and resource conditions: Lydia had access to trade networks connecting Mesopotamia and Persia to the east, and maritime trade routes to Greece and the Aegean Sea to the west, attracting a multitude of merchants and facilitating frequent exchanges. The Pactolus River within its territory was rich in natural gold-silver alloy (electrum), which is malleable, easy to smelt, and has a color between gold and silver, providing an exceptional material for coinage.

The royal family minted coins with a lion's head as the emblem, symbolizing royal power and credit. Their weight and fineness have undergone standardized testing, allowing them to be priced per piece and circulated instantly. Compared to the old days when metal blocks needed to be weighed and tested for purity, this uniformly minted currency has indeed improved transaction efficiency and has stamped currency with the mark of national power.

Starting from the mid-7th century BC, the coinage practices of the Lydian kingdom spread to the city-states of the Aegean and the Persian Empire within about 100 years, becoming a model for imitation by various countries. By the 5th century BC, Greece, Persia, and the Mediterranean nations gradually established a system of unified coinage by states or city-states.

The history of paper currency mirrors the trajectory from natural currency to metal currency: it begins in the private sector and is later monopolized by the state. The “Jiaozi” from Sichuan during the Northern Song Dynasty in China is the world's earliest paper currency, issued by 16 wealthy merchants with joint guarantees and taken over by the government in 1023 AD when the “Jiaozi Office” was established. The earliest paper currency in Europe appeared in the mid-17th century in Sweden, issued by the Stockholm Bank. With the expansion of circulation and increased government regulation, by the end of the 17th century, Sweden and England successively established central banks, and the issuance of paper currency gradually became concentrated in the hands of the state.

The state monopolizes the power to issue currency, and the benefits are evident. For private commercial activities, the efficiency of transactions is enhanced. For the state, it adds a financial tool and a source of income. The drawbacks are more hidden. In the era of metal currency, the state could effectively levy taxes by reducing the precious metal content of the currency. In the era of paper money, the behavior of excessive currency issuance is even less constrained. During peacetime, excessive issuance is often tolerable, but once war strikes, it is often accompanied by the state printing money wildly to raise military funds, while the citizens holding the currency lose their wealth. At the time of dynastic change or credit collapse, the currency of the previous dynasty often becomes worthless.

Many historians have tried to prove that inflation is necessary for achieving long-term economic growth. Hayek refuted this view with facts. Taking the UK as an example, from the mid-18th century to the early 20th century, during the 200 years of the Industrial Revolution and the gold standard, industrial output and national income increased exponentially, but the price level remained close to that of the mid-18th century. The same phenomenon occurred in the United States during the wave of industrialization from the second half of the 19th century to the early 20th century—rapid economic expansion, with prices not rising but falling, even dropping below levels from 100 years earlier by the early 20th century.

Hayek's monetary ideal

In 1976, when Hayek published “The Denationalization of Money,” Europe and the United States were experiencing severe inflation. To trace its origins, we have to go back to the Bretton Woods system on the eve of the end of World War II.

In 1944, to prevent the competitive devaluations and financial turmoil during the war, representatives from 44 allied nations held a conference in Bretton Woods, New Hampshire, USA. The conference established a fixed exchange rate system centered on the US dollar: each country's currency was pegged to the dollar, which was then convertible to gold at a rate of $35 per ounce. This system effectively maintained exchange rate stability and low inflation for nearly 30 years after the war and is widely regarded as a support for the post-war recovery of Europe and Japan.

After entering the 1960s, the inherent contradictions of the system gradually became exposed. As the issuer of the global reserve currency, the United States had to continuously supply dollars to meet global liquidity, but the issuance of dollars far exceeded gold reserves. The Vietnam War and social welfare spending further increased the fiscal deficit. In 1971, the U.S. gold reserves were insufficient to support the overseas dollar stock. In August of that year, Nixon announced the suspension of the dollar's convertibility into gold, leading to the collapse of the Bretton Woods system. In the following decade, oil prices soared, prices rose, and U.S. inflation once exceeded 13%. The pound and franc depreciated significantly, while economic growth stagnated—resulting in a rare phenomenon, which could even be said to be unprecedented in the post-war Western economic history, known as stagflation.

Three economists are crucial to the birth and the era following the end of the Bretton Woods system: Keynes, Friedman, and Hayek.

Keynes's core view is that the market cannot self-fulfill full employment, and the government must intervene to adjust total demand through fiscal and monetary policy to stabilize the economic cycle. He advocated for increased spending during a depression and tightening during prosperity to maintain employment and growth. This thought laid the foundation for the post-war Western policy consensus of “state intervention in the economy,” giving rise to the welfare state and the macro-control system of central banks. In 1944, he attended the Bretton Woods Conference as the chief representative of the British delegation, and his ideas on fixed exchange rates and international coordination profoundly influenced the post-war financial order.

Friedman argued that government intervention in monetary policy should be limited, proposing the replacement of arbitrary policy stimuli with a fixed monetary growth rate, the establishment of an independent central bank, and the stabilization of prices and expectations through control of the money supply. After the stagflation of the 1970s, Keynesianism failed, and Friedman’s monetarism emerged, pushing the United States and the United Kingdom to implement tightening policies and raise interest rates, ultimately curbing inflation.

On the spectrum between “government intervention” and “free market”, Hayek stood at the farthest end. He believed that Keynesianism was merely drinking poison to quench thirst—while it might alleviate short-term recessions, it would inevitably come at the cost of inflation and stagflation. He also disagreed with Friedman's monetarism, as the government's power to issue currency could not be permanently constrained; once an economic recession occurs, political forces would inevitably overcome the rules, and the printing press would be activated again. Thus, he proposed a more radical solution: since it is impossible to limit power, it is better to strip it away—abolish the state's monopoly on currency issuance and let money return to market competition.

In Hayek's vision, any private institution, such as banks, chambers of commerce, large corporations, and even international organizations, can issue their own currency. In this competitive system, if a currency depreciates due to over-issuance or mismanagement, the market will automatically abandon it, and the issuer will lose credibility and market share. Ultimately, only the most stable and trustworthy currencies can survive. The value of money is no longer dependent on political power, but is determined by market trust.

Hayek further proposed the characteristics that an ideal currency might possess: its primary goal is to maintain stable purchasing power, and its value should be anchored to a basket of representative goods or a price index; the issuer needs to actively adjust the money supply according to changes in market prices to prevent inflation or deflation; it should maintain credibility through a transparent asset and exchange mechanism. He also emphasized that the final form of an ideal currency should be determined by market evolution, rather than predetermined by theorists.

Between 1979 and 1985, Hayek's vigilance against state intervention and his belief in spontaneous order in the market provided important ideological support for Thatcher and Reagan's implementation of market-oriented, deregulation, and anti-inflation policies. However, his advocacy for the abolition of the state's monopoly on currency and allowing money to return to market competition was never adopted by any government before his death in 1992. Many years later, with the advent of the technological wave of the Internet and cryptocurrencies, a series of minting experiments emerged in cyberspace. These experiments became a distant echo of Hayek's ideas.

Coinage experiments in cyberspace

Today, the most well-known currency born in cyberspace is undoubtedly Bitcoin. However, before its emergence, the internet world had undergone several coinage experiments, all of which ended in failure.

The most widely used is E-Gold. In 1996, former American oncologist Douglas Jackson and lawyer Barry Downey founded this company, attempting to reconstruct the gold standard order online. E-Gold issued digital currency equivalent to gold online, allowing users to settle in “grams” and transfer funds across borders, while the company held corresponding gold assets in vaults in London and Dubai. At its peak, there were over 5 million accounts, with an annual transaction volume of $2 billion. In 2007, E-Gold was sued by the U.S. Department of Justice for “money laundering, conspiracy, and operating an unlicensed money transfer business,” which severely hindered its operations and gradually led to a liquidation phase.

Hayek predicted in his book that the state would prevent the emergence of private currencies because the monopoly of the minting power is its most secret source of revenue. This may very well be the underlying reason for the failure of E-Gold. Its anonymity features indeed facilitated fraud, drug trafficking, and money laundering. The end result is that while the state combats crime, it simultaneously defends its monopoly on the minting power.

This situation has changed since the emergence of Bitcoin. E-Gold relied on centralized companies and physical gold reserves, making it susceptible to regulation. Bitcoin has no issuing institution and no confiscatable vaults, and even its founder, Satoshi Nakamoto, remains unknown. It replaces trust in institutions with technology, allowing currency issuance to break free from control at the national and corporate levels for the first time. However, due to the lack of a physical anchor, its value primarily depends on network consensus, the energy invested by miners, and operational costs, leading to extreme price volatility. This high instability further distances it from Hayek's vision of an ideal currency—a currency that maintains stable purchasing power in free competition.

Subsequently, new experiments followed one after another. People attempted to pursue stability and order in the uncharted territory of blockchain. The most important attempts can be roughly divided into two categories.

The first category has an Internet gene. The most representative is Libra, announced by Meta (formerly Facebook) in 2019. This project can be said to be ambitious: the Libra Association was jointly established by more than twenty institutions, including Visa, Uber, Temasek, and Coinbase, with the plan to issue a global digital currency anchored to “a basket of fiat currencies and short-term government bonds,” aiming to create an international payment and settlement network. However, before the project could take off, it triggered strong backlash from regulators in Europe and the U.S.—concerns about its threat to monetary sovereignty, impact on financial stability, and even encroachment on privacy and antitrust red lines. Three years later, Libra was stillborn, and the ideals scattered.

The second category has the genes of cryptocurrency and can be further divided into three types: algorithmic stablecoins, over-collateralized stablecoins, and asset-backed stablecoins. Algorithmic stablecoins are attempts to maintain the stability of the coin's value through algorithmic mechanisms. The most famous example is Luna, which crashed in 2022 and at its peak had a market value of $40 billion. After the crash, people realized that this resembled a Ponzi scheme dressed in algorithmic clothing. Over-collateralized stablecoins, on the other hand, use assets like Bitcoin and Ethereum on the blockchain as over-collateralization to mint digital currency equivalent to $1. Their collateralization rate is usually over 150%, meaning that to generate $1 of stablecoin, it often requires locking up $1.5 to $2 worth of assets. The utilization of funds is too low, resulting in limited adoption.

The truly mainstream stablecoins are those pegged to dollar assets. The two most representative companies are Tether and Circle. The former created a net profit of over $13 billion last year with a team of about 150 people, while the latter went public on the NYSE in June this year. The core model of both is basically the same: they reserve highly liquid assets such as cash, U.S. Treasuries, and short-term deposits, issuing a roughly equivalent “on-chain dollar”. The difference is that Tether also holds a small amount of non-traditional liquid assets like Bitcoin and gold. From Hayek's perspective, these companies are not competitors to the dollar, but rather extensions of the dollar's credit—a kind of shadow dollar.

So, we return to the starting point: the denationalization of currency has not yet been truly realized. In today's financial order, there is still no widely used currency that can be stable in value without relying on state credit. Will it appear in the future? If Hayek were alive today, he might, like me, want to know the answer to this question.

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