Crypto Assets sixteen years

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

The cryptocurrency industry, which has been born 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” that is difficult for national power to reach. The recent surge in regulatory measures signifies that this industry is being incorporated into the mainstream financial order.

There are two threads of thought that run through cryptocurrency: one originates from the “cypherpunk movement” of the 1990s, advocating for privacy and freedom through cryptographic technology. The other stems from the history of economic thought, traceable to Hayek's 1976 work “The Denationalization of Money.” This article revisits this book at this moment, looking back at the origins of money, the monopoly of coinage, and the grassroots minting experiments in cyberspace, following Hayek's line of thought.

The Non-Statehood of Money

[English] Friedrich von Hayek | Author

Yao Zhongqiu | Translate

Hainan Publishing House

May 2019

Monopolized Minting Rights

The earliest currency was not invented by states, but rather was a tool gradually agreed upon by people through countless exchanges, a 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 being only a few dozen kilometers. At this time, the medium of exchange between people could only be considered the early form of currency, or what is known as “natural currency,” such as livestock, salt blocks, shells, and grains. The common characteristic of these “currencies” is that they have basic functions of trade and value storage, yet are not easy to carry and divide.

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

In the 6th century BC, the Kingdom of Lydia, located in western Anatolia (now inland on the western coast of Turkey), was the first state to mint metal coins. This was closely related to its unique geographical and resource conditions: Lydia was linked to the trade networks of Mesopotamia and Persia to the east and connected to the maritime trade routes of Greece and the Aegean Sea to the west, attracting a large number of merchants and facilitating frequent exchanges. The Pactolus River within its territory was rich in natural gold-silver alloy (electrum), which was flexible, easy to smelt, and had 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 purity have been standardized and tested, allowing them to be priced by the piece and circulated instantly. Compared to the old days of weighing and verifying the purity of metal blocks, this uniformly minted currency indeed improved transaction efficiency and marked currency with the imprint of national power.

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

The history of paper money has replayed the trajectory from commodity money to metallic currency: it began in the private sector and was later monopolized by the state. The “Jiaozi” from Sichuan during the Northern Song Dynasty in China is the world's earliest paper currency, issued with the guarantee of 16 wealthy merchants and taken over by the government in 1023 AD by establishing the “Jiaozi Office.” The first paper money in Europe appeared in the mid-seventeenth century in Sweden, issued by the Stockholm Bank. As circulation expanded and government regulation strengthened, by the end of the seventeenth century, Sweden and England successively established central banks, and the issuance of paper money gradually concentrated in the hands of the state.

The state's monopoly on the issuance of currency has obvious benefits. For private commercial activities, the efficiency of transactions is improved. For the state, it provides an additional fiscal tool and a source of income. The drawbacks, however, are more subtle. In the era of metal currency, the state could effectively impose taxes by reducing the precious metal content of the currency. In the paper currency era, excessive issuance of currency is even less constrained. During peacetime, excessive issuance is often bearable; however, once war breaks out, it is often accompanied by the state printing money recklessly to fund the military, causing the citizens holding currency to lose their wealth. At times of dynastic change or credit collapse, the currency of the previous dynasty often becomes worthless paper.

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-eighteenth century to the early twentieth century, during the 200 years of the Industrial Revolution and the gold standard, industrial output and national income grew exponentially, but the price level remained close to that of the mid-eighteenth century. The same phenomenon occurred in the United States during the industrialization wave from the second half of the nineteenth century to the early twentieth century—rapid economic expansion with falling prices, even lower than a century ago in the early twentieth century.

Hayek's monetary ideal

In 1976, when Hayek published “The Denationalization of Money,” Europe and America were experiencing severe inflation. To trace its origins, one must return to the Bretton Woods system on the eve of the end of World War II.

In 1944, to prevent competitive devaluation and financial chaos 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 in turn 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 having supported the post-war recovery of Europe and Japan.

After entering the 1960s, the internal contradictions of the system gradually became apparent. 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 its gold reserves. The Vietnam War and social welfare expenditures 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 increased, and the U.S. inflation rate once exceeded 13%. The pound and the franc depreciated significantly, while economic growth stagnated — leading to a rare phenomenon that could even be described as unprecedented stagflation in the post-war Western economic history.

Regarding the birth of the Bretton Woods system and the era following its demise, three economists' voices are crucial: Keynes, Friedman, and Hayek.

Keynes's core view is that the market cannot achieve full employment on its own; the government must intervene to regulate total demand through fiscal and monetary policies to stabilize the economic cycle. He advocated for increased spending during recessions and tightening during booms to maintain employment and growth. This idea laid the foundation for the post-war Western consensus on “state intervention in the economy,” giving rise to the welfare state and the central bank's macroeconomic control system. In 1944, he attended the Bretton Woods Conference as the chief representative of the British delegation, and his fixed exchange rate and international coordination ideas profoundly influenced the post-war financial order.

Friedman argued that government intervention in monetary policy should be limited, proposing a fixed monetary growth rate to replace arbitrary policy stimulus, establishing an independent central bank to stabilize prices and expectations by controlling the money supply. After the stagflation of the 1970s, Keynesianism became ineffective, and Friedman’s monetarism rose, promoting contractionary policies and interest rate hikes in the United States and the United Kingdom, ultimately curbing inflation.

On the spectrum of “government intervention” and “free market”, Hayek stands at the farthest end. He believes that Keynesianism is nothing but a thirst for poison—while it can alleviate short-term recession, it inevitably comes at the cost of inflation and stagflation. He also disagrees with Friedman's monetarism, as the government's power to issue currency cannot be permanently constrained; once an economic recession occurs, political forces will inevitably overcome the rules, and the printing press will eventually start again. Thus, he proposed a more radical solution: since power cannot be limited, 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, or 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 will survive. The value of currency is no longer dependent on political power but is determined by market trust.

Hayek further proposed the characteristics that an ideal currency might have: 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; issuers should actively adjust the money supply based on changes in market prices to prevent inflation or deflation; and maintain credibility through a public asset and exchange mechanism. He also emphasized that the final form of the 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 market order provided important ideological support for Thatcher and Reagan in implementing market-oriented, deregulation, and anti-inflation policies. However, his advocacy for the abolition of the state's right to issue currency and for allowing currency to return to market competition was never adopted by any government before his death in 1992. Years later, with the advent of the internet and the wave of cryptocurrency technology, a series of minting experiments emerged in cyberspace. These experiments became a distant echo of Hayek's thought.

Cyber Space's Minting Experiment

The most widely known currency that was 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 restore the gold standard order online. E-Gold issued digital currency equivalent to gold, allowing users to settle in “grams” and transfer across borders. The company maintained corresponding gold assets in vaults in London and Dubai. At its peak, it had over 5 million accounts and an annual transaction volume of 2 billion USD. In 2007, E-Gold was prosecuted by the U.S. Department of Justice for “money laundering, conspiracy, and operating an unlicensed money exchange business,” which severely hindered its operations, leading it to gradually enter a liquidation phase.

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

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 searchable vaults, and even its founder, Satoshi Nakamoto, remains unknown to this day. It replaces trust in institutions with technology, allowing currency issuance to break free from control at the national and corporate level for the first time. However, due to the lack of physical backing, its value primarily depends on network consensus, the energy and operational costs invested by miners, leading to significant price volatility. This high instability diverges from Hayek's vision of an ideal currency—a currency that can maintain stable purchasing power in free competition.

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

The first category has internet genes. The most representative is Libra, announced by Meta (formerly Facebook) in 2019. This project can be described as high-profile: it was jointly established by more than twenty organizations, including Visa, Uber, Temasek, and Coinbase, to form the Libra Association, with plans to issue a global digital currency anchored to “a basket of fiat currencies and short-term government bonds,” aiming to create a cross-border payment and settlement network. However, before the project could take off, it triggered strong backlash from regulators in Europe and the United States—fearing it threatened monetary sovereignty, impacted financial stability, and even touched on privacy and antitrust red lines. Three years later, Libra was stillborn, and the ideals dissipated.

The second category includes cryptocurrencies with genetic traits, which 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 experienced a collapse in 2022, reaching a market cap peak of $40 billion at one point. After the collapse, people realized that this was more like a Ponzi scheme disguised as an algorithm. Over-collateralized stablecoins involve using assets such as Bitcoin and Ethereum as collateral on the blockchain to mint digital currencies equivalent to $1. Their collateralization ratio is usually over 150%, meaning that to generate $1 of stablecoin, $1.5 to $2 of assets often need to be locked. This results in low capital utilization and limited widespread adoption.

The stablecoins that are truly entering the mainstream are those pegged to dollar assets. The two most representative companies are Tether and Circle. The former created over $13 billion in net profit last year with a team of about 150 people, while the latter went public on the NYSE in June this year. The core models of both are basically the same: they reserve highly liquid assets such as cash, U.S. Treasury bonds, and short-term deposits, and issue a roughly equivalent “on-chain dollar”. The difference is that Tether also holds a small amount of atypical 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 form of shadow dollar.

Thus, we return to the starting point: the denationalization of currency has still not been truly realized. In today's financial order, there is not a widely used currency that can operate without relying on state credit while also ensuring stable value. Will this emerge in the future? If Hayek were alive today, he might also, like me, want to know the answer to this question.