The Institute of Economic Affairs (IEA) has today released a report stating that the UK should privatise the pound and replace it with cryptocurrencies.
Founded in 1955, the London institute was described as the "most influential thinktank" in modern British history by journalist Andrew Marr. Its impact on public policy should not be underestimated.
The institute believes bitcoin will “open the floodgates to a tidal wave of private money,” but points out that digital currencies are quite a bit different than previous examples of private money. For example, due to its decentralised nature bitcoin cannot be easily shut down, so the institute thinks it is here to stay.
A bit-part player?
In the institute’s report, titled ‘New Private Monies – A Bit-Part Player?’ professor Kevin Dowd argues that the innovation behind non-conventional types of money, including digital currencies like bitcoin, has been fuelled by “mounting restrictions on financial freedom.”
Dowd believes states must allow a “level playing field” for private money and stop stifling competition between state-backed and private currencies. Central banks should welcome competition, as it will force them to offer greater choice and improved quality, argues Dowd, adding:
“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.”
Dowd believes governments should stop favouring their own or any currency in particular and refrain from imposing regulations. He explained his pro-privatisation position in an interview with The Guardian:
"The natural analogy is with some of the old, bad, monopolies like British Gas or British Telecom. Telecom is a very good example: for a long time, we had a government monopoly, which stifled innovation, and the service was poor. Once that got opened up, competition opened, new innovation prospered, and we got all sorts of innovation that we couldn't possibly anticipate, and we're a lot better off for it."
Four factors behind bitcoin’s success
Should the UK, or any other country, decide to ‘privatise’ its national currency and embrace competition from private monies, Dowd believes these new forms of money will by cryptocurrencies.
Although Dowd talks about bitcoin, he believes bitcoin is unlikely to replace the pound. The way it is designed, bitcoin is prone to bubble-bust cycles, hence Dowd expects it to fail in the long run.
However, the professor sees a silver lining: he expects bitcoin to be displaced by superior and more imaginative forms exchange.
Dowd outlines four reasons for bitcoin’s success:
- Low transaction costs associated with bitcoin
- Self-regulating nature of the bitcoin market, no sweeping regulation imposed by central banks
- High level of anonymity (or pseudo-anonymity) in an age when financial freedom is being eroded by governments
- Novelty factor – bitcoin can be used to facilitate trade in activities prohibited by the state
Dowd believes the market for private monies will continue to thrive as long as states try to restrict and prohibit various forms of commerce. Assaults on personal freedoms make alternative currencies and private money more attractive to wider circles of people.
Mark Littlewood, Director General at the Institute of Economic Affairs, thinks that a decision to embrace private monies rather than suppress them would have profound implications on personal freedom. He added:
“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.”