Private Currencies Finally Having Their Moment?

Private Currencies

According to Investopedia, a private currency is issued by a private entity such as a corporate organization or a credit union. It is an alternative to national fiat currencies like the US dollar. 

Many societies have accepted and used private currencies throughout human history. Indeed, even gold, the most widely and longest used currency in history, has mostly been used as a private currency. 

Gold did not become a store value and medium of exchange primarily through government decree. It acquired its status because of its inherent instrumental value

The same can be said of compressed tea bricks used as currency by nomads of Siberia, Mongolia, and China going as far back as before the Ming dynasty and only being abandoned in the 20th century. This is also true about tobacco use in colonial-era America, especially in Virginia, Maryland, and North Carolina. 

Free currency market

In the 19th century, the US experimented with the idea of allowing anyone who wanted to issue their currency to do so. In particular, the period between 1837 and 1866 is known as the Free Banking Era. Besides States, private banks, municipalities, companies, and churches, even individuals could print and issue paper currency. 

A currency was embraced, and its demand grew based on how it was managed and the reputation of those who issued it. If it failed to meet the needs of its users or the reputation of the issuers was damaged, it was pushed out of circulation by competition.

With that stated, the idea of the government having the monopoly to print or mint money has had dominance going back to ancient city-states and empires. During the Roman empire, it became known as the right of coinage, and was considered one of the primary pillars of a nation’s sovereignty. 

Almost all countries today protect this concept of the right of coinage. However, how they do it is not the same. For some, like the United States, the concept is sustained through the legal tender laws like the Coinage Act of 1792. 

While issuing private currency in the US is not considered illegal, debt settlement is only enforceable in court through government-issued currency. Also, taxes have to be paid only in the government-issued currency. 

Meanwhile, getting private currencies approved has been difficult. Also, once in circulation, the issuers are always at the risk of being charged with money laundering and a violation of any of the numerous laws guiding the issuance of currency. 

For example, Liberty Dollar was a private currency launched in 1998. In 2009, Bernard von NotHaus, its founder, and others were arrested and prosecuted for issuing currency similar to the US dollar. The FBI and the US secret service stopped the issuance and management of the currency.

These challenges have made it difficult for private currencies to be established and, more importantly, flourish even when the law allows their creation and existence. 

In other countries, such as China, it is illegal and even a treasonable offense for a private organization to attempt to issue a currency. 

For these reasons, many over time have assumed that only the government can issue currency. Nevertheless, economists, especially those in the Keynesian school, have held that issuing currency shouldn’t preserve the state. That the private sector can issue and manage currency even more efficiently.

One of those who has argued for private currencies and predicted a future where they would be commonplace is Friedrich August Hayek, winner of the 1974 Nobel Memorial Prize in Economic Sciences.

Beginning of another Free Banking Era

The launch of Bitcoin in January 2009 appears to have marked the beginning of a new era for private currencies. For the first time, it seems like private currencies are overcoming the obstacles that have always stood in the way.

Today, Bitcoin, according to the market tracking site Coinmarketcap, is valued at over US$700 billion. Even more, it has inspired the emergence of other digital currencies. Close to 10 000 digital coins have been launched in the last decade. 

Some of these, such as Litecoin, Monero, and Ripple, are near copies of Bitcoin or designed to be just currencies. Others like ETH, Binance Coin, and Solana are designed to serve as utility tokens for the virtual machines on blockchain that host various applications.

The entire cryptocurrency market capitalization is close to US$2 trillion and growing.

Another category of private currencies is emerging, and it comprises what is known as stablecoins. The most used stablecoins are  Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai. 

A stablecoin is a digital currency usually on the blockchain issued by a private entity and is backed by another asset. For example, USDT, BUSD, and USDC are backed by the US dollar. That means if you hold any of them, you can exchange them for USD at an exchange rate of close to 1:1.  

That means the entity that issues a stablecoin has to maintain a US dollar reserve or other assets equal to the number of coins it issues.

In November 2021, the presidential working group in the US published a report on stablecoins proposing ways the industry can be regulated. Though asking for a stringent regulatory environment, the report seems to accept it as inevitable that stablecoins will be an integral part of the financial system going forward.

Central banks playing catch up

For a moment, the central banks didn’t recognize crypto as private currencies that were a threat. That could be because they had not had a private currency to deal with as a serious threat for hundreds of years.

According to the Atlantic Council, a nonprofit shaping global leadership, over 90 central banks around the world are working on setting up their own digital currencies, which copy a lot from cryptocurrencies and stablecoins. These have been christened central bank digital currencies (CBDC). 

In particular, central banks recognize that there are benefits that private currencies, in particular crypto, have managed to unlock that did not exist in the fiat currency system.

It also happens that these are the same benefits that made Bitcoin, other cryptocurrencies, and stablecoins succeed where other private currencies, especially in the last 200 years, failed. 

What made Bitcoin succeed.

Several things made Bitcoin succeed and overcome the challenges that past private currencies could not.

First, Bitcoin is decentralized. It is a code released to a community of members who can participate anonymously on a peer-to-peer network. It has no central point of control, which protects it from a stringent regulatory environment. 

Satoshi Nakamoto, the founder, did not need to reach out to authorities for licenses. Meanwhile, the authorities have no server, office, or employees to target even when they want to shut it down.

A case in point on how a private currency struggles to come to the market if centralized is the Libra project by Meta. In 2019, Meta (then known as Facebook) announced plans to launch its own digital currency, which could be used through its social networks, particularly Messenger and Whatsapp.

The Libra project has so far stagnated because of regulatory obstacles. Mark Zuckerberg and his team cannot proceed until they are confident that they cannot be targets of civil and criminal proceedings later.

Second, Bitcoin relies on the internet, which gives it a global reach with hardly any obstacle for anyone who wants to use it. 

Third, Bitcoin offers great privacy, something fiat currencies don’t guarantee, especially when used online. Payment processors have to keep personally identifying data. Bitcoin made it possible to make payments online without sharing personally-identifying information.

Fourth, Bitcoin came with a mechanism for putting inflation under control, a problem that most government-issued currencies have so far failed to solve. The Bitcoin currency has a hard cap of 21 million coins. That means over a long time, it is not expected to lose its purchasing power.

Is it necessary for the government to issue money? 

The conversation about the role of government in the financial system is more relevant now than ever before.

Some believe that the government should get out of printing money and only focus on creating the right regulatory and policy environment for the private sector to offer competitive solutions in the market.

Dante Disparte, Chief Strategy Officer and head of global policy at Circle, a peer-to-peer technology payment company, which is part of the consortium behind the USDC stablecoin, has stated, “I don’t want central banks competing in this manner any more than I would want Federal Aviation Administration (FAA) building aircraft engines and flying planes.” 

Others believe that government-issued currencies and private currencies can co-exist. Josh Lipsky, director of the Atlantic Council’s GeoEconomics Center, has stated that “money is sovereignty. It is fiat currency. It is part of what makes a country a country. To ask a central bank to remove itself from the innovation going on in the space is unrealistic.”

Indeed, with CBDCs, there is a growing push towards public-private sector partnerships. 

The voice that is becoming quieter over time in the conversation is the one holding the position that issuing currency is a preserve of the state. Even those who strongly hold this position acknowledge that it is becoming difficult to contain private currencies, especially cryptocurrencies like Bitcoin.

As the digital revolution in the financial sector was bound to happen, consumers have no options without private currencies like crypto, especially when central bank systems can easily infringe on privacy and economic rights.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.