Evan Kuo is the co-founder of Ampleforth (formerly Fragments), a startup developing advanced technological solutions for the stablecoin market, and the former founder of on-demand delivery startup Pythagoras Pizza.
The following is an exclusive contribution to CoinDesk’s 2018 Year in Review.
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government. That is, we can’t take them violently out of the hands of government. All we can do is by some sly roundabout way introduce something that they can’t stop.” – Friedrich Hayek
In 1976, the Nobel Laureate Friedrich Hayek authored an important and prescient paper titled: “The Denationalization of Money.” Bitcoin proponents love and often quote this work as the rationale for why Bitcoin needs to exist, but Hayek’s original vision looks less like today’s Bitcoin, and more like today’s stablecoins.
Hayek painted the picture of a world where money, like banking, is denationalized. He believed that unlike law and language, money had not been allowed to evolve due to sovereign influences suppressing competition. And he predicted that if governments were to allow for it, currencies would naturally evolve to compete on increased stability, eventually eliminating the devaluing effects of inflation altogether.
A bold claim, paired with a simple two-pronged approach:
- Open the free trade of money
- Allow the issuance of independent money.
At the time of publication, it would have been nearly impossible to imagine either of these taking place. Still, Hayek wrote with the hope that some perfect storm of circumstances might someday change the game, even going so far as to suggest that the change may need to happen without government support.
Today, more than 40 years after the idea’s inception, we see the denationalization of money unfolding organically in the form of digital assets.
A Sly Roundabout Way
The Bitcoin protocol can certainly be described as a “sly roundabout way” of introducing an independent money that no central authority can stop. In a stroke of genius, Bitcoin’s creators traded technical scalability for social scalability. And in this sense, Bitcoin’s approach toward decentralized money was precisely the workaround that Hayek asked for.
However, this is where the analogy connecting Bitcoin with Hayek’s fictional currency the ducat, diverges.
Hayek explicitly opposed the notion of a fixed supply currency. Possessing full knowledge of the economic history behind scarce metals and fresh off the collapse of Bretton Woods, he knew with certainty that fixed supply was not the solution he sought.
Like scarce metals, fixed supply assets cannot respond to changes in demand, and will never achieve the sustainable level of near-term price stability needed to compete with central bank money.
Fortunately, with Bitcoin’s ideals amplified by extreme speculative interest, the protocol succeeded in drawing a critical mass of attention to the inefficiencies of existing monetary and banking systems. And more importantly, Bitcoin instilled in a new generation of innovators the idea that money is something we can change.
The vast majority of stablecoins we see today are fiat collateralized. Back in 2015, unbanked cryptocurrency exchanges needed a fiat pegged token so that traders could move in and out of speculative positions on floating price assets like Bitcoin. Many of these exchanges existed outside the U.S. and lacked direct banking relationships.
Tether rose to fill this pressing need, collateralizing 1 U.S. dollar for every USDT token minted and forming partnerships with all major exchanges. This meant that whether you were a U.S. citizen or not, you could buy and sell a tokenized representation of the US dollar without restriction. Effectively, Tether opened up the free trade of sovereign money, unlocking the first phase of Hayek’s vision – what he referred to as the “practical” approach to denationalization.
Since then, much has been written about Tether’s controversy and it suffices to say that its near monopoly, lack of transparency, and reliance on centralized banking partners predisposed it to allegations of abuse.
Hayek believed that opening the free trade of money would lift the floor of monetary quality by placing pressure on weak currencies to execute monetary policy at the level of their best sovereign peers. For example, if citizens of Venezuela or Argentina could simply buy in and out of U.S. dollars, there would be no excuse for extended abuses of monetary policy.
And it’s fitting that in an environment of open competition, the digital asset market’s natural tendency was to diversify away from Tether through competition. Recently, a number of fiat collateralized alternatives have entered the stage including Paxos Standard Token (PAX), Gemini Dollar (GUSD), TrueUsd (TUSD) and Circle’s CENTRE consortium (USD-C).
These new entrants are…