New Private Monies by Kevin Dowd professor in finance and economics at Durham University. A book about Bitcoin and other electronic currencies.
- A private money is a widely accepted medium of exchange or payment issued by a non-governmental body in the absence of any legal privileges. Private monies do not have to be generally acceptable; they merely have to be widely accepted. Three examples of contemporary private monetary systems are the Liberty Dollar, e-gold and cryptocurrencies. The former two are based on precious metals and the best-known instance of the latter is Bitcoin.
- There is a public demand for and interest in private currencies from various groups of people. Some wish to hold private currencies in the expectation that they will not diminish in purchasing power as state money has; some wish to conduct illegal activity; some wish to be part of a movement against increasing state control of economic and personal behaviour; and others just want better money.
- The Liberty Dollar was based on a private mint that issued gold and silver coins; it also issued notes redeemable in precious metals. It was periodically revalued against the US dollar as the value of the latter fell over time against the precious metals. The Liberty Dollar was specifically designed to function in parallel with and in competition to the US dollar and never marketed or represented as official US currency.
- The Liberty Dollar was highly successful and became the second most popular currency in the US. Though initially tolerated, the US government turned against the Liberty Dollar, declared its use a federal crime and eventually secured a conviction against its founder for counterfeiting, fraud and conspiracy against the United States. This was an extraordinary result given that the purpose of the founders of the Liberty Dollar was to produce a currency that was distinct from but superior to the greenback dollar, and there was never any attempt to pass off the former for the latter.
- e-gold was a private digital gold currency, a digital payment system in which the unit of account is gold and in which user accounts are backed by gold reserves. It was an ‘offshore’ payment system rather than a money transmitter or bank as defined under then-existing regulations, not least because gold was not legally ‘money’. By 2005, e-gold had grown to be second only to PayPal in the online payments industry: it had 1.2 million accounts and transactions that year totalled $1.5 billion.
- US law enforcement services also turned on e-gold and its principals were indicted in April 2007. The charges boiled down to e-gold being an unlicensed money-transmitting entity and a means of moving the proceeds of illegal activities with the principals’ tacit knowledge. These charges were never proven and even the judge in the e-gold case expressed major doubts about the government case.
- Bitcoin is a totally decentralised monetary system that would be very difficult for the law enforcement agencies to shut down because it has no single ‘point of failure’. Bitcoin is produced by a ‘digital mining’ process that is intended to limit its supply in a way that is in some ways analogous to the supply process of gold under a gold standard. As with other cryptocurrencies, Bitcoin has the potential to restore financial privacy and create a peaceful crypto-anarchic social order that operates beyond government control.
- The demand for Bitcoin has taken off since its launch in 2009 and it is increasingly used for both legal and illegal transactions, the latter thanks to its potential to achieve a very high degree of transactions anonymity. These illegal transactions include, most notoriously, its use to trade illegal drugs on the Silk Road dark web marketplace.
- Though the supply of Bitcoin is limited, the demand is very variable; this variability has made its price very uncertain and created a bubble–bust cycle in the Bitcoin market. Perhaps the safest prediction is that Bitcoin will eventually be displaced by alternative cryptocurrencies with superior features.
- The appropriate government response to private money is to allow competition on a level playing field between alternative forms of money. As with the provision of other goods and services, competition would best promote good money and drive out bad.