There are better fiat currency alternatives available, and the private sector is offering them.
In the early days of electronic money, Federal Reserve Board Chairman Alan Greenspan gave a paper at a US Treasury conference called "Electronic Money and Banking: The Role of Government," arguing that the future of ecash will be determined by the private sector's "flexibility to experiment, without broad government interference." The COVID-19 epidemic has accelerated the shift from paper to electronic money. People still desire cash, but it's increasingly in the shape of digital wallets rather conventional bill folds.
China has already closed the door on private, market‐based cryptocurrencies to protect the state’s stake in creating a central bank digital currency (CBDC). There is little doubt that eventually all major central banks will create their own digital currencies. The question is whether governments will allow private digital currencies to emerge and compete with these official digital media of exchange, or follow in China’s footsteps by banning private, market‐based substitutes.It is vital to get the interaction between money, the market, and the state correct when thinking about the future of money. Enabling a private digital currency system in addition to CBDCs and allowing consumers to select would be beneficial. Instead of giving the government the upper hand, the market discovery process might help determine the future of money.
Decentralized choices by a network of traders to choose a widely recognized good as a medium of exchange gave rise to private money long before central banks. Cowrie shells and other primitive forms of money were gradually supplanted by gold and silver coins. With the advent of paper currencies and checks, money became more abstract and centralized.
Today's currency is almost entirely made up of fiat money. Its value is purely determined by keeping supply and demand in balance. Governments do not want their currency monopolies disrupted by private businesses offering superior alternatives, thus the official money network is difficult to compete with.
Yet, there is no reason to fear the spontaneous development of alternatives to discretionary government fiat money. Allowing free competition within a genuine rule of law that safeguards property rights – including the right to a sound currency – is the best way to encourage innovation and progress. A monetary system based on trust is an important foundation for economic and social harmony. Allowing a free market in ideas and experimentation, whether it be for money or other institutions, generates new information that is lost when the state bans competition, which is best understood as a Hayekian discovery process.Overreaching government officials who want to safeguard their territory and perpetuate the status quo, or bankers who don't want competition in the supply of financial services, should not be allowed to stifle the new frontier of cybercurrency and blockchain. If we are to profit from fintech and the information revolution, we must keep the doors open to a more inventive and adaptable monetary system while preserving adequate regulation to ensure a clear and orderly payments system.
As a result, striking the correct balance between state and market is critical in creating an institutional framework that encourages freedom and responsibility while also broadening people's options. It is more probable to build a healthy monetary system if the balance is shifted toward the private sector than than putting a bigger burden on discretionary central banks generating fiat money, whether physical currency or digital cash.That sentiment is echoed in a recent analysis by the Bank for International Settlements, which highlights the benefits of CBDCs while also highlighting the hazards of a lack of private alternatives:
The eventual advantages of adopting a new payment technology will be determined by the underlying payment system's competitive structure and data governance procedures. The same technology that may promote a virtuous loop of wider access, cheaper prices, and better services can also promote a vicious circle of data silos, market dominance, and anti-competitive behavior. The most favorable to a virtuous loop are CBDCs and open platforms.
Instead of following China's lead and cracking down on cryptocurrencies, the US and other open societies should look to the market to see whether it can provide better alternatives to government fiat money that is not bound by any monetary rules.