In a recent Cryptoassets and Financial Innovation conference held by the Swiss National Bank, economists and scholars delved into the intriguing question of whether Bitcoin could potentially replace fiat currencies. The keynote presentation, delivered by economist Lawrence H. White, shed light on various aspects surrounding this debate. This article aims to explore the ideas presented at the conference and examine the potential implications of Bitcoin on the future of global currencies.
The Need for Competition
Amidst the backdrop of historical inflation, economists sought solutions to address the issue. One proposed remedy back in the 70s was the introduction of competitive forces into the central banking system.
The late Friedrich Hayek argued for opening economies to foreign fiat currencies, creating a competitive environment among central banks. Another proposition involved the introduction of private currencies, which would be designed to maintain purchasing power.
Bitcoin and Gold: Contenders for Private Currencies
In the realm of private currencies, two notable contenders in the present day are gold and Bitcoin according to the participants. While both are considered hedges against inflation, their supply mechanisms differ significantly.
Gold responds to increased demand by stimulating production or recycling, thus moderating long-term price fluctuations. Bitcoin, on the other hand, follows a predetermined supply schedule, unaffected by market demand. This characteristic introduces inherent volatility to the purchasing power of the world’s oldest crypto, making it a less stable medium of exchange.
The Network Effect and Fiat Currency
Despite the potential advantages of Bitcoin and gold, White expressed skepticism about a widespread shift away from fiat currencies. The network effect, which benefits established currencies, poses a significant barrier to alternatives.
The economist emphasized that people are unlikely to abandon fiat currencies unless there is a lack of stable alternatives. Instances of citizens adopting foreign currencies, such as the US dollar in Argentina and Zimbabwe during times of hyperinflation, were cited as examples.
Bitcoin’s Censorship Resistance and Challenges
One of Bitcoin’s notable advantages over gold is its censorship resistance. However, White raised concerns about the potential for the digital asset to be driven underground, as observed in China. While this may not eliminate its usage, it hinders its path to becoming a mainstream means of payment.
Additionally, gold boasts a wider installed base and holds a considerably higher market capitalization. This factor makes it a more established contender in the unlikely event of fiat currency failure.
Exploring Blockchain Alternatives
Beyond Bitcoin and gold, the keynote presentation also discussed other blockchain-based alternatives. These include “flatcoins” linked to price indices, such as Ampleforth’s SPOT token, and cryptocurrencies with elastic supplies, exemplified by PraSaga, which focuses on industrial use cases.
The mentioned emerging alternatives aim to address specific niches and utilize blockchain technology to enhance various aspects of financial systems.
The Cryptoassets and Financial Innovation conference hosted by the Swiss National Bank provided a platform for economists and scholars to examine the potential impact of Bitcoin on fiat currencies. While the crypto asset’s unique properties, such as censorship resistance, make it an intriguing contender, the network effect and the stability of established fiat currencies present significant obstacles.
The keynote presentation by Lawrence H. White offered valuable insights into the future of global currencies, emphasizing the importance of stable alternatives and competition within the central banking system.