A little-known history of private currency innovation might provide clues as to where Bitcoin is headed.
For ardent followers, the adoption of Bitcoin is a direct result of government failures, addressing private concerns over hegemonic control (by states but also by the oligopolistic banking sector), privacy and inflation. What makes the solution scalable is the cryptographic trust mechanism that makes cryptocurrencies censorship-resistant, subject to rules on money growth, decentralized and reasonably private. Bitcoin can be thought of as both a token (so a unit of account, a store of value and a medium of exchange) and a ledger (a way of recording exchanges).
Bitcoin is, however, not the first, nor likely the last, private currency solution that relied on new technology as a trust mechanism to address problems with our monetary system, even if Distributed Ledger Technology (DLT) is revolutionary from a technological point of view.
In 18th century Britain, a new technology was developed specifically to address the need for small coinage that the government refused to provide. I suggest, in a paper available here, that this and other past experiences with Bitcoin-like solutions throughout history can offer some lessons and insight into the possible future of cryptocurrency.
For much of Britain’s post-Roman history, there was a lack of small coinage for marketplace transactions, which required market transactions to be necessarily local, and based on seller trust and credit. An economy based on local credit and personal trust could not provide a monetary basis for the nascent industrial revolution, where small anonymous payments were required by employers and workers, alike.
The steam press invented by Matthew Boulton was to provide mass-produced small token coins to be used to pay wages and to provide for the new industrial working class, successfully mitigating a potential disaster for millions of wage-earning Brits and their employers.
With the steam press ensuring scalability and uniqueness, the Parys Mine Company of Anglesey Wales, and several large competitors were able to supply all the tokens needed for the industrialized economy to function. Millions of coins such as the one shown here were minted: One issuer minted three hundred tons, at 600+ coins per minute.
As the private sector’s efforts gained in popularity, the solution and the underyling technology were both eventually monopolized and adopted by the state and survive into the 21st century as the British copper penny. The state-backed coin was an improvement over the private token, the latter of which was always subject to legal uncertainty: it was not always accepted across Britain.
One possible lesson to be learned from this history, and indeed other such events throughout the world and across time, is that sovereigns don’t mind private solutions to their failures as long as they do not interfere with its own state-backed fiat currency. Once it is seen as a threat, bans and replacements, sometimes using the same technology used by the private solution, have been the result.
If Bitcoin ever threatens to become a true replacement for fiat payment and value storage, I expect that governments will fight tooth and nail to replace it with something, hopefully something better. Is that Central Bank Digital Currency?
If BTC remains a speculative asset only, perhaps states will only watch the on- and off-ramps for AML purposes.