On March 10th, 2023, one of the largest banks in the United States suffered a collapse, causing widespread economic panic and financial instability. This event has shaken public confidence in the banking system and brought attention to issues related to financial regulation and oversight. It has led to renewed discussions about the best alternative to a system that is gradually losing public confidence and stability.
In light of the internet’s growth, Milton Friedman anticipated the necessity for electronic currency that would facilitate global connectivity. This currency enables financial independence without relying on governments or central banks for transactions. As e-commerce and other online services become more prevalent, digital currency would ensure a seamless experience.
Friedman described this concept as “decentralized currency” in his article titled “Should there be an independent monetary authority?” back in 1962. He mentions, “objective of a monetary structure that is both stable and free from irresponsible government tinkering” which is now known as cryptocurrency. He further elaborated on this concept in an interview on Antitrust and Tech in 1999, where he said “I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill, hand it over to you and then there’s no record of where it came from”.
Friedman also highlighted how the major effect of such a revolution will be the increasing difficulty for the Government to collect taxes. Governments impose taxes best on things that don’t move and the internet which primarily exists in cyberspace will make it difficult to impose taxes on services of all kinds. This would usher in a freer world, one where the value of a dollar was not determined by the government, and where government influenced financial institutions were not necessary for transactions, eliminating the need to divulge every detail of one’s financial dealings.
The banking sector has been under the influence of the government for a long time. Between 2019-2021 alone, the U.S. Federal Reserve has printed 40 percent of all dollars in circulation. Known as the Cantillon effect this has resulted in huge levels of inequality, since the people close to the government’s trough (such as banks) benefit from the higher purchasing power compared to the people at the bottom of the food chain (like fixed income recipients, students, etc.) who only see prices rise with diminishing real purchasing power.
The failure of Silicon Valley Bank is a very recent highlight to the dangers of government intervention in the banking sector. The bank’s collapse led to a dramatic federal rescue of its depositors. Some individuals, including the bank’s own clients, have argued that the government should have stepped in sooner to prevent the bank’s collapse. However, they failed to realize that by doing so the government merely repeated the vicious cycle of market distortion which will lead to many unintended consequences. The failure of Silicon Valley Bank thus serves as a reminder of the importance of allowing free market principles to operate in the banking sector, rather than relying on government intervention.
This is where cryptocurrency comes in. Cryptocurrency operates under a decentralized system, meaning that it is not controlled by any government or central authority. This means that it is not subject to the same regulations and restrictions as the traditional banking sector. With the introduction of Blockchain Security and more research being done in regards to online transactions security, companies are coming up with new and more secure ways of securing customer accounts. Cryptocurrency transactions are also faster and cheaper than traditional banking transactions and people will have more control over their finances and can send and receive money across borders without the need for intermediaries.
The decentralized nature of cryptocurrencies also makes them more convenient. Since they are not controlled by any central authority, anyone can use cryptocurrencies, regardless of their location or financial status, thus making them more accessible. This makes cryptocurrencies an attractive option for people who are excluded from the traditional banking system. The convenience and accessibility of cryptocurrencies have made them popular among a growing number of people. Today, there are over 4,000 different cryptocurrencies in circulation, such as Bitcoin, Litecoin, Ethereum, Monero and many others, with a combined market cap of over $2 trillion. This demonstrates the growing popularity of cryptocurrencies as a potential alternative to the traditional fiat system.
While they do come with their drawbacks like all innovative and new fields, cryptocurrencies still provide a viable and convenient alternative to the fiat system. It empowers millions of unbanked people and promises a future where the control of money is away from the Government. It has been making its way faster into developing countries going through economic crises and where there are higher numbers of people without bank accounts, such as, Turkey, Venezuela, Argentina, Iran, Brazil, Colombia, Mexico, and Indonesia. With the use of smart contracts and blockchain it has certainly become more feasible for cryptocurrencies to stabilize its place among the existing financial systems and with the growth of technology and awareness, it is only a matter of time before it replaces the fiat system, the scope and extent of which are subject to study further proving its viability. It is certainly deserving of further research and consideration.