What would Hayek make of Crypto?

Monetary theorist and Nobel laureate, Friedrich Hayek's influence on the economic policies of advanced economies was profound, particularly in the Reagan/Thatcher era.

In Hayek’s vision of currency competition; the principal function that money fulfilled was a means of payment (or ‘medium of exchange’).

Hayek regarded this as closely tied to money’s ‘store of value’ function. Ostensibly, it appears that he did not anticipate that these two ‘functions of money’ could ever be at loggerheads in which a competitive conflict could ensue between these dimensions.

Interestingly, we observe that in stark contrast to Hayek's vision the market for extra-systemic crypto-currencies places a premium on price volatility as this allows for speculative gains.

This effect, however, encourages competition in lieu of traditional network effects as media of exchange.

Thus, when examining the function of money as a ‘store of value’ in contrast to that of a ‘medium of exchange,’ we observe a different behaviour. Transactions are completely dominated by speculation with no signs of change. Whereas with traditional fiat currencies we observe that network effects are far more prevalent in the market for ‘media of exchange’ than in the market for ‘stores of value.’

Competition in the crypto market therefore seems to be less dependent on this latter function of money. While competition works well for the function as a (speculative) ‘store of value,’ there is a general tendency towards attempting to achieve primacy over the function as a ‘medium of exchange.’

In practice, the crypto market is still immature and dynamic which shares some characteristics in congruence with Hayek's concept of ‘private currencies’ even though it uses a technology completely beyond the realms of his imagination at the juncture where Hayek published his book in 1976. Ironically, the principal argument Hayek asserted - that monetary competition would distil into producing currencies which were less volatile or more stable in value, and consequently lead to lower inflation - is eluded by crypto-currencies. In my own book, I argued that this effect is amplified by crypto-currencies which feature embedded ‘acyclic monetary policy’ and are thus deflationary asset classes in lieu of simply stable.

Hayek might have been correct insofar as competition currently seems to outweigh network effects, but he was focused on a different function of money.

In a present crypto context, it is not the ‘medium of exchange’ that is the dominant function but the (speculative) ‘store of value.’ Most adopters of crypto-currencies seem to value volatility over stability of value. However, even over the relatively short time span that crypto-currencies have been in existence, they have evolved significantly. In an extremely dynamic market that is almost entirely based on technology, first mover advantages diminish rapidly, and dominant leadership positions seem to be perpetually in flux.

Demand for stable currencies, such as ‘stablecoins,’ are on the rise, which may lead to at least a sub-market where Hayek's vision is ultimately fulfilled. It remains inescapably ironic however, that these ‘stablecoins’ remain “stable” exclusively relative to the US Dollar, whereas Hayek's principal argument for the competition among private currencies was to establish ‘media of exchange’ that would be independent from, and immune to the inflationary pressures of major currencies, the US Dollar in particular.

As this Hegelian-style dialectic dilemma between the dominance of ‘stores of value’ and ‘media of exchange’ gain critical mass, I can’t help but wonder whether this will evolve into a trilemma once Central Bank Digital Currencies enter mainstream use. Logically, it would be reasonable to assume that CBDCs will displace stablecoins in this dynamic. However, prudence demands that we consider that as the tokenisation of varied asset classes (commodities in particular), broadens the field of competition between ‘stores of value’ and ‘media of exchange’ (both public and private) we may be in for some unpredictable and interesting times ahead. The latter being particularly salient as a climate of inflation-output volatility and global systemic resistance towards dollar hegemony persists.

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