Free Banking Rather Than Bitcoin Is The Sustainable Way To Stateproof Our Money

While the Free Market Foundation gets 99% right, I must disagree with the recommendation of Bitcoin as a reserve asset.

Photo by Kanchanara on Unsplash

Money is a complicated subject. It is so complicated that I went from being a believer in bitcoin to a complete sceptic of the “asset”, along with the entire cryptocurrency complex. The defining moment for me was my experience during lockdown. Simply put: I had a use for precious metals; I had none for cryptocurrency. This is partly why I believe the Free Market Foundation’s State Proof Money: The case for bitcoin adoption in South Africa is mistaken in its recommendation of bitcoin, most egregiously where bitcoin is recommended as some sort of reserve asset.

First of all, I agree with 99% of the analysis put forward in the paper. I only disagree with the recommendation of bitcoin. There is a need for state-proof money, especially in the South African context. I agree with the properties of sound money provided by the FMF paper: sound money is scarce, durable, portable, divisible, and fungible. Of course, these properties can be present in any given instance of money to a greater or lesser extent. No instance of money perfectly embodies all of these properties.

Bitcoin does have some of these properties. BTC is less fungible than gold (all money has to be compared against gold; it is the standard in more than one sense of the word). The paper itself recognises this, implicitly, when it points out that revealing your identity as an owner of a bitcoin wallet would forever associate you with those bitcoin. This is why bitcoin alternatives like Monero exist: to bring about true fungibility. In contrast, with gold, even if I announce on YouTube that some gold bars with my name on them belong to me, I can still melt them down later and transact anonymously with the same gold.

It is also true that bitcoin has superior portability when compared to gold. Gold has to be transported in physical form. I can still remember being forced by the police to open my bag in a taxi from Johannesburg and reveal precious metals that made up a significant proportion of my net worth at the time. But the problem of buying bitcoin anonymously to begin with has not been solved, whereas the fact that gold can come in the form of, for example, jewellery largely solves this problem. You do not need to register for KYC or FICA on a centralised exchange; you can simply buy second-hand jewellery to accumulate gold.

The other issue that BTC-bugs often bring up, and which the FMF paper also touches on, is decentralisation. As you can tell from the previous paragraph, bitcoin’s decentralisation is not all that robust. Theoretically, you do not need trusted third parties to acquire or transact in bitcoin. Why, then, does bitcoin usage rely on so many third parties in practice? The paper mentions some of them (MoneyBadger, VALR, Luno, Binance).

The truth is that free markets rely on trusted third parties. This is why the concept of insurance exists. The difference between gold and bitcoin is that gold has third parties that have been tested through the passage of time. These include Swiss vaulting services, and some of the Asian gold and silver dealers (often trusted family businesses operating in the informal sector) with track records of protecting their customers against government overreach running into the hundreds, if not thousands, of years, much longer than bitcoin has existed. Some of these have been so effective that, even today, most Indian savings are still in precious-metal form, and the Indian government has various policy initiatives aimed at incentivising the owners of this gold and silver to convert it to fiat currency.

Of course, bitcoin is highly volatile, so why would anyone use it as money? You may argue that the volatility will abate with time, but this means recommending bitcoin now is premature. Wait for it to become established. Gold was used in the market for hundreds of years before it came to be trusted as money. That is because the degree to which an asset embodies the properties of money can only be assessed over time. Bitcoin theoretically embodies some of these properties to a high degree, but we do not really know this right now. Perhaps, with advancements in AI and quantum computing, the cryptography underlying bitcoin may be broken someday. Unlikely, but not impossible.

Bitcoin also fails as a store of value. In economics, value is subjectively determined. Bitcoin bugs seize on this to argue that the fact that some people value bitcoin means it is a store of value. But for something to be stored, it must exist prior to the storage of that thing. This is basic logic, yet bitcoiners often fail to point out where the value of bitcoin lies prior to its use as a store of value. This matters because the use of bitcoin for transactions has not enjoyed widespread adoption, and it has no use comparable to gold’s uses in jewellery, dentistry, electronics, etc.

So bitcoiners seize on the only widespread use of the asset: speculation on its price. They then conflate this with bitcoin being used as a store of value because both uses bear a superficial similarity: you buy and hold the asset in both cases.

So should the FMF recommend gold instead? No. Remember, value is subjectively determined. As the Free Market Foundation, they should not recommend any particular asset. Markets are dynamic. It is possible that market participants may value something different from what the foundation, or anyone (including me), sees as being important in money. Therefore, the answer is to recommend what the consensus has been among those who believe in free markets and freedom more broadly: a system of free banking where individuals can determine what to use as money.

Explaining the details of this system is beyond the scope of this article. Plenty of authors have written about such a system on platforms such as mises.org. The main point that matters for our purposes is that government plays no role in defining what money is; people decide through their choices in the market. While there is debate on whether fractional reserves should be allowed in such a system, this is a matter for the courts to decide: whether fractional-reserve banking constitutes fraud or not.

The point is that the government plays no role, and the only decision government has to make is what money should be used for the payment of taxes. Government would be free to require payment of taxes in a fiat currency that the government controls, but it cannot interfere in transactions between free individuals, decide what the exchange rate between its currency and other monies is, or tell anyone what they should use as savings, as governments currently do.

Mpiyakhe Dhlamini is a libertarian, writer, programmer, entrepreneur, and associate of the Free Market Foundation. He writes about personal finance and wealth-building from a South African perspective. The views in this article are his own and not those of any organisation he is associated with.