Friedrich Hayek: prophet of cryptocurrency? Part 1

The philosophy and (future) politics and economics of bitcoin

(As bitcoin sets yet another all-time high today of over $111,000, I've decided to republish a blog post originally written in early 2021 for the Centre for the Study of Governance and Society.

In it I discussed the future prospects of cryptocurrency in general, and of bitcoin in particular. Just like Hayek’s own place in the history of bitcoin, much of the blog has turned out to be uncannily prophetic.

Below is Part 1. I'll post Part 2 tomorrow.)

For many in the cryptocurrency community Austrian economist Hayek is a pioneer avant la lettre, with his writings on the monetary system from the mid-1970s being regarded as especially prescient. As the Nobel Laureate argued in The De-nationalisation of Money, the best monetary system would be one that replaced government issued currencies with currencies issued by private banks. This, he claimed, would help avoid the worst excesses of centralised control, particularly with respect to the money supply and the setting of interest rates, because of the distorting effect decisions in these areas have on the economy's ability to adjust to cyclical change.

Yet, Hayek conceded it was unlikely that his radical proposal would ever be adopted, so much so that by the 1980s he came to regard it as “completely utopian”. The primary obstacle was political, for the very agency that would be called upon to give up its control of the monetary system would also be entrusted with implementing the policy. “I don’t believe we shall ever have good money again before we take it out of the hands of government,” he concluded in an interview given at the University of Freiburg in 1984. “We can’t take it violently out of the hands of government. All we can do is by some sly, roundabout way introduce something they can’t stop.”

And it is here where many believe that Hayek was at his most prophetic, for the emergence of cryptocurrency in the last decade appears to be just that "sly, roundabout" and unstoppable denationalised solution that he argued for. The key element here is the “blockchain” technology upon which cryptocurrencies such as Bitcoin (https://bitcoin.org/en/) run. Intended as a decentralised version of a ledger, or record of accounts, blockchain, or “distributed ledger” technology, is in fact a combination of three different technologies. A peer-to-peer (or “P2P”) network of computers (or “nodes”) that is open to all and requires no central authority to run it, cryptography to ensure privacy and to protect against malicious actors, and a “consensus algorithm”, or rules governing how new entries are recorded. It is this combination that makes the “chain of blocks”, or entries onto the ledger, permissionless and decentralised (as opposed to the centralised ledgers to be found in banks), but also immutable and tamper-proof.

Thus, because they remove executive control of money from the hands of central authority, blockchain-based cryptocurrencies such as Bitcoin will see to it that Hayek's vision of a decentralised monetary system, free from government control and conceived almost half a century before its emergence, comes to fruition, and possibly sooner than many expect.

Hayek and the past (and future) or cryptocurrency

Yet, Hayek’s place in the history of cryptocurrency is not that straightforward, for there is an important difference between cryptocurrencies and the idea of denationalisation. Even if governments did denationalise the monetary system, the free market in money that would follow would still leave