- The Swiss National Bank’s recent Cryptoassets and Financial Innovation conference featured a keynote by economist Lawrence H. White, exploring the potential for Bitcoin and other digital assets to challenge or even replace fiat currencies.
- While White doesn’t foresee a sweeping shift from fiat currencies due to their incumbent network effect benefits, he acknowledges the possibility under extreme circumstances like runaway inflation and a lack of stable alternative fiat currencies.
The Cryptoassets and Financial Innovation conference, hosted recently by the Swiss National Bank, became a platform for a riveting discourse about the potential upheaval of fiat money. Economist Lawrence H. White, a distinguished Senior Fellow at George Mason University and senior scholar at the Cato Institute, steered the conversation. White hypothesized about the feasibility of traditional currency being dethroned by options like gold, BTC, or possibly an inflation-linked token.
In his presentation, White shared intriguing anecdotes about crossing paths with Hal Finney and Nick Szabo, individuals speculated to be Satoshi Nakamoto, the enigmatic creator of Bitcoin. Central to his talk was the issue of a lack of competition among central banks.
Recalling the rampant inflation of the 70s, White revisited proposals from that time aimed at limiting the discretion of central bank policymakers. Renowned economist Hayek had suggested increased competition, first via access to foreign fiat currencies, and later through the introduction of private currencies aimed at preserving purchasing power.
In today’s financial landscape, potential challengers to the dominance of fiat currency might be gold or Bitcoin. To maintain purchasing power, White pointed out, one could either commit to repurchasing the currency at a fixed price or constrain its supply, an approach exemplified by Bitcoin.
Bitcoin and Gold
Bitcoin and gold operate under vastly different supply mechanisms. Gold supply can expand in response to rising demand and price, resulting in long-term price stabilization. Similarly, Bitcoin’s supply is pre-determined, impervious to demand changes. Even if price inflation might drive more mining activity, the quantity of Bitcoin remains unchanged.
White argues that this inherent purchasing power volatility in Bitcoin’s design might be a stumbling block in its adoption as a universally accepted medium of exchange. Despite this, he doesn’t expect a widespread shift away from fiat currencies due to their ingrained network effect benefits. However, the exception to this could be in cases of extreme inflation, without a stable alternative fiat currency, as seen when Argentine and Zimbabwean citizens adopted the U.S. dollar.
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White sees Bitcoin’s censorship resistance as an advantage over gold, but posits it could be marginalized, as seen in China. This might not eradicate its usage but could inhibit it from becoming a mainstream payment method. White suggests gold, with its widespread presence and significantly higher market capitalization, could potentially outdo Bitcoin if fiat currency collapses.
White also touched on other blockchain alternatives such as an inflation-linked token like Ampleforth’s SPOT token and cryptocurrencies with elastic supplies like PraSaga, on which White serves as an advisor.