“All money is a matter of belief” – Adam Smith. Indeed, the basic idea behind money is that it is a medium of exchange based on trust. Trust that you will still be able to use your currency in a week’s time for groceries, to pay your mortgage, or to tip your waiter.
To describe his ideal market, Adam Smith pioneered the term “invisible hand”, which dictates that given a set of rational consumers, they will produce and consume the goods and services they require independently. They do not require external regulation by the government. Not dissimilar to the theory of natural selection, those companies which are weak or do not provide sufficient value will slowly but surely leave the market organically. In a currency framework, this means no central intervening power, such as a central bank, enacting unnatural policies on consumers, such as quantitative easing, duties, taxes, target interest rates, etc.
These views also align strongly with those of Friedrich Hayek, who with great foresight once stated,
“The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process…only competition in a free market can take account of all the circumstances which ought to be taken account of.”
This artificial manipulation from external forces when dealing with fiat currencies undermines the very philosophy Hayek, Smith and countless others have argued is fundamental to any sound economy; a free market.
So what is the solution to such a universal problem? The obvious answer is cryptocurrency. By now, almost everyone has heard of Bitcoin or Ethereum, even if they do not fully understand it. One could argue the very existence of Bitcoin was wrought by the “invisible hand”. The market demanded an alternative to the traditional system, and thus one was born. Unbeknownst to cryptocurrency, it solves two core problems at once. The first solution? It provides an anonymous and decentralized way to send money from one person to another relatively fast. In a financial world where bank transfers and clearing houses can take multiple business days and significant fees to process, this is a huge advantage. There are also other benefits lumped into this fintech, such as transparency, confidentiality, and security.
The second solution it provides is what was hinted at above, and a bit more complex. It allows a consumer the freedom of choice when it comes to currency. In an overwhelming majority of the world, fiat currency is the only accepted medium, whether it be a wad of bills or a shiny new credit card. This currency is also dependent on one single entity and its actions (the central bank). Cryptocurrency, with its fixed supply and decentralized nature, combats these flaws. While cryptocurrencies are not perfect themselves, they do provide a new platform from which it is possible to counter some of the problems facing the current financial infrastructure.
Today, we can see the words of Hayek and Smith coming to fruition. Bitcoin initially appealed to a few select individuals who saw the value of a peer-to-peer, anonymous currency. But in the past 10 years, cryptocurrency has advanced much farther than such a simple use case. The cryptocurrency market grows larger every day, with thousands of ‘altcoins’ vying for their piece of the market, most with some sort of value proposition for a variety of industries. Regulations are being put into place in notable financial markets such as the United Kingdom, United States, Switzerland, Singapore, and Japan, amongst others, signaling some nuance of acceptance or integration.
While a single cryptocurrency may provide the benefits mentioned above, the true value of cryptocurrency comes in its disruptive nature. The current fintech landscape does not allow for much free competition, if at all. Cryptocurrency aims to bring about a new fintech landscape, one where the principles of a free market are allowed to flourish; and in the end, individuals will decide for themselves the winners of this digital capitalism.