One of the main reasons why Bitcoin was created was a frustration with central banking and a frustration with the discretionary monetary policy that followed the financial crises of 2008 and 2009.
The Legal Tender Act was passed in 1862 and essentially said US dollars were legal tender, had to be accepted for all debts public and private. After the legal tender act was passed, someone couldn’t say “I don’t want to pay you in gold coins, I want to pay you in these depreciated and these depreciating dollar bills.”
The Legal Tender Act says that’s completely fine because the Central Bank wants to ensure it’s money is accepted and it’s monetary policy is effective, it’s going to have to ensure that the money they print is accepted and so the Legal Tender Act and legal tender laws generally around the world act as a kind of monopoly advantage to Central Banks.
Digital currency challenges legal tender laws in the same way Uber challenges Taxi monopolies. Previously there has been a system where the Yellow Taxi Cab was the gold standard and it was the only one that was sanctioned by the government. Then Uber comes around and provides people with an alternative and they really like this alternative.
So what the government has essentially done is turn a blind eye and say “we’re not going to privilege the Yellow Taxi Cabs anymore.” And so they could have a similar response to their money. They can say, “listen, we think that the dollars are good, but we think they should be competing on the free market.” Those are the benefits of competition; it’s essentially allowing the market to satisfy consumer demand. We don’t know what consumer demand is, but we know that one provider of a good is probably not able to satisfy consumer demand in a way that multiple actors are.
The downside of competition from the governments perspective is they are no longer possibly able to affect monetary policy in a way that they would like to. If individuals decide they don’t want to transaction in dollars and euros, especially in cross border transactions, central banks are going to have to behave in a different manner. They’re not going to be able to for instance inflate or engage in the quantitative easing and the kind of monetary policy that has come to typify that has come to financial crises.
Many say that the legal tender laws are necessary and needed for the government to conduct monetary policy. But some, like F.A. Hayak for instance would have the idea that instead of having the date dictate which money wins out, what you should essentially have is market forces determine which currencies is going to become a more predominant one.
And just like you have suppliers and demanders of shoes, and you have supply and demand of food. You should have supply and demand of money. And so in this vast market, where there’s millions of actors and they’re all giving their information, you’re able to get a more robust solution to the question of what money we should have. And it might not be one answer.
So as it stands right now, Central Banks don’t really face competitive threats from digital currency, but in the long term, the idea of having a currency that’s not susceptible to the vagaries of countercyclical monetary policy is posing some kind of a threat or provides an honest check to central banks because they no longer have as secure of a monetary advantage.