During an interview in 1999, Nobel-prize winner and famous economist Milton Friedman was asked what he was optimistic about in the future.
Milton famously said:
“The one thing that’s missing, but that will soon be developed is a reliable e-cash. A method whereby on the internet you can transfer funds from A to B, without A knowing B or B knowing A. The way in which I can take a twenty-dollar bill and hand it over to you, and there’s no record of where it came from and you may get that without knowing who I am. That kind of thing will develop on the internet, and that will make it even easier for people to use the internet”1.
If Milton Friedman were alive today, what would he say about Bitcoin?
When Milton used the words ‘reliable e-cash’ no doubt he would have been impressed with Bitcoin because it solves several problems with online value transfers. Bitcoin eliminates the double-spend problem. It does this with a novel approach of combining a blockchain with a decentralized network that is incentivized by rewards for mining in a process called proof-of-work2.
As evidenced by his statement, Friedman was also concerned about censorship of transactions. Because Bitcoin is open-source and decentralized he would have appreciated its ability to neuter government power. An example of this uncensorable characteristic of Bitcoin is when the US Government attempted to ban donations to Wikileaks3. Friedman would have touted this as proof that Bitcoin was reliable in the same way that cash transactions also cannot be censored.
Friedman would see Bitcoin’s solution to the double spend problem as ingenious and now with the implementation of the lightning network transaction opacity will continue to increase while also reducing the wait time needed to fully confirm transactions. He would also point to Bitcoin’s low inflation as further evidence of its reliability.
What would Friedman say about Bitcoin’s volatility and purchasing power?
Let’s face it. The Bitcoin price is volatile and has been known to make massive gains one week only to get slammed by FUD the next. A price-stable coin that is pegged to another asset like the USD could provide the mechanism for price stability required to make it ‘reliable’ from a purchasing power perspective. In this way, a price-stable coin meets Friedman’s standards.
Are you saying Friedman would support Tether?
No. Like the point we made earlier about transaction censorship, Tether is too centralized. Tether’s independent auditor recently resigned4 and even if Tether has all the money they say they have in their bank accounts, it can’t be considered reliable if these accounts can be censored by governments. For example, if Tether gained a lot of adoption and was being used in drug deals or even to send donations to Wikileaks, governments could freeze Tether’s bank accounts to ensure its compliance. The price-stable cryptocurrency of the future must be censorship-resistant. It must weather political pressure made on credit card providers, banking institutions and the SWIFT network by operating outside of the fiat money paradigm.
A new generation of price-stable currencies are forming which can provide increased decentralization in conjunction with stability of purchasing power. To meet Friedman’s high standards these new coins must be collateralized with cryptocurrencies like Bitcoin. They must also be administered in a decentralized way and can use various trading algorithms, bond and share issuance schemes to guarantee stability against a peg like the USD. Bitcoin will be the foundation of this new digital economy acting as a form of digital gold and a price-stable cryptocurrency backed by this digital gold will play the important role of a reliable (and non-volatile) e-cash.