For over a century, central banks have reigned as the undisputed arbiters of money. Their authority rests on a simple but powerful monopoly: only they can create and control the reserves that underpin the banking system, and through those reserves, they set the price of liquidity across the economy. Yet history shows that monetary arrangements are not immutable. Just as private banks once issued competing notes before being eclipsed by state monopolies, a new wave of private, programmable, and collateralized digital money now threatens to erode central banks’ practical dominance. Stablecoins and other crypto-based innovations embody an idea that Friedrich Hayek articulated decades ago: that money, like any other good, can be subject to competition. If these technologies achieve scale, they could redraw the boundaries of monetary power, shifting central banks from monopolists to participants in a pluralistic market for trust.
The Ultimate Monopoly
The power of central banks rests upon their monopoly over the cost of money. By adjusting the quantity of cash in the economy through open‑market operations and reserve requirements, a central bank pins down the overnight rate that clears the interbank market. That short rate then ripples outward, shaping the cost of credit across the economy, from commercial paper to mortgages, and filtering into longer‑dated yields through expectations, risk premia and the slope of the yield curve.
That is the logic of the monopoly. What might unwind it?
A monopoly over reserves yields control over the price of credit because reserves are the indispensable settlement asset. Undermine that indispensability, by providing widely used, high‑quality substitutes for payments and settlement outside the banking system, and the monopoly’s practical significance shrinks.
In other words, the more payments migrate to privately issued electronic money, the harder it becomes for changes in the quantity or price of bank reserves to transmit cleanly into the broader economy. If significant shares of transactions, savings, and even credit intermediation happen on platforms where final settlement occurs in non‑bank tokens, then the overnight interbank rate no longer anchors as much economic activity.
Denationalized Money
Friedrich Hayek argued for the denationalization of money: allow private issuers to compete by promising stable purchasing power and let users vote with their wallets.
In his thought experiment, an issuer would sell its own currency for government money, commit to stabilize its real value, and stand ready to redeem. The peg would be maintained with a familiar set of operations: when the issued currency traded cheap, buy it back with reserves; when it traded rich, issue more. The issuer’s incentive would be part market‑maker profits and part returns on the reserve portfolio. The Achilles heel was also clear: if the backing assets deteriorated or the issuer lost credibility, the peg would fail.
Crypto turned this blueprint into code and widened the design space. Stablecoins implement the creation/redemption discipline Hayek described and do so programmatically. Fiat‑backed models hold cash and short‑term bills with custodians and promise one‑for‑one redemption. Crypto‑collateralized models lock volatile assets in smart contracts and over‑collateralize to absorb shocks; when the market price of the token drifts from its target, arbitrageurs use mint/burn mechanisms to close the gap. The market structure echoes exchange‑traded funds: authorized participants (or anyone with a wallet, in decentralized designs) turn primary issuance and redemption into a price band that tethers secondary‑market trading to net asset value.
Competition in Money
Two implications flow from this. First, stablecoins demonstrate that price stability in a unit of account can be delivered by rule‑bound issuers competing for trust, not only by states. The trust proposition may come in many forms, but ultimately involve a credible redemption commitment plus adequate, liquid collateral. Second, stablecoins generalize: the same creation/redemption logic can track not only a single fiat currency but baskets of goods, foreign currencies, or other indices.
If the purpose of a currency was aimed to stabilize purchasing power against a consumer‑price basket, then crypto makes such index tracking programmable and portable. In principle, one could hold a token that targets an explicit inflation hedge rather than with the liabilities of a single central bank.
If such tokens reach material scale, the practical monopoly of central banks over money begins to erode. When households and firms settle invoices and payroll on crypto rails, the demand for bank deposits, deposits that require central bank reserves for settlement, declines at the margin. If credit can be extended in stablecoins and funded in stablecoins (especially ones not pegged to the dollar), then price discovery for credit risk migrates to venues that do not clear in reserves. If economic agents increasingly think and contract in alternative units, the central bank’s signaling power over the economy via its overnight rate weakens, because fewer balance sheets are sensitive to that lever. Finally, private digital monies are natively cross‑jurisdictional, and as such the more international trade and finance denominate in portable, programmatic units, the less any single central bank can exert global influence by moving its policy rate.
Monetary Pluralism
This is not a prediction that central banks will vanish. They retain unique authorities such as legal tender status for taxes, prudential oversight over systematic risk, emergency liquidity in their own currency, and the capacity to intermediate monetary policy. But the question is relative power; if the social functions of money, store of value, medium of exchange, unit of account, can be supplied competitively with credible rules, and if network effects tip enough activity onto alternative rails, then the central bank’s monopoly on reserves may remain intact in law yet matter less in practice for an expanding slice of economic life.
Ass such, the claim is less that crypto can replace central banks, and more so that crypto reframes the boundary between public and private money. It restores contestability to parts of the monetary stack that were monopolized by historical necessity rather than by timeless logic. Central banks will still set the price of reserves and act in emergencies. But they may set those prices for a smaller share of economic life, and their emergencies may be fewer if private monies are better capitalized, more transparent, and less maturity‑transforming than the deposit‑taking system they displace at the margin.
The endgame is not monetary anarchy but rather pluralism. Users choose the monetary rule they trust. Issuers compete on redemption credibility, collateral quality, governance, privacy, programmability, and yield. Regulators police disclosures, reserve segregation, consumer protection, and pathways for orderly failure rather than trying to stamp out competition. Central banks accept that while they still command the high ground of sovereign finance, the lowlands of everyday money can be served by interoperable, rule‑bound tokens. In that world, Fed‑watching does not disappear; it is complemented by protocol‑watching. Monetary policy remains consequential, but it is one force among several that shape the price of liquidity. The monopoly power over money fades not because the law changes, but because technology and user preference route around its chokepoints.
That possibility was dimly visible even in 1999, when The Economist wrote that
Central banks’ monopoly on supplying cash and bank reserves is relatively new. In the 19th century, private banks in Britain and America issued competing currencies. A return to such a “free-banking” era seems unlikely, but even if central banks’ monopoly is not in danger, it may eventually become irrelevant. Privately issued electronic money could one day complicate or even nullify central banks’ ability to set interest rates. Central banks are not about to vanish overnight. But, like the Kremlin, they may not retain their pre-eminence forever.
Two decades on, the mechanism by which that prediction could come true is clear: a credible, collateralized, redemption‑disciplined, and programmable form of private money that scales across borders and integrates with commerce at the protocol level. Crypto does not abolish the state or the need for rules. It simply offers a different way to bind promises, one that is legible in code, contestable by design, and portable by default. If it succeeds, central banks will remain, but as one important institution among many in a competitive market for monetary trust, rather than as monopolists.
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