Historically the breakdown of exchange controls led to state monies becoming increasingly open to competition with other currencies. But now, through technology, state monies are facing a new kind of competition with private sector monies, although this competition is very limited at present.
Bitcoin is a private cryptocurrency; a form of highly anonymous computer currency based on the use of cryptography to control the creation and transfer of money. The significance of private monies, such as Bitcoin, is that their existence is a form of currency competition. Any market competition is seen as a positive as it is generally agreed that competition results in gains for the whole economy, through promoting consumer sovereignty.
One might question the need for competition with national currencies, but one need not look deep into state monies to realise they’re problematic. The root problem with conventional currency is that the central bank must be trusted not to debase the currency; the history of fiat currencies is full of ruptures of that trust. Debasement leads to inflation, which now seems to have become endemic to most of the world. Central banks have the ability to issue money and credit, and without competition, this turns into mass debasement over a long period of time.
So what would happen if private institutions were allowed to produce and market their own currencies, in their own denominations, competitively with freely fluctuating exchange rates? The intriguing point about this question is that it queries why government monopoly of money issuance is necessary to start with. Given that currencies with stable values are preferred (as stability is required to maintain capital and control cost) the expansion of private monies will lead to greater competition (between private firms with themselves and the state), hence there will be pressure to increase allocative efficiency by aiming to provide stable currency. Therefore for other currencies to be utilised they must be more appealing then the already established state currency. Bitcoin has done this to an extent as it provides greater stability of supply. Demand for Bitcoin however is very volatile and hence as a currency is not that stable – this was not the case until mid 2013, before this Bitcoin had been very stable for two years. Although it is was noting that a vast amount of demand for, and use of, Bitcoin is for use on illegal dark web markets (due to the currencies anonymity) opposed to individuals choosing to use alternative currencies.
In short, Bitcoin is probably not the currency to challenge the state’s monopoly on money due to its extreme volatility, however it is a step in the right direction. The fact that alternative currencies are starting to be offered matched with examples like the reports of Bitcoin ATMs in America that would exchange dollars for Bitcoin implies that there is a need for an alternative to the monopolistic issuers of national currencies. Where Bitcoin fails, other future currencies will succeed providing there is sufficient competition. This leaves the possibility for future currencies to successfully challenge the state’s monopoly on money.