The Cato Institute’s mission is to originate, disseminate, and advance solutions based on the principles of individual liberty, limited government, free markets, and peace. Within the Center for Monetary and Financial Alternatives, we narrow that scope to the realm of monetary and financial policy. And while our work often involves digging into the weeds to assess the merits of specific pieces of legislation, it’s always important to step back and ask what the subject of our work means for liberty. Today, that subject is cryptocurrencies.
So, what do cryptocurrencies mean for liberty?
At the most fundamental level, the mere existence of cryptocurrencies creates opportunities for people to make choices that were unheard of just over a decade ago. But more specifically, cryptocurrencies offer the potential for choices to be made in a realm long dominated by government monopolies––the realm of money.
It’s not unusual for people to seek alternative currencies in times of hyperinflation or unstable regimes. In fact, the U.S. dollar is a popular choice (hence the term “dollarization”) in desperate times, but getting the physical dollars to other countries can have its challenges. Normally the U.S. government is happy to ship those dollars across land or sea, but that service can stop at a moment’s notice when global politics get in the way. For example, the U.S. government stopped all shipments of U.S. dollars headed to Afghanistan––a heavily dollarized economy––shortly after the Taliban took control of Kabul in August 2021. At no fault of their own, the citizens of Afghanistan were suddenly without access to dollars and forced to find an alternative as a cash shortage set in.
Where cryptocurrencies have the potential to become a widely accepted money, they also have the potential to provide a choice that is free from both poorly managed governments and global politics. That alone is a major step forward for liberty across the world.
However, cryptocurrencies offer more than just an alternative to escape national currencies, poorly managed or otherwise. They can also offer a layer of protection for one’s financial privacy that is missing from most national currencies.
To understand why financial privacy is in need of greater protection, consider the case of China where the government recently increased financial surveillance through the launch of a central bank digital currency (CBDC). Or, consider the case of India where plans are underway to launch a CBDC because it can be designed to “promote non‐anonymity at the individual level” and “monitor transactions.” Partly because cryptocurrencies offer such an attractive alternative to CBDCs in regard to privacy, both the Chinese and Indian governments are also actively trying to ban cryptocurrencies.
While the U.S. government’s plan for a CBDC is still uncertain and it has not resorted to banning cryptocurrencies (at least, not directly), Americans are still right to be concerned about their financial privacy. A 45‐year‐old ruling by the Supreme Court has held that people cannot reasonably expect privacy when providing information to a bank, or third party. Most recently, the dismal state of financial privacy and the weight of this so‐called “third party doctrine” was put on full display when a proposal to monitor bank accounts with at least $600 in annual transactions was announced. That proposal may be off the table for now, but the message was clear: a person’s privacy protections only go so far with the U.S. dollar and traditional banking system.
For some people, cryptocurrencies may be exactly what is needed to better protect their privacy. Despite the fact that cryptocurrencies are not completely anonymous, users are still offered a heightened level of financial privacy because decentralized cryptocurrencies (e.g., Bitcoin) remove the banks from the equation. Therefore, there is no third party to pressure for information if the bitcoins in question are held in a self‐hosted wallet.
If a government wishes to access the information in such a wallet, it must go through the traditional legal system to secure a warrant. That idea, of course, is precisely what underlies the Fourth Amendment to the U.S. Constitution and should be the norm. So, while the U.S. courts may be following the law when they choose to side with the third‐party doctrine, the protections for one’s privacy offered by cryptocurrencies is clearly more in tune with the spirit of liberty that the United States was built upon.
The protection of one’s financial privacy is important, if for no other reason, because financial privacy is often violated by governments seeking to censor individuals. Across the world, governments freeze the financial accounts of activists and rivals in attempts to eliminate their competition. However, regardless of if an account is frozen in the midst of a toppled regime or in an advanced economy, one thing remains the same: governments turn to private banks to have the accounts frozen. And those banks have to comply.
The absence of a third‐party intermediary (e.g., a bank) in decentralized cryptocurrencies, of course, means that there is no one for the government to pressure to release a person’s information except for the direct owner of that information. In the United States, where financial privacy has been weakened by the third‐party doctrine, the absent third party means that the government cannot circumvent the traditional legal system to stop or censor a person’s financial activity. In effect, by strengthening the protection that the Fourth Amendment provides, decentralized cryptocurrencies can better protect Americans from government censorship. And while one would be correct to note that cryptocurrency miners are involved in the process, the miners receive no information in addition to what appears publicly on the blockchains and no one miner has control of the system.
The lack of any one controlling party is a key component of the system’s ability to resist censorship. If the government stopped a miner from updating the ledger, there are countless other miners across the world that would continue to ensure the ledger is kept up to date. In fact, this resiliency was put on clear display when China cracked down on cryptocurrencies in 2021. As illustrated in Figure 1, despite China eliminating 44% of the world’s Bitcoin mining power (measured by the hash rate), the decentralized system was fully restored in just a few months.
Cryptocurrencies, and the blockchains they are built on, also have a role to play in preserving property rights. Not only do the qualities described above preserve individual ownership, but cryptocurrencies can also play a direct role in enforcing contracts.
Enforcing contracts is one of the few roles a limited government should take on. However, despite it being a fundamental role of government, not all governments enforce contracts effectively. Contracts hold little value where governments are compromised by corruption. Worse yet, even where the rule of law is upheld, contract enforcement can be prohibitively expensive. Through smart contracts built with cryptocurrencies, however, the role of enforcement no longer rests with the government alone.
As noted by Brian Armstrong, “Smart contracts move enforcement from the courts to the blockchain.” In short, a smart contract is a digital contract where the underlying code requires conditions to be fulfilled before the contract can be executed and automatically enforced. Unfortunately, smart contracts have many challenges to overcome if they are to gain widespread use. However, even with those challenges in mind, it is already clear that they have a beneficial role to serve in preserving property rights in developing and advanced nations, alike.
Finally, cryptocurrencies can improve exchanges across national borders because transactions on blockchains do not discriminate between an address in New York City and an address in Paris. And the transactions are often more transparent than those in the traditional banking system.
Unfortunately, governments have largely restricted banks in their ability to service cross‐border payments. It can take as long as five business days on average for transactions to settle. Part of that delay is due to the banks checking (and rechecking) for the possibility of fraud or money laundering, as required by most governments. In late 2021, 55 percent of the banks surveyed by the Financial Action Task Force said complying with multiple regulatory requirements significantly slowed their settlement times. Worse yet, 66 percent of those banks said multiple regulatory requirements also raised the cost of cross‐border payments. (The global average for remittance payments in 2021 was 6.38% for $200, or $12.56.)
However, cryptocurrencies are inherently borderless and transparent. Because there is no distinction between sending cryptocurrencies to someone next door versus someone across the world, the transaction will likely be near instantaneous compared to the traditional system––an especially important feature when sending money home in times of crisis and an especially important feature for the free movement of one’s wealth. However, the details of those transactions will also be forever preserved on the blockchain, enhancing the ability of governments and citizens alike to find those who engage in criminal behavior.
So, what do cryptocurrencies mean for liberty?
Cryptocurrencies offer a new range of choices and opportunities that never before existed. They offer protections for financial privacy that should be already offered by the Fourth Amendment. They offer censorship resistance that protects individuals from authoritarian and overbearing governments, alike. They enhance the ability of individuals to enter reliable contracts. They improve the movement of wealth across the world. And overall, cryptocurrencies offer the opportunity for individuals to gain financial independence from the government.
No two cryptocurrencies are created equal. However, in principle, cryptocurrencies offer the potential to enhance liberty across the world. And for that, they are something worth fighting for.