Cryptocurrency and the Problem of Intermediation

Abstract

Though Bitcoin currently enjoys a healthy niche, the aspirations of many in the project are grander: to supplant the existing regime of fiat currencies with cryptocurrencies, and to do so outside of normal political channels. Its primary practical obstacle is its purchasing power volatility, arising from a rigid money stock in the face of wide swings in demand. Nevertheless, the historical example of gold, another (much more successful) money commodity with a more or less rigid supply, illuminates the institutional prerequisites for purchasing power stability, economic efficiency, and sustained growth – namely a market of financial intermediaries whose liabilities denominated in the base money themselves circulate as media of exchange. This paper discusses potential benefits and hurdles to establishing financial intermediation in cryptocurrency, as well as the possibility of managing the money supply to create a stable purchasing power cryptocurrency without the need for intermediation at all. Such schemes ultimately require an existing market of intermediaries in order to provide any benefits, the emergence of which governments are for the moment well-positioned to prevent.