The correct government response to the rise of cryptocurrencies should be to allow free competition on a level playing field, according to a new monograph published by the Institute of Economic Affairs (IEA).
New Private Monies: A Bit-Part Player? was launched at the IEA's offices in Westminster with a panel discussion in front of a packed audience.
Author of the paper, Kevin Dowd, a professor of finance and economics at Durham University, examined three contemporary cases of private monetary systems including Bitcoin. Dowd argues that money, like any other good or service, is best provided through a competitive free market.
Dowd's first case of private money is the Liberty Dollar. The private mint was operated by Bernard Von NotHaus, who drew inspiration from the works of Austrian economist Friedrich Hayek. Based on precious metal it appealed to those who did not have faith in the soundness of the US dollar.
NotHause's project proved popular with consumers and was periodically reviewed against the USD, whose value continued to fall over time.
However, in 2007 the Liberty Dollar was shut down by the Federal government, with NotHaus now facing a lifetime behind bars on counterfeiting charges.
"This is the United States government. It's got all the guns, all the surveillance, all the tanks, it has nuclear weapons, and it's worried about some ex-surfer guy making his own money? Give me a break!", says NotHaus.
Dowd proceeds to turn his attention to the digital payment system e-gold. The service proved to be wildly popular, so much so that by 2005 it had soared to be second only to PayPal in the world of online payments. It had 1.2m accounts and transactions that year reached $1.5bn. Run from the Caribbean by Dr Doug Jackson, it too was shutdown on the grounds of illegal money transmission.
Dowd's third case is certainly the most relevant and has enjoyed even greater success - Bitcoin. The cryptocurrency has proved popular with libertarians, venture capitalists and even Hollywood celebrities.
The decentralised, semi-anonymous currency has experienced a meteoric rise from three cents in 2009 to around $600 today.
Bitcoin's developer Satoshi Nakamoto has in the past explained some of the advantages of the digital currency: "The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust…"
"Bitcoin’s solution is to use a peer-to-peer network to check for double-spending…the result is a distributed system with no single point of failure."
Bitcoin has similarities to a commodity money such as gold since it is costly to produce and inelastic in supply. Because the supply of Bitcoin is limited to 21m it may prove attractive to those looking to protect themselves against inflation. However, sceptics have said this feature will be a significant drawback since it makes the currency inherently deflationary.
Despite its innovative technology and rapid take-up Dowd is sceptical that the first mover can be successful in the long term.
The BBC's technology correspondent and fellow panelist Rory Cellan-Jones echoed this point saying Bitcoin had so far failed to meet the standards of security, utility and convenience to achieve widespread adoption.
Cellan-Jones recounted one of his most experiences using Bitcoin, which involved ordering a pizza that cost the equivalent of £30 and arrived 24 hours late. However, he praised Bitcoin as a "brilliant idea" and was confident that Bitcoin and other private monies would grow significantly in the future.
As well as analysing private monetary alternatives the panel had some harsh words for fiat currency, with Azteco's Akin Fernandez calling government money "inherently unstable" due to the tendency of central banks to debase it over time.
In the wake of a series of security issues, there have been ever growing calls for governments to take a tougher regulatory line on Bitcoin. Dowd staunchly opposes this line of thinking, writing "the experience of contemporary private monetary systems shows that the only regulation they need is that by the market itself."
Should there be a regulatory crackdown, the consequences would be less consumer choice and reduction in competitive pressure on the state to maintain the quality of money, Dowd warns.
Furthermore, the paper recommends that a host of current laws be repealed or liberalised to allow private monies to flourish. Legal tender laws should be abolished and the government should be willing to accept taxes in the form of private money, according to the paper.
On the more radical side of what cryptocurencies could achieve, the paper lists the ability of individuals to free themselves to purchase illegal drugs, engage in illegal forms of gambling and protect their wealth from predatory governments.
This, in turn, raises profound issues of an emerging spontaneous social order, in particular, the prospect of a crypto-anarchic society in which there is no longer any government role in the monetary system and, potentially, no government at all.