Cryptocurrencies, Bitcoin, and the Challenge to Official Currencies

By Olivier Klein, Professor of Economics at HEC

A cryptocurrency is a digital currency whose transactions are recorded and verified by decentralized technology, often the blockchain. Bitcoin, which appeared in 2009 (notably at the very end of the global financial crisis), is the first cryptocurrency to have achieved major success. Its founding principles are decentralization, the absence of a central authority controlling the creation or regulation of money, a limited supply, transparency, and the immutability of transactions.

The founders of Bitcoin promoted this currency for several reasons. First, it would allow protection against inflation of the money supply and monetary manipulation: unlike official currencies, created by banks and regulated by central banks, Bitcoin relies on a fixed, predetermined protocol, without the intermediation of a financial institution. Next, it offers greater individual freedom and autonomy, granting the user anonymity and independence from a national currency and its constraints. It also introduces the notion of algorithmic trust: instead of relying on an institution, one relies on technology and the distributed consensus of the network. Finally, it can foster financial inclusion in regions where access to banking services is limited.

Bitcoins and other cryptocurrencies of the same nature ultimately derive from the utopia of a world in which money would no longer be national but universal, valid for all countries and for everyone, transferable securely and without cost. Such money would dispense with intermediaries, its value could not be manipulated by governments or central banks, and it would be tied to decentralized private management. It would guarantee transaction anonymity, with its guardian not being a central bank but an algorithm—assumed to be infallible. A form of anarcho-capitalist utopia. In the 1970s, Friedrich Hayek and the Austrian School advocated for the denationalization of money, removing the monopoly of monetary creation from governments and entrusting it to private industry. In some sense, the development of cryptocurrencies could be seen as an attempt to fulfill this wish.

The differences with official bank-issued money are therefore fundamental. Modern money is always, at issuance, a debt of the issuer (a bank, here) against itself. But this private debt must be recognized by society in order to be universally accepted as legal tender —that is, as a means of extinguishing the debt arising from an exchange. Modern money is issued by banks, no longer in proportion to gold or silver reserves, but in relation to the development of the economy. Money is created from the act of credit, which simultaneously generates a deposit in favor of the borrower. This deposit appears on the bank’s liabilities. It is, de jure, a debt of the bank to the deposit holder. And bank deposits constitute money, because they are accepted by society as legal lender (except in cases of collective loss of confidence in the bank’s solvency). Credit thus creates deposits. Today, banks create money ex nihilo, since it no longer bears any relation to quantities of precious metals held, but instead to credit demand—that is, to the needs of the economy. Finally, this system is regulated by an external institutional authority, the central bank, since the automatic regulation of monetary creation through the possibility of converting currency into gold or silver has disappeared.

The severe, repeated financial crises of the second half of the 19th century led to the creation of official institutions—central banks—after repeated bank failures. By homogenizing the monetary space (a dollar, for example, issued by one bank in the United States henceforth always equaling a dollar issued by another American bank), and by acting, when necessary, as a lender of last resort, central banks created the possibility of stability. Hence the usefulness of institutions and rules…

Bank money—which is therefore a bank liability—regulated by central banks and governments, rests on trust in these institutions. It is in this way validated by all as a discharging means of payment. To trust money is thus to trust the effectiveness of the system for settling debts. And since the money supply is backed by credit to the economy, its evolution is mainly tied to the evolution of the economy’s needs.

Bitcoin and other cryptocurrencies, by contrast, have a limited, predetermined supply, independent of the economy’s evolving needs. Since they are backed not by any official institution but by a protocol, and have no economic counterpart, they are highly volatile, their value being entirely self-referential. Bitcoin, for example, is worth only what its buyers and sellers accept it to be worth, without any external objective reference, such as the economy, and without any external regulation. Their legal framework is also uncertain. As a result, their universal adoption remains very limited.

Taking a broader perspective, with anthropological and political philosophy lenses, it becomes clear that the ideas of the libertarian school regarding the role of institutions illuminate the choices of “bitcoiners.” They promote cryptocurrencies as a response to institutions considered inherently dangerous or oppressive. Thus, they create a new, unofficial alternative “institution”: a set of rules coded in a protocol, norms, and a system of trust based on technology rather than the state. Libertarians hold that institutions are artificial constructs that hinder the self-organization of human beings. They therefore see them as harmful and dangerous. We, however, along with the institutionalist school and thinkers such as René Girard, argue that institutions—whether visible or invisible—are the product of the spontaneous evolution of society. They represent the sedimentation of humanity’s historical learning, aimed at improving society’s effectiveness, its capacity to live together, and its mastery of violence. Of course, some institutions may also become inefficient or even harmful, for reasons discussed in some of our articles. But in such cases, our aim is to warn of their fragility and potential deviations or abuses, not to deny their foundational and regulatory role. In other words, the goal is to preserve their utility and correct those that become ineffective or even disruptive, potentially dangerous for the balance of our societies.

The institutionalist school, in economics as in sociology, views institutions as deep and resilient social structures. They encompass both formal rules—laws, contracts, central banks, visible institutions—and informal norms—customs, conventions, shared beliefs, invisible institutions. They constitute the “rules of the game” that structure social interaction, provide benchmarks for collective action, and enable society to function in a stable and predictable manner. Among visible institutions we can cite constitutions, laws, money, the judiciary, or the educational system. Among invisible institutions we find social norms, trust, shared values, and cultural codes. Institutions make effective cooperation possible, strengthen mutual trust, and reduce both transaction costs and conflicts. Without them, markets, economic life, and social peace would be unstable, uncertain, even chaotic. They therefore form the basis upon which social consensus and mutual trust rest, ensuring better economic and social outcomes than could be achieved in their absence.

René Girard, for his part, sees institutions as regulators of violence. According to him, all human societies are marked by potentially contagious dynamics of violence, arising from mimetic desire—that is, the tendency to desire what others desire. To avoid the risk of paroxysmal and destructive crises, societies invented institutions: religious rites, moral codes, judicial systems that channel, redirect, or transform violence. The emblematic institution in his thinking is the scapegoat mechanism: the community discharges its collective violence onto a victim or group, temporarily restoring peace. In modern societies, these sacrificial mechanisms are replaced by more “civilized” institutional forms—such as justice, police, or even money—all of which play a role in organizing and pacifying rivalries.

Whether we refer to the institutionalist school or to Girard, an institution presupposes shared rules, explicit or implicit, collectively accepted, as well as a structure of trust enabling individuals to rely on the predictability of others’ behavior. It also implies a capacity to regulate conflicts: justice regulates punishment, money regulates exchange, the rule of law channels rivalries over power or wealth. Institutions, whether visible or invisible, thus appear, both for institutionalists and for René Girard, as the primary regulators of human societies. In this sense, Bitcoin—a private currency not backed by a public institution, issued without any external objective reference, detached from the evolving economic needs of society—cannot be validated by all as a universal discharging means of payment. This is all the more so given that its self-referential value, and therefore the extreme volatility of its price, makes its everyday use as a means of payment highly difficult.

And yet, institutions themselves are not immutable, immune from drift; they can be fragile. Over time, each risks losing effectiveness, developing dangerous entropy, or being undermined by a poor understanding of the mechanisms of human societies. If monetary constraint, for example, were suspended for too long—if public debt were permanently monetized by creating money to finance it—then trust in the debt-settlement system, and thus in money itself, could be called into question. And if confidence in money were lost, we could face not traditional inflation but a flight from money. The consequences would be disorganization and possible collapse of both economy and society. Money is, in fact, constitutive of the social bond. As Michel Aglietta put it: “Money is the alpha and the omega of society.” Or again: “Money is the fundamental social bond of market-based societies.”

Cryptocurrencies, and Bitcoin in particular, could thus establish themselves as an alternative or even substitute currency, whose value would keep rising, if debt levels continued to increase relative to GDP—as is the case worldwide—and if fear spread that “official” money might be corrupted by the lasting monetization of such debt. Otherwise, their characteristics make them hyper-speculative assets, whose value can only remain highly uncertain, being the product solely of market participants’ anticipations of their own future behavior. A speculation “in the void.” They are not money. Let us beware of their becoming so.