Separation of Currency and State

Ask most people why government issues the currency and you'll get a shrug — of course it does, who else would? The monopoly feels less like a policy choice than a fact of nature, the same way a national anthem or a flag does.

It isn't. For most of monetary history, "who issues the money" was a genuinely open, competitive question, and the state's exclusive claim on it is a comparatively recent, anomalous, comparatively contested arrangement that has to be built, defended, and enforced rather than one that simply always was.

Blockchain matters here less as a technology than as an answer to a question that's been sitting unresolved for two centuries: if a currency didn't need a state behind it to be trusted, would people still use it? For the first time, that question has a real-world answer instead of a theoretical one, and the social pressures pushing people toward that answer — inflation, capital controls, a generation that came of age watching institutions fail — matter as much as the cryptography itself.

The monopoly is younger than it looks

Scotland ran a free banking system from 1716 to 1845: multiple private banks issued their own competing banknotes, redeemable in specie, with no central bank and no government note monopoly, and it was — by the standard measures economists use, bank failures and financial panics — more stable than England's centralized system over the same period.

New England ran something similar with the Suffolk System, a private clearinghouse arrangement among Boston-area banks that disciplined note issuance without a central authority from 1824 until 1858, when it was supplanted by a rival clearinghouse rather than by any government takeover.

The United States had no central bank at all for much of the 19th century and ran instead on notes issued by thousands of individual chartered banks, a system with real problems — but problems of quality control, not proof that a state monopoly was the only alternative to chaos.

What ended these arrangements wasn't a market failure that only a state monopoly could fix -- it was mostly the state's own fiscal interest. England's Bank Charter Act of 1844 concentrated note issuance in the Bank of England partly to stabilize the currency and partly because a government monopoly on money creation is an extraordinarily convenient thing for a government to have — it makes seigniorage a direct revenue source, it makes wartime finance easier (print now, dilute everyone's savings later, and call it a loan), and it makes every other economic actor's transactions visible and taxable in a way a landscape of competing private currencies never quite is.

Hayek made the argument explicit in Denationalisation of Money (1976): he wasn't proposing something untested so much as pointing out that the untested part was the monopoly, not the competition, and that governments had never demonstrated they were the only entity capable of producing money people would trust — they'd simply made it illegal to find out.

What blockchain finally solved

Hayek's proposal went nowhere in 1976 for a boring, practical reason: a private currency still needs some mechanism to prevent double-spending and counterfeiting without a central issuer keeping the ledger, and nothing available at the time could do that at scale between strangers who don't trust each other. David Chaum's DigiCash, launched in 1989, got close — cryptographically sound digital cash — but still needed Chaum's own company as a trusted central clearinghouse, which meant it inherited exactly the single-point-of-failure problem it was trying to escape, and the company folded in 1998.

The cypherpunk movement that grew up around exactly this problem in the early 1990s treated it as the central unsolved question of digital life. Eric Hughes's 1993 A Cypherpunk's Manifesto put the stakes plainly: privacy in an open society requires the tools to transact without every counterparty and every intermediary being able to see and record the transaction, and "we cannot expect governments, corporations, or other large, faceless organizations to grant us privacy" — it has to be built, not requested.

What the cypherpunks were missing wasn't the ambition. It was a way to keep a shared ledger honest without any single party controlling it.

Bitcoin's 2008 whitepaper solved that specific problem, not the abstract one. Proof-of-work let a network of mutually distrusting strangers agree on a single, tamper-evident transaction history without any of them needing to trust the others, and without needing a bank, a clearinghouse, or a state in the loop at all.

That's the technical contribution, and it's a narrower one than the hype around it suggests — but it was exactly the missing piece needed. Hayek's currency-competition argument and Chaum's cryptographic-cash design had both been sitting there for over a decade with no way to combine them without a trusted center. Bitcoin was the first design that didn't need one.

Socialization -- Why people started using it

None of this would have mattered outside cryptography conferences if the social conditions hadn't made state-issued money worth leaving. They did, repeatedly, and the pattern is consistent enough to name.

Inflation flight. Argentina's peso has lost the large majority of its value against the dollar across repeated currency crises, and Argentina has consistently ranked among the highest countries in the world for crypto adoption relative to its economy — not because Argentines are unusually interested in cryptography, but because holding pesos has been a demonstrably losing proposition and dollars are hard to legally obtain in the quantities people want.

Turkey, Lebanon, and Iran show the same pattern for the same reason: when the state currency is visibly failing to do the one thing a currency is supposed to do — hold value — an alternative that isn't issued by that state stops being a novelty and starts being a rational hedge.

Capital controls. China's restrictions on moving money out of the country, and Nigeria's on accessing dollars amid naira volatility, turned crypto into one of the few remaining channels for citizens to get their own savings past a wall their own government built around it.

This is the sharpest version of the underlying argument: a state currency monopoly isn't only about which paper says "legal tender" — it's also, often primarily, a control on capital mobility, and a currency the state can't gate is a currency citizens can't be economically trapped behind.

Remittances and the unbanked. El Salvador's 2021 law making Bitcoin legal tender was framed domestically around remittances — money sent home by Salvadorans abroad, historically taxed by transfer fees running well into the double-digit percentages through incumbent services like Western Union.

Whatever one thinks of the policy's execution, the underlying problem it targeted was real: a large share of the country's population is unbanked, and a currency that needs no bank account and no correspondent-banking relationship to receive is a currency that reaches people the existing system structurally excludes.

A generational trust deficit. People who came of financial age around 2008 watched central banks and regulators fail to prevent a crisis that then transferred the largest bailouts to the institutions that caused it. Bitcoin's genesis block famously embeds a headline from that same week — The Times, January 3, 2009: "Chancellor on brink of second bailout for banks" — not a coincidence but a stated motive.

That's a social fact as much as a financial one: an entire cohort's formative experience of state-managed money was watching the state manage it badly, at their expense, and a currency explicitly designed to need no central manager reads to that cohort less as speculation and more as an alternative worth trying.

The other axis: what lightness and speed make possible

More than one colleague pushed back on an earlier draft of this essay for stopping at exactly this point — for treating escape from state control as the whole argument, when what they kept coming back to in conversation was something closer to the opposite instinct: not what a citizen is fleeing, but what becomes buildable once value can move at the speed a network moves rather than the speed a bank does. That pushback is worth taking seriously on its own terms, because it isn't a footnote to the escape argument. It's a separate case.

Everything so far has framed blockchain currency as an escape — from inflation, from capital controls, from a monopoly that outlived its justification. That framing undersells it. Escape is a defensive category; it explains why someone leaves a system, not what becomes possible once they're not carrying its weight anymore. The part of this that may matter most to social liberty isn't what people are running from. It's what a currency that moves at the speed of a data packet, instead of the speed of a correspondent-banking relationship, lets people build that a slower currency structurally couldn't support.

Legacy money is heavy. A cross-border wire routes through a chain of correspondent banks, each taking a cut and a day, landing anywhere from one to five business days later. Card rails carry a fixed cost per transaction — often thirty cents plus a percentage — that makes anything under a few dollars uneconomical to charge for at all, which is why the internet spent two decades unable to sell anyone a single paragraph, a single song, or a single API call for a fraction of a cent, and defaulted instead to advertising and subscriptions as the only monetization models the rails could carry.

A settlement layer that clears in seconds for fractions of a cent doesn't just do the same job faster. It makes an entire category of transaction economically possible for the first time. The Lightning Network settles Bitcoin payments in under a second for costs too small to matter. Streaming-payment protocols like Superfluid let a salary or a subscription flow continuously, by the second, instead of arriving in lumps on a payday a finance department chose for its own convenience. Coinbase's x402 protocol, built on the dormant HTTP 402 "Payment Required" status code, lets one piece of software pay another a fraction of a cent per API call with no human, no invoice, and no thirty-day billing cycle in the loop at all — a machine economy that simply cannot exist on rails built for a person swiping a card. Stripe's 2024 acquisition of the stablecoin infrastructure firm Bridge for roughly $1.1 billion is a bet from the center of the legacy payments industry that this isn't a fringe use case; it's where settlement is headed.

Speed also does something at the opposite end of the scale from a per-second salary or a fractional-cent API call: it makes liquidity itself continuous rather than something that shows up during exchange hours and goes home at night. Automated market makers on decentralized exchanges price and fill trades every block, around the clock, with no floor, no specialist, and no opening bell — a form of always-on liquidity provision legacy markets, gated by human trading hours and T+1 or T+2 settlement, structurally cannot offer.

Flash loans push the same property to its logical extreme: a loan of any size, borrowed and repaid within a single atomic transaction, valid only if it's paid back before that transaction finishes, which is a financial instrument that is not merely faster on a blockchain than off one — it has no off-chain equivalent at all, because it depends on same-block settlement to exist as a concept.

High-frequency trading firms spent decades building custom fiber and microwave links to shave milliseconds off order execution on legacy exchanges; a settlement layer where finality itself is measured in seconds rather than days collapses that entire arms race into the base layer of the currency, making the kind of tight, continuous liquidity that used to require a seat on an exchange available to a market maker with a wallet and no permission slip from anyone.

None of this was designable in advance, in the way a policy analyst designs a program. Nobody in 1990 could have specified "a way for one AI agent to pay another a tenth of a cent to run a query" as a use case worth building for, because the rails that would make it worth building didn't exist yet and the need hadn't been imagined into existence.

To understand this, think not to the gold standard or free banking — but to early internet, where removing the friction from moving information didn't just make existing communication cheaper, it produced blogs, open-source collaboration at planetary scale, and forms of publishing nobody had a name for the day before they appeared.

A social libertarian case for currency outside state control that stops at "citizens can protect their savings from an inflating peso" is making a real argument, but a narrow one. The fuller argument is that a state monopoly on currency issuance was also, all along, a monopoly on the speed and shape money was allowed to move in — and that removing it doesn't just relieve a burden, it opens a design space and a set of powers nobody has finished exploring, the same way removing the state's grip on who could publish opened one three decades ago whose edges we're still finding.

The part that's hardest for our culture of fear and control to grasp: untaxed and untraceable

Everything above is a case for currency competition — money that exists outside a state's control. It isn't yet the harder case: money that moves untraceably, which is where the real friction with government sits, because a state can tolerate a competing currency it can still see far more easily than one it can't.

Bitcoin itself is pseudonymous, not private — every transaction is on a public ledger forever, and chain-analysis firms like Chainalysis have built an entire industry around de-anonymizing it well enough that it now regularly convicts criminals who assumed it was untraceable.

Technologies built for true privacy are a distinct, smaller category, but effective: Monero, whose default protocol obscures sender, receiver, and amount using ring signatures and stealth addresses; Zcash, which offers an optional fully-shielded transaction type using zero-knowledge proofs; and mixing services like Tornado Cash, which break the on-chain link between a deposit and a withdrawal on transparent chains like Ethereum.

These tools deliver on truly private movement of money, and they are also, predictably, where the state pushes back hardest. The U.S. Treasury's Office of Foreign Assets Control sanctioned Tornado Cash itself — not a person, the smart contract (!) — in August 2022, on the grounds that it had laundered billions in stolen funds including for North Korean state hackers, a designation later challenged in court and partially struck down on First Amendment grounds regarding the open-source code itself, while the underlying sanctions authority over its use survived in some form.

The EU's Markets in Crypto-Assets regulation (MiCA), fully applicable from December 2024, and FATF's "travel rule" guidance both push in the same direction globally: exchanges and custodial services are increasingly required to collect and share the same identity information a bank would, which doesn't touch the privacy coins themselves but does close off most of the on-ramps and off-ramps ordinary people would use to reach them.

A currency nobody can trace is a currency nobody can tax, and a currency nobody can tax is a currency that can't be made to fund anything collectively — not roads, not courts, not the ledger infrastructure, no option exists for forced wealth redistribution. Untraceable money doesn't just escape an overreaching state. It escapes a legitimately elected one just as completely, and it escapes the tax base that funds the public defender for the dissident being surveilled by the overreaching one just as completely as it escapes the surveillance itself. The same property that lets a Lebanese saver protect a life's earnings from a collapsing lira also lets a ransomware operator or a sanctioned regime move money with none of the friction that currently gives law enforcement and diplomacy any leverage at all — Chainalysis's own crime reports put illicit crypto transaction volume in the tens of billions of dollars annually, a real cost, not a hypothetical one, riding on the same rails as every legitimate use.

Three things can be true

It's true that the state's monopoly on currency issuance was a policy choice, not a law of economics, defended as much for its fiscal convenience to the state as for any stability it delivered to citizens — the Scottish and Suffolk System evidence is real and doesn't go away because it's inconvenient to the monopoly's defenders.

It's true that a currency nobody can trace can't be made to fund anything collectively, including the parts of public life that even a minimal state needs funded, and that the same privacy protecting a dissident is protecting a ransomware operator on the identical rails with no way to tell the two apart from the chain alone.

And it's true that neither of those first two facts is the whole stake — that the lightness and speed this technology moves value at is opening a design space nobody's finished mapping, and that a social libertarian case built only on evasion and only on privacy sells the technology short of what it will finally turn out to be for.

What blockchain changed isn't the ethics of that tension — Hayek and the cypherpunks argued the ethics decades before a single block was mined. What it changed is that the tension is no longer theoretical. For two centuries, "should currency be a state monopoly" was a debate conducted entirely in the register of political philosophy, because there was no working alternative to point to either way.

Now there is one, several governments have already watched their own citizens choose it under pressure, and the argument has moved from "would people really do this" to "now that they are, what follows."

That's a genuine shift, and it's one no amount of legal tender law or capital control has yet managed to fully put back in the bottle — not because the state has stopped trying, but because for the first time in two hundred years, it's no longer the only party with a working system on the table.

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Sources: Wikipedia: Free banking (Scotland); Wikipedia: Suffolk Bank; Wikipedia: Bank Charter Act 1844; Wikipedia: Denationalisation of Money; Wikipedia: DigiCash; A Cypherpunk's Manifesto, Eric Hughes, 1993; Wikipedia: Bitcoin — Genesis block; Wikipedia: 2021 Bitcoin Law (El Salvador); Wikipedia: Monero; Wikipedia: Zcash; Wikipedia: Tornado Cash; U.S. Treasury: Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash; Wikipedia: Markets in Crypto-Assets Regulation; Chainalysis: 2024 Crypto Crime Report; Wikipedia: Lightning Network; Superfluid Protocol: real-time finance; Coinbase: x402 — a new payments protocol for the internet; Reuters: Stripe to buy stablecoin platform Bridge for $1.1 billion.