As Bitcoin gets more and more prominent, there’s been an implicit debate about what it’s useful for: Could it become a genuine currency on its own, or is its main use going to be the fact that it can work as a cheap, unregulated payment system? (Which would allow people to avoid onerous fees when sending remittances to relatives in developing countries, for instance. The latter purpose obviously doesn’t preclude the former.)
As I explained a while ago, the latter seems a lot more feasible and carries clear benefits, but the former purpose has gotten a lot more attention — one, because, well, Bitcoin is a cryptocurrency, and two, because the political angle to creating a private currency is compelling and exciting, especially to certain strand of technologically adept and highly motivated libertarians.
Members of that clique often happen to be fans of the Paul political dynasty, so it’s unsurprising that Rand Paul likes the private-currency angle. In fact, he likes it so much that he wants to make Bitcoin, which is in some sense a fiat currency, into a hard currency. When asked in a Fortune interview what he thinks of the currency, he said the following:
I was looking more at [using Bitcoin] until that recent thing [sic — probably referring to the failure of Mt. Gox, a huge Bitcoin exchange]. And actually my theory, if I were setting it up, I’d make it exchangeable for stock. And then it’d have real value. And I’d have it pegged, and I’d have a basket of 10 big retailers… I think it would work, but I think, because I’m sort of a believer in currency having value, if you’re going to create a currency, have it backed up by — you know, Hayek used to talk about a basket of commodities? You could have a basket of stocks, and have some exchangeability, because it’s hard for people like me who are a bit tangible. But you could have an average of stocks, I’m wondering if that’s the next permutation.
This is kind of a modern version of a gold standard: Hayek suggested a basket of commodities; Rand wants a basket of stocks, which problematically are traded only on exchanges that are denominated in dollars or other fiat currencies. While there is real value to stocks, Paul’s idea would likely still rely on a fiat currency to tie Bitcoin’s existence and value to something of real value.
What’s sort of ironic here is that Bitcoin seems, incredibly, to be working without any hard backing at all, let alone any legal system conferring the fiat. This could be a point for the feasibility of private currencies and free banking (i.e., without a government-run/endorsed central bank), which was the preference both of Friedrich Hayek and Milton Friedman. But it’s not a point in favor of the gold standard or any other standard, which Paul and his dad like and could play a role in a free banking system but haven’t with Bitcoin.
More important, Paul’s idea would also probably make it much harder for something like Bitcoin to take off. As I said above, the idea that it’s a new unregulated payment system doesn’t exactly conflict with the idea that it could also be an alternative currency, but it’s possible the latter idea can be problematic: It might make it seem more crazy and less reliable than it actually is for people who need a cheap payment system, it raises expectations unrealistically high, and it seems harder to get such a system off the ground if you want some private entity to be guaranteeing its value.
In fact, if the value of Bitcoin were tied to the stock market, it seems like that would give the SEC a much stronger case for regulating it (it would basically become a security), which would then reduce a lot of its advantages.
If Rand Paul had been in charge of starting Bitcoin and followed this idea, in other words, it probably wouldn’t be where it is today. That doesn’t make his idea impossible, though, of course.