The government monopoly on money is a relatively recent phenomenon. Until the creation of the Federal Reserve just over 100 years ago, private banks could issue notes backed by gold that functioned akin to money.  

The era of government money has not been without some growing pains: The Fed’s reluctance to extend credit to cash-strapped banks in the aftermath of the stock market crash of 1929 was the proximate cause of the great recession, despite the fact that preventing such a thing was the main motivation for creating the Fed in the first place.  The 1970s stagflation, as well as the severe recession of the early 1980s that ended the inflationary spiral of the previous decade, was also a direct result of the Fed’s actions.  

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Some monetary scholars go so far as to place the blame for every economic downturn since its creation--including the last one--on the actions of the Federal Reserve

There are also plenty of countries that have essentially forfeited their monopoly on money creation throughout the years through sheer government incompetence: People in 1980s Argentina and Zimbabwe in the last decade more or less abandoned the local hyper-inflated currency and resorted to barter or the use of other currencies to conduct trade.  

Reciting a few missteps by monetary authorities in the past does not constitute a coherent argument for ending the Fed, of course--we had plenty of recessions before its advent--but it does suggest that we should be wary of immediately dismissing any threat to the Federal Reserve’s monopoly over the monetary system.  With the rise of bitcoin and other alternative crypto-currencies, it may be worth having a conversation about what role the federal reserve should have in their development.  

The reflexive response by many is that the government should do nothing to help these crypto-currencies and that their very legality is a threat to our nation’s tax laws, monetary policy, and mores, as well as a well-functioning economy. Paul Krugman, for instance, opined that “their main use so far has been for an online version of those back-alley exchanges.” 

A more reasonable response to alternative currencies would be to begin by acknowledging that the U.S. dollar is not going anywhere. It has had plenty of competition in the form of other nation’s currencies, and despite the advent of the Euro and rise of the Renminbi it has remained the world’s reserve currency. At the same time, the foes of these new currencies should recognize that the government doesn’t have the ability to completely shut down these markets, just as it would be hopeless to try to put a stop to the Ebays and Craigslists of the world.

This is not to say that the rise of virtual currencies is inexorable: the steep drop in the value of bitcoins over the last year as well as the collapse of a Tokyo-based exchange after a hacking attack cost investors millions has given pause to many nascent bitcoin investors. However, the ability to conduct transactions via computer not only anonymously but without either party needing to pay a fee to a credit card company suggests that there will always be financial incentives for their development.

Bitcoin proponents have tried to address concerns regarding its use in illicit transactions but with mixed results.  For instance, a newly-created bitcoin exchange called Coinbase worked assiduously to ease government concerns about the industry only to have New York and California regulators challenge its claims that it was regulated. California even issued a “consumer alert” warning that Coinbase lacked a license to operate its new exchange under the state’s laws for money transmission. The exchange also drew criticism for touting the ability of virtual currency to evade international sanctions imposed on Russia. 

The appropriate regulatory approach for the nascent cryptocurrency market is a tough needle to thread, but the status quo--where bitcoin and its ilk exist in a grey market, where illegal transactions can be easily done and no one who owns a bitcoin can be certain it won’t be stolen via cybertheft--is not anyone’s idea of an optimal arrangement.   

A light regulatory touch to preclude these untoward activities may not be possible, but if bitcoin and its imitators are to ever to be used by anyone other than the libertarians and anarcho-capitalists it will be almost surely necessary.

Brannon is a former senior economist at the U.S. Treasury.