If you’ve read a research or policy paper from a government or central bank in recent years, you may have noticed an interesting distinction such institutions tend to make when it comes to money. They like to refer to national fiat currencies as ‘public money’ and cryptocurrencies — as well as other virtual currencies — as ‘private money,’ implying that one somehow ‘belongs’ to the public while the other is strictly the reserve of private individuals.
This distinction is misleading if not downright false, and for various reasons.
Yes, fiat currencies may be ‘public’ insofar as they’re created and managed by institutions which are (nominally) accountable to the public, and yes, cryptocurrencies may be ‘private’ insofar as they operate largely outside of the purview of governments. However, many figures working within the cryptocurrency industry argue strongly that members of the public have more of an influence over the development of cryptocurrencies than that of fiat currencies.
What is ‘public’ money?
It’s not hard to find examples of central banks using the terms ‘public money’ and ‘private money.’ In a speech delivered in June by the Bank of England’s Christina Segal-Knowles, references are made to both, with money issued by a central bank being ‘public’ and pretty much everything else (including money issued by commercial banks) being ‘private.’
Likewise, the International Monetary Fund made a similar distinction in a blog published in February, in which it also happened to describe public money as “perfectly safe.”
Some proponents of the public-private money distinction appear to have a fairly rosy view of what public money is. Here’s the European Central Bank’s Fabio Panetta, offering a definition of public money in a speech delivered in November 2020:
“a public good that central banks have been managing for centuries in the public interest and that should be available to all citizens to satisfy their need for safety.”
Community control, no center of power
However, the cryptocurrency industry would seem to disagree fundamentally with such a view of public money, particularly when it’s claimed that fiat currencies are managed “in the public interest” and are intended to “be available to all citizens.” For them, such an assessment is largely at odds with the reality of how money (in whatever form) is actually managed and distributed.
“There should be no public money with regards to citizens, all money created from an individual’s productive output should be private and protected by property rights,” said Peter McCormack, the host of the What Bitcoin Did podcast, implying that ‘public’ is perhaps the wrong adjective to use to describe money, even when created by a central bank.
Likewise, others take issue with the distinction’s suggestion that Bitcoin (BTC) and other cryptocurrencies are somehow out of the reach of members of the public, while fiat currencies are somehow under their control.
“A cryptocurrency that is built using open-source code and does not provide its founders with any exclusive advantages over any other participant of its ecosystem (like Bitcoin) is definitely a more public good than central bank-issued currencies, where a centralized agency has exclusive, direct control over its issuance and price,” said Nishant Sharma, founder and CEO of mining-focused consultancy BlocksBridge Consulting.
Decentralized cryptocurrencies such as Bitcoin are decentralized precisely to the extent that no one group or individual holds dominance over their development, with the absence of a formalized or hierarchical governance structure meaning that members of the community have equal access to influence (at least in theory).
“Fiat currency management is decided by governments, with the public having little influence over policy. On the other hand ‘private currencies,’ if decentralized (like Bitcoin) are managed by the community, giving the ‘public’ control,” said Lou Kerner, CEO of BIGtoken.
If you’re a developer, there’s nothing stopping you from submitting proposals for an update for your favorite cryptocurrency, and if its wider development community like this proposal, it will be approved and implemented. It would certainly be very hard to do something similar for central bank-issued ‘public’ money.
“Anybody can theoretically contribute to the code of a cryptocurrency and have a say in critical decisions on its development roadmap. That includes critical decisions that can ultimately have a big impact on the price of the said currency,” according to Nishant Sharma.
On the other hand, even if members of the public may theoretically have more of a chance of swaying the direction of Bitcoin (than of the dollar, euro or pound), the need for community cohesion in approving updates ensures that no single agent becomes dominant.
“The good thing about Bitcoin is that it is very difficult for any individual to influence it,” stressed Peter McCormack.
There is, however, one misgiving observers may have when trying to argue that decentralized cryptocurrencies belong more to the public than fiat currencies. Looking at the distribution of bitcoins, for example, you may notice that the top 0.4% of all BTC addresses hold around 85.6% of all bitcoin in circulation. However, this picture is not really accurate, as some of these addresses belong to exchanges that hold BTC for millions of their customers.
In either case, going forward, distribution of BTC might be even better if more members of the public get involved in Bitcoin.
As Nishant Sharma concluded, “The fact that a person gets to truly own bitcoin, makes that person a major stakeholder and well-wisher of that cryptocurrency. This is in stark contrast with elected (or appointed) officials who get to decide on critical decisions regarding fiat currencies, such as their issuance.”