Across the animal kingdom, natural selection has sculpted a remarkable array of reproductive strategies, but humans are unique in that we consciously design institutions that shape incentives and constrain behavior. Among institutions, the modern welfare state highlights this dynamic. As resources are redistributed for paternalistic purposes, the State increasingly supplants functions once anchored in family and kinship. By altering costs and benefits, these interventions create conditions for alternative reproductive strategies to emerge.

The patterns of reproductive behavior are illuminated by Robert Trivers’s Parental Investment Theory, which demonstrates how sexes differ in their approaches to the trade-off between parental care and mating efforts. Applicable across species, the theory predicts that the sex that invests more in parenting (e.g., gestation, lactation, food provisions, or training) will be more selective when choosing a mate, while the opposite sex competes for intrasexual mating opportunities. Selection pressures arising from this competition favor conditional responses, which over time, and across variations, can stabilize as Alternative Reproductive Tactics (ARTs) within a population.

Against this evolutionary backdrop, Homo sapiens harness their cognitive capacities to an unmatched degree in reproductive strategies and beyond, employing high-level abstractions and acting purposefully through reason to achieve multi-layered ends. Other intelligent species exhibit elements of culture and technology, but nothing rivals humanity’s achievements. In an effort to impose order, mankind has devised systems in which authority spans from centralized to decentralized, with forms of governance ranging from ruthless tyrants to libertarian societies rooted in natural rights. Along this continuum, modern welfare states justify redistributive policies under the guise of benevolence—and by doing so, subvert incentives that hold families together.

As Hans-Hermann Hoppe observed in Democracy: The God That Failed:

Every form of government welfare—the compulsory wealth or income transfer from “haves” to “havenots” lowers the value of a person’s membership in an extended family-household system as a social system of mutual cooperation and help and assistance. Marriage loses value.

In other words, by systematically altering the payoff matrix of reproduction, welfare states not only redistribute resources; they predictably distort incentives, weaken pair-bonding, and favor reproductive tactics that externalize parental costs, mirroring parasitism in the biological sense. These effects are not pathologies of character, but consequences of institutional design. To analyze how relative incentives are reshaped, we turn to game theory.

Game Theory

In 1944, John von Neumann and Oskar Morgenstern formalized classical game theory in Theory of Games and Economic Behavior. A classical game involves two or more rational actors and can be competitive or cooperative. The strategic interactions among players are often represented in a payoff matrix, where payoffs depend on the strategies each player employs. The prisoner’s dilemma is perhaps game theory’s most famous application, but it has been applied across all walks of life, from couples negotiating conflicting preferences over where to go on a date, to residential segregation, to decisions throughout sports.

A notable extension of this approach is evolutionary game theory, which applies to biological systems and provides a framework for analyzing frequency-dependent evolution of phenotypes. Rather than modeling rational actions, as in classical game theory, it examines how strategies—genetically inherited, conditional, or learned—evolve and perform over time. Payoff matrices capture an organism’s survival and reproductive strategies, molded by natural selection, and measured as fitness. In 1973, John Maynard Smith and George Price introduced the Hawk-Dove game to illustrate the logic of conflict over resources in animals.

Figure 1. Payoffs are listed as Player #1, Player #2. Colors correspond to each player.

Organisms of the same species engage as players in this game. In each interaction, a player can either escalate aggression (Hawk) or retreat (Dove), with the optimal choice depending on their opponent’s strategy. When one player plays Dove and the other Hawk, the Dove yields while the Hawk claims the resource, producing payoffs of (V,0) or (0,V). If both players play Hawk, conflict ensues, reducing payoffs to (V-C)/2 for each due to the risk of injury. If both players play Dove, the resource is shared equally, (V/2, V/2).

The payoff matrix in the Hawk-Dove game is determined by the resource’s value and the cost of fighting. When V < C, no pure dominant strategy will exist, and the population stabilizes as a mixture of Hawks and Doves. As the resource’s value rises, so does the frequency of Hawks; when the cost of fighting rises, Doves become more common.

Successful strategies, whether genetic, conditional, or learned, replicate and spread according to their relative fitness. Strategies emerge without conscious design, driven by the relentless logic of survival and reproduction. In this sense, much like competing firms in a free market, advantageous strategies proliferate, while disadvantageous ones fade away. Over generations, these pressures harden into enduring behavioral patterns, paving the way for Alternative Reproductive Tactics.

Alternative Reproductive Tactics

Except in asexual species, males and females are the vehicles that pass genes from one generation to the next. In the creation of an embryo, each sex holds a vital resource sought by the other: sperm requires eggs, and eggs require sperm. In the natural world, a dizzying variety of strategies has evolved in the battle to secure mates. When selection pressures produce a discontinuous distribution of behavioral, physiological, or morphological traits—and there is fitness to be gained by pursuing divergent reproductive strategies—an ART may emerge. Given the natural limitations of energy, time, and resources, each tactic carries its own biological costs and benefits. Echoing Thomas Sowell’s insight, evolutionary systems offer no costless solutions—only trade-offs.

Southern elephant seals call the Antarctic home. Males come in two varieties that differ in morphology and reproductive strategy. Bull elephant seals tip the scales at nearly 9,000 lbs, and during mating season, a “beach master” can command a harem of up to 150 females. These beasts roar, bite, and slam their bodies into any and all competitors, exemplifying a high-investment reproductive tactic. Meanwhile, smaller “sneaky” males lurk at the edges of the territory, waiting for the beach master to be distracted so they can slip under his nose and copulate.

Male side-blotched lizards in the southwestern deserts of the US come in three flavors. Each sports its own color and strategy for mating. As with the elephant seal, the orange variety is territorial and polygamous, whereas yellow ones are non-territorial and employ a sneaky strategy. Blue lizards are mostly monogamous, dedicating their resources to mate-guarding while patrolling smaller territories. Akin to rock, paper, scissors, color dominance shifts over time as success is based on the frequencies of competing colors within the population. When orange lizards are common, blue ones struggle to secure mates, and sneaky yellows thrive. As blue lizards become more numerous, sneaky yellows falter, and the cycle repeats.

Throughout North American freshwater lakes, ponds, and streams, bluegill sunfish build colonial circular nests. Larger, nest-guarding males defend the eggs, resulting in high fertilization success. Outside the nests, smaller sneaky males take advantage of lapses in defense during spawning. When the time is right, they dart in, releasing their sperm in a bold bid to fertilize the eggs. Parasitic tactics externalize costs, allowing sneaky males to exploit the energetic and risk-related investments of more committed competitors, though at the cost of lower fertilization success per attempt.

Within a species, high-investment and parasitic strategies fluctuate dynamically over time, often stabilizing due to frequency-dependent selection. Parasitic tactics cannot dominate indefinitely; their success depends on the continued presence of high-investment competitors. When parasitic strategies spread too widely, selection can lock populations into individually adaptive yet collectively maladaptive states, leaving the system destabilized, heightening the risk of population collapse. In non-human species, these dynamics unfold through biological selection alone; in humans, they are further shaped by cognition, culture, and the institutions they construct.

Homo sapiens

Unlike their animal brethren, humans act purposefully through high-level reasoning, using available means to achieve desired ends. The perceived value of potential mates is inherently subjective, shaped by personal histories, interactions, cultures, and societal structures. Individual preferences can be inferred from observable human action. Yet beneath the surface, humanity’s biological underpinnings remain present, as sexual desires can cloud reason. Consequently, in humans, payoff matrices do not represent biological fitness alone, but a hybrid of evolutionary pressures and reasoned decision-making, where strategies respond dynamically to environmental and social conditions.

In terms of parental investment theory, a profound asymmetry exists between the sexes. Women invest at least nine months in pregnancy, and often bear the bulk of post-birth care, while a man’s minimal contribution is measured in minutes and milliliters of semen. As a result, women tend to be more selective when choosing mates, whereas men face competition with other men for reproductive opportunities. These differences in investment influence the conditions under which ARTs emerge in both sexes, though cultural and social factors can modulate their expression.

In contemporary societies, men employ a variety of reproductive strategies. Through a game-theoretic lens, mates function as a proximate resource, instrumental to the goal of offspring production. Monogamous pairings and marriages then act as forms of mate-guarding. Aggression, building on the Hawk-Dove game, can serve as a reproductive tactic. However, aside from its moral reprehensibility, forced copulation—which is descriptive, not justificatory—yields low long-term success due to the significant costs it entails, including injuries, retaliation, ostracism, or incarceration. Alternatively, enabled by technology, a man seeking to maximize his offspring could adopt the sperm bank approach. Other ARTs may emerge as a result of institutional interference.

The rise of institutional strategies is an adaptive response to the incentive structures imposed by their environment. Welfare programs vary widely in eligibility and benefits, and their effects are shaped by prevailing cultural stigmas. For the purposes of this discussion, the safety net refers to assistance—cash or in-kind—provided to impoverished parents. Operating broadly, these institutions systematically replace or supplement support traditionally provided by kinship and pair-bonding, acting as a form of social insurance. By externalizing a portion of parental investment, the safety net reduces penalties associated with non-investment, creating conditions that allow parasitism to take hold as a viable reproductive strategy.

From an evolutionary perspective, a man’s reproductive success benefits from philandering. In a welfare state, however, men who once needed to invest heavily in resource acquisition to attract mates can now redirect their effort toward spreading their genes, as the redistribution of resources reduces the relative cost of abandonment within the payoff matrix. This, in turn, further favors a more polygamous reproductive strategy. Males adopting this parasitic strategy not only gain access to sexual variety but also have the option to adopt a mixed strategy, in which time and resources are selectively provided to improve the well-being of progeny.

From the female perspective, quality of mate is prioritized over quantity. In the absence of a safety net, extreme caution must be exercised when selecting a mate, with emphasis on the man’s ability to assist with child-rearing. The introduction of a welfare system can warp the female payoff matrix, altering the incentives that shape mate choice. Consequently, finding a good, stable provider to support offspring becomes less critical for welfare recipients. As predicted by Gary Becker’s economic analysis of the family, this phenomenon has been termed the “independence effect.” If a woman has her own resources, she may adjust her mate preferences or opt to raise children alone.

The Seattle-Denver Income Maintenance Experiments (SIME-DIME) of the 1970s provide a vivid illustration of the independence effect. Families with at least one dependent below a specified income threshold received guaranteed cash transfers for up to five years. Analyses of the program found significantly higher divorce rates in the experimental group than the control group—approximately 36% higher for black couples and 40% for white couples. Relieved of financial dependency on their spouses, participants adjusted their reproductive strategies.

Since the implementation of the Great Society programs, welfare has dramatically altered family structures. The proportion of births to unmarried women has risen sharply, from 5.3% in 1960 to 40.0% in 2023. At the same time, the share of children living in two-parent households in the United States has declined—from 87.7% in 1960 to 71.1% in 2023. These patterns are disproportionately concentrated among poorer and working-class families, who are also the primary recipients of welfare. While the expansion of the welfare state is only one of many influences and is not a monocausal explanation for these trends, the correlation between state interventions and a reduced reliance on stable pair-bonds is striking.

When resources are subsidized by the State, provisioning becomes less salient in mate selection, and relative rankings of potential partners may shift. As a result, welfare programs distort how subjective values are expressed through demonstrated preference in reproduction. The introduction of institutional ARTs disrupts equilibrium patterns that have historically favored high-investment pair-bonding, facilitating the proliferation of parasitic strategies that undermine traditional families.

Conclusion

From an evolutionary perspective, the welfare state reshapes human incentives. By reducing the personal costs of child-rearing and parental investment, it enables alternative reproductive strategies that would otherwise remain marginal. Over time, interventions that redistribute resources warp the payoff matrix, fostering dependency on the State while weakening traditional pair-bonding.

These are not the consequences of moral failings, but follow the logic of incentives. When the costs of reproduction are systematically externalized, parasitic strategies gain a relative advantage on the fitness landscape. As long as this payoff advantage persists, low-investment strategies will increase in frequency relative to high-investment strategies, creating conditions that can destabilize the population over generations.

Historically, families and local communities bore primary responsibility for dependents. In such environments, the costs and benefits associated with child-rearing were largely internalized within households and kin networks, keeping reproductive incentives aligned with parental investment.

The welfare state cannot eliminate reproductive trade-offs; it can only select which strategies prevail.

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A prosperous economy lives and breathes through voluntary exchange on free markets. Legal tender laws pollute the air of commerce with coercion and moral decay.

Each day we are reminded of this legal imposition by the familiar phrase stamped on every US dollar bill: “This note is legal tender for all debts, public and private.” Innocuous on the surface, but these words conceal a profound immorality that strikes at the heart of voluntary exchange. If a man of sound mind agrees to settle a contract in X, then he should be obligated to pay X. Forcing him to accept anything other than X as payment is an egregious violation of contractual and property rights.

The State tramples on our natural rights through legal tender laws that grant fiat a privileged status. Contrary to the popular misconception, merchants are not obligated to accept cash. However, the exclusive ability to settle debts, public charges, taxes, and dues bolsters artificial demand, elevating fiat currencies to the preferred medium of exchange in most countries. By privileging fiat above alternatives, the State clears the way for unbacked issuance. When governments can print irredeemable notes, price inflation predictably ensues, turning money itself into a political instrument.

In countries suffering rampant inflation, citizens readily seek out alternative forms of money, whereas those in nations with relatively stable currencies rarely entertain such thoughts. When they do, governments actively discourage alternatives through sales and capital gains taxes. Statist beliefs that money originates from government decree, coupled with the myth that only a single form of money should circulate, further impede adoption. Together, these barriers have solidified the government’s control over money, setting the stage for monopolization.

Friedrich Hayek, in Denationalization of Money, observed that when money is monopolized, it suffers from the “…defects of all monopolies; one must use their product even if it is unsatisfactory, and, above all, it prevents the discovery of better methods of satisfying a need for which a monopolist has no incentive.”

Time and again, paper fiat currencies have proven to be an unequivocal failure as a medium of exchange. Inevitably, they erode over time, disrupting economic calculation and leaving ruin in their wake. Thanks to profligate money printing, public debt across the globe has soared to unprecedented levels, empowering governments to grow untethered.

The roots of the US dollar’s expansion trace back to the War Between the States—a turning point that established the legal tender system and stacked the deck against monetary competition. Over time, the dollar became the world’s reserve currency and bankrolled the US empire—feeding a bloated bureaucracy, funding endless wars abroad, and underwriting an ever-expanding welfare state.

Monetary Tyranny in the US

As the war raged on in the early 1860s, the Union faced a shortage of specie. To sustain the war effort, taxes were raised, new levies imposed, and bonds were sold. Yet, Republicans in Congress argued for more drastic measures. They wanted to sever the dollar’s convertibility to gold and silver. In January 1862, US Representative from Ohio, George Pendleton, warned of the consequences:

It requires no prophet to tell what will be their history. The currency will be expanded; prices will be inflated; fixed values will depreciate; incomes will be diminished; the savings of the poor will vanish; the hoardings of the widow will melt away; bonds, mortgages and notes, everything of fixed value will lose their value.

Later that year, President Abraham Lincoln signed the Legal Tender Act into law, authorizing the printing of $150 million in “greenbacks” to finance the war. By its conclusion, their circulation had swelled to roughly $430 million.

The rapid expansion of greenbacks soon provoked legal challenges, sparking a constitutional struggle over the legal status of money. In 1870, the Supreme Court ruled in Hepburn v. Griswold that Congress lacked the power to make greenbacks legal tender. The majority held that forcing creditors to accept payment deprived them of property without due process. President Ulysses S. Grant expanded the Court later that year by appointing two new justices. The reconstituted Court quickly reversed its earlier decision in Knox v. Lee and Parker v. Davis, declaring legal tender laws constitutional during a national emergency under the Necessary and Proper Clause.

During times of crisis, the size and scope of government tend to expand—a pattern Robert Higgs later described as the “ratchet effect,” where even after retrenching, elements of temporary measures become permanent once the emergency has passed. This effect soon manifested in legal tender laws.

Though the Specie Resumption Act of 1875 established gold redeemability for greenbacks, it did so with partial reserves and without altering the privileged legal tender status of paper fiat. In 1884, Juilliard v. Greenman extended Congress’s authority to peacetime, citing its constitutional power to coin money under Article I, Section 8. This ruling marked the beginning of the end for sound money in the US. Worse still, the Court’s ruling set a dangerous precedent for debasement, opening the door for further monetary manipulation in the decades to follow.

At the height of the Great Depression in 1933, President Franklin D. Roosevelt issued Executive Order 6102. Henceforth, US citizens were prohibited from “hoarding” gold and compelled to surrender their holdings under threat of fines or imprisonment. The following year, the Gold Reserve Act transferred all gold and gold certificates to the US Treasury, consolidating federal control. The dollar remained convertible into gold for foreign central banks until 1971, when President Richard Nixon closed the gold window, cutting the final link between the dollar and sound money.

As Hayek observed, “Though gold is an anchor—and any anchor is better than a money left to the discretion of government—it is a very wobbly anchor.” Without its anchor, the US has accumulated over $38 trillion in debt as of October 2025. In contradiction to its founding principles, legal tender laws have paved the way for the country’s radical reshaping.

Denationalization of Money

Repealing legal tender laws would allow open competition among different forms of money. Naturally, competition would favor monies capable of maintaining their purchasing power and, over time, the most desirable would exhibit portability, durability, divisibility, fungibility, recognizability, and scarcity. As Hayek argued, unreliable and unstable monies would eventually die off. In this competitive landscape, fiat would contend with precious metals, cryptocurrencies, and other commodities.

This competitive dynamic is far from theoretical. The cryptocurrency landscape offers a clear illustration of how such a system could operate. As of November 2025, CoinMarketCap tracks millions of crypto-assets. While not all are intended to serve as money, they do differ in liquidity, degrees of centralization, consensus mechanisms, monetary policies, and underlying technologies.

Among these, Bitcoin (BTC) has established itself as a decentralized, censorship-resistant alternative that has functioned as an inflation hedge. Privacy-focused coins—such as Monero (XMR) and Zcash (ZEC)—are preferred by individuals who prioritize anonymous transactions. Ethereum (ETH) and Solana (SOL) serve as programmable money, offering built-in smart contract functionality. A variety of stablecoins also exist, ranging from fiat-pegged to commodity-backed to algorithmic, each catering to users with different preferences and priorities.

By genuinely leveling the playing field, individuals could freely opt out of using depreciating Federal Reserve notes. Facing the risk of displacement, governments would be compelled to exercise at least minimal fiscal responsibility. Among competing mediums of exchange, each individual’s choice would reflect dynamic rankings based on subjective value. Those who wish to continue using fiat could do so. Ultimately, the medium of exchange that prevails would be determined by voluntary market interactions.

Conclusion

Supreme Court Justice Stephen Johnson Field, who served from 1863 to 1897, was a steadfast opponent of legal tender laws, consistently arguing that they violated the spirit of the Constitution and the principles of limited government. In Dooley v. Smith (1871), he wrote:

We are therefore compelled by every consideration of duty which may be supposed to govern judicial officers on this bench to express on all proper occasions our dissent from what we regard as a wide departure from the limitations of the Constitution. Those limitations must be preserved or our government will inevitably drift from the system established by our fathers into a vast centralized and consolidated government.

A century and a half later, Justice Field’s warning has fully come to fruition. At the expense of our civil liberties, the government has continued to consolidate power, cementing its control over the monetary system. Beneath the surface, legal tender laws continue to gnaw at the foundation, underscoring the need to abolish them and allow for free competition.

In an open market for money, the moral and economic bankruptcy of the State would be exposed. Throughout history, precious metals have served as sound money; today, open-source, decentralized blockchains offer possibilities of a digital alternative. Whatever its form, sound money would emerge. By protecting purchasing power and reestablishing economic freedom, it would lay the cornerstone for a prosperous society—and finally free us from the monetary chains forged by the State.

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In a surveilled society where property rights are undermined and truth is distorted, freedom demands building alternatives beyond the regime’s reach.

Within the Soviet bloc, Václav Benda advocated for the creation of an invisible society as a form of resistance. To combat the atomization of the citizenry, he called for the construction of parallel structures. As he explained in a response published in Civic Freedom in Central Europe: Voices from Czechoslovakia:

To tear down or corrode these miniature iron curtains, to break through the communications and social blockade, to return to truth and justice, to a meaningful order of values, to value once more the inalienability of human dignity and the necessity for a sense of human community in mutual love and responsibility—these, in my opinion, are the present goals of the parallel polis.

Through the Charter 77 movement, Benda’s vision came to life. Together with Václav Havel, fellow dissident and future president of Czechoslovakia, he emphasized the power of “living in truth”—the simple yet radical act of refusing to participate in the regime’s lies. Charter 77 organized parallel educational structures, fostered a second culture through the performance of banned plays, and built underground networks that published forbidden books and journals. Though Charter 77 made cultural strides, Benda acknowledged the daunting challenge of bypassing the command-and-control economy in The Parallel Polis:

At the moment, the tasks facing us in the parallel economy are unimaginable, but though our opportunities are limited, the need to exploit them is urgent. The regime treats the economy as a key means of arbitrarily manipulating citizens and, at the same time, it regulates it as strictly as possible.

As in Czechoslovakia under the communist regime, parallel structures offer citizens in “liberal democracies” a way to resist the creeping authoritarianism unfolding before our eyes. From freedom of speech to freedom of contract, our civil liberties are being eroded by paternalistic bureaucrats and self-serving, power-mongering politicians. Countries that once championed classical liberalism have traded freedoms for dependency and sacrificed liberty for the illusion of safety.

In resisting authoritarianism, parallel structures take many forms. Among these, homeschooling movements have long offered families an escape from state-run education systems that teach conformity over critical thinking. Today, technology allows these alternatives to scale exponentially: educational courses and lectures are freely accessible online, and curricula such as the Ron Paul Liberty Classroom provide invaluable resources for parents. Free-speech-oriented platforms such as X, Telegram, Rumble, and Substack have become homes for dissident voices. While “liberal democracies” have been forced to tolerate resistance on these platforms and accept that they no longer fully control the narrative, they will never willingly relinquish their monopoly on money—the spigot for the welfare-warfare State.

Among the State’s many domains of control, its economic interventions stand out for their scope and destructiveness. It begins with monetary and fiscal policies that erode the purchasing power of fiat currencies and continues with legal tender laws that compel citizens to accept these devaluing pieces of paper as money. Beyond that, governments intrude on voluntary exchange through an ever-growing collection of laws and regulations, turning peaceful transactions into crimes.

Contraband is whatever the State declares. In the US, farmers are prohibited from selling raw milk across state lines. Across the EU, only fruits, vegetables, and seed varieties registered in the official catalog can be marketed. Amid COVID hysteria, Australia restricted prescriptions of otherwise commonly used drugs like Ivermectin. Should Central Bank Digital Currencies (CBDCs) gain widespread adoption, the State could freeze funds tied to “unacceptable” goods or services—or censor the transactions of anyone who dares question its authority.

The risks are real, but so are the tools of resistance. Thanks to cryptography, blockchain technology, and the rise of Web 3.0, the foundations of a permissionless, trustless parallel economy are in place. Unshackled from reckless money printing, regulatory interference, and censorship, these technologies open the door to unprecedented human flourishing within a truly free market.

Cryptocurrencies

By solving the Byzantine Generals Problem, Bitcoin (BTC) transformed the monetary landscape. Built on an immutable distributed ledger, BTC minimized double-spending risks and demonstrated that cryptocurrencies can fulfill the core functions of money. Algorithmic scarcity, enforced by a secure protocol, turned BTC into digital gold. Unlike fiat currencies, whose value is continuously inflated away to serve political ends, BTC’s hard cap of 21 million preserves purchasing power.

However, for a parallel economy to truly resist pressure from the State, privacy is essential. Governments have actively suppressed privacy technologies, relentlessly targeting developers and enacting anti-money laundering (AML) and Know Your Customer (KYC) regulations that discourage the use of mixing services. As a medium of exchange, transparent ledgers like those used by BTC and stablecoins expose users to surveillance and potential censorship.

Monero (XMR), by contrast, stands at the forefront of private digital cash. Using advanced cryptography to conceal the sender, receiver, and transaction amount, XMR has been demonized and delisted from nearly all centralized exchanges. Nevertheless, it has proven resilient thanks to innovations like atomic swaps and decentralized exchanges, which enable users to trade XMR for other crypto-assets in a permissionless fashion.

Digital Identity

In Web 2.0, our data was controlled by governments and platforms. Information was siloed, and trust was curated by individual websites and credit bureaus—each one a honeypot for hackers seeking personal data. The best way to prevent abuse is by keeping our information out of others’ hands to begin with.

Web 3.0 flips the script, putting the user in control. Data is secured by private keys held in digital wallets. Personal information is no longer stored on centralized servers, reducing the risk of breaches. User-owned wallets set the stage for Self-Sovereign Identity (SSI), a system that allows individuals to receive tamper-proof, verifiable credentials and voluntarily disclose personal information while safeguarding privacy. From government programs like the European Digital Identity (EuDI) and Vietnam’s NDAChain to decentralized efforts such as WorldCoin and Human Passport, a variety of digital identity solutions are being developed. However, only solutions that grant users total control of their digital identity while preserving privacy can underpin a free, parallel, voluntary economy.

Zero-knowledge proofs (ZKPs) are a critical component of SSI. These cryptographic protocols allow users to prove something without revealing the underlying data. Imagine proving that you can solve a maze without showing the path. A real-world application is age verification: instead of handing a bouncer an ID that reveals a wealth of sensitive information, a ZKP-enabled app could simply confirm that you’re of drinking age with a green check mark—and nothing more.

Decentralized finance (DeFi) already enables anonymous financial activity, but when combined with SSIs and ZKPs, trust can be fostered where it’s otherwise lacking. Lenders could issue loans and borrowers could access capital by proving creditworthiness, without invasive disclosures. Smart contracts allow parties to interact without intermediaries by automatically executing agreements once predefined conditions are met. While preserving privacy, these technologies could unlock new frontiers for collaboration and entrepreneurship.

Trust and Reputation in E-commerce

In an anonymous, cross-border market, trust presents a challenge. Trust acts as the lubricant for exchange, while reputation reflects a history of trustworthiness. When trust is absent, transaction costs rise. But when parties can reduce fear of loss, barriers to entry come down, and trade flourishes.

A market-based solution could involve independent domain-specific entities that assess trustworthiness by compiling and weighing data points. Using verifiable on-chain data alongside voluntary disclosures through ZKPs, consumer and seller reputations could be reliably evaluated. For instance, a business could cryptographically demonstrate that they’ve met or exceeded certain performance thresholds (e.g., $X in sales or Y% of successful transactions) without disclosing detailed transaction records.

As in other industries, private rating and reputation agencies would likely arise through spontaneous order. If there’s a market, multiple agencies will compete. For example, credit bureaus like Equifax, Experian, and TransUnion—though heavily regulated—assess creditworthiness for individuals and businesses alike. In the collectibles industry, organizations such as PSA and Beckett grade memorabilia and authenticate autographs, helping maintain trust between buyers and sellers.

Moreover, when users control their own data, e-commerce platforms become interoperable. A seller on Amazon, for example, could seamlessly carry their reputation over to eBay or any other marketplace, centralized or decentralized. By reducing friction and unifying fragmented systems, global trade becomes more efficient. Markets thrive not through government mandates but on sound money and trust that make voluntary exchange possible.

Conclusion

The freer the market, the more prosperous the people. As Ludwig von Mises explained, “The development of capitalism consists of everyone’s having the right to serve the customer better and/or more cheaply.”

Decentralized networks and blockchains enable the creation of parallel economies that span the globe. By allowing resources to be allocated more efficiently, these systems represent a natural evolution of capitalism. Peer-to-peer marketplaces, decentralized reputation systems, SSI, and private digital cash empower individuals to transact securely and voluntarily. Many of these innovations are already taking shape; others remain under active development. Together, these technologies form the foundations of a decentralized revolution—one that could pave the way toward the freest of markets, where access is permissionless, privacy is woven into every protocol, and the State becomes nothing more than an afterthought.

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The future of money is being coded—not printed—and the preservation of our liberties hinges on whether the underlying protocols uphold the principles of sound money. As a commodity, money is unlike any other; it is not consumed, nor does it directly contribute to the production process. Individuals naturally seek to acquire as much as possible, yet paradoxically, from a societal perspective, more is not better. There is no such thing as an “optimal” money supply; any quantity is sufficient, as long as prices can freely adjust. Statists often conflate monetary expansion with economic growth, but inflation merely erodes the purchasing power of existing monetary units—enriching the earliest recipients at everyone else’s expense.

Milton Friedman, one of Monetarism’s principal architects, rejected the gold standard on the grounds that producing commodity money (e.g., mining precious metals) was wasteful. Instead, he advocated for a fiat currency with a predictable, transparent inflation rate in the 3–5% range. However, Monetarists fail to recognize that the free market is not only capable of effectively regulating counterfeiting, but that privately issued money serves as a vital check on the welfare-warfare State’s expansionary impulses. As Murray Rothbard explained:

The reason is that a money under the control of the government and its banking system is subject to inexorable pressures toward continuing monetary inflation. In contrast, the supply of gold cannot be manufactured ad libitum by the monetary authorities; it must be extracted from the ground, by the same costly process as governs the supply of any other commodities on the market.

Debates over the nature and supply of money have escaped the confines of academic journals and central planning committees. For cryptocurrencies, monetary policy is encoded within the protocol—defined by a fixed or inflationary supply and an emission schedule that governs the creation of new coins. Not only do these rules dictate supply; they also establish the incentive structure that underpins network security.

At the heart of that security lies the protocol’s consensus mechanism, which ensures the accuracy and integrity of the decentralized ledger. Proof-of-work (PoW) coins require specialized participants, known as miners, to dedicate computational power to solving complex mathematical hash puzzles. The first miner who solves the puzzle proposes a new block filled with transactions, which is subsequently verified by other nodes in the network. Upon confirmation, the winning miner is compensated with a block reward and transaction fees. Overall, the higher the hash rate, the more resilient a network is to attacks. A malicious actor controlling over 51% of the hash rate could halt transactions, reorganize the blockchain, or execute double-spend attacks, breaches that would be catastrophic to trust.

Monetary policy directly affects decentralization by determining mining profitability, which in turn influences both a network’s short-term survival and long-term viability. In the following sections, we’ll examine two PoW coins that exemplify contrasting approaches to monetary policy: Bitcoin (BTC), often described as “digital gold,” and Monero (XMR), the leader in the private digital cash space.

Bitcoin

When Satoshi Nakamoto created Bitcoin, total supply was capped at 21 million BTC. According to the protocol, approximately every ten minutes, a new block of transactions is added to the chain, and the miner responsible earns a reward. Initially, miners were awarded 50 BTC per block. Every 210,000 blocks—roughly four years—the block reward is cut in half. These halving events have historically triggered astronomical surges in BTC’s value. Since April 2024, the block reward has been 3.25 BTC. By the year 2140, the final Bitcoin will be mined. What happens then? How will the network be secured?

As block rewards diminish over time, miners must increasingly rely on transaction fees. Whether these fees alone will be sufficient to secure the network against 51% attacks is a question shrouded in uncertainty. Large holders and Bitcoin companies may be incentivized to contribute hash power “altruistically.” However, entrusting the network to such miners undermines decentralization and increases censorship risk. Moreover, a protocol dependent on transaction fees upends the game theory for miners. To maximize rewards, miners might find it profitable to delay publishing blocks or engage in undercutting strategies.

Growing demand for non-monetary applications, combined with diminishing block rewards, is already reshaping network activity and miner incentives. Miners have profited immensely from rising fees driven by Bitcoin’s burgeoning NFT community. In a controversial upgrade scheduled for October 30, 2025, a software change aimed at blockchain neutrality will remove data limits on the arbitrary content that can be appended to transactions. Whether non-monetary data ends up clogging the network remains to be seen, but over the long run, transaction fees must sustain the network once block rewards are exhausted. The soundness of money is compromised if its future purchasing power becomes uncertain, undermining its ability to serve as a reliable store of value.

Monero

Monero’s first block was mined in April 2014. In 2022, the protocol reached its initial supply cap of 18.4 million XMR, triggering tail emissions—a perpetual block reward of 0.6 XMR. Approximately every two minutes, a new Monero block is mined with these tail emissions. The 0.6 XMR reward was set with the annual gold extraction rate in mind, thereby keeping yearly tail emissions under 1% of the total XMR supply. The rate of inflation from these block rewards asymptotically trends toward zero over time. Eleven years after Monero’s inception, the XMR supply currently stands at 18.44 million.

While Monero’s monetary policy superficially resembles Monetarist theory, its inflation differs fundamentally in both purpose and impact. The effect on purchasing power is negligible, given the small reward. More importantly, this modest issuance is a deliberate trade-off that prioritizes long-term security and stability.

Moreover, tail emissions serve a pragmatic function by offsetting lost coins. Private keys are lost over time, and coins are sometimes sent to burn addresses, shrinking the circulating supply. Monero’s privacy features make the amount of lost XMR unknowable, but Bitcoin’s transparent ledger offers a reference point. Analysts estimate that between 2.3 million and 3.7 million BTC—11% to 18% of the total supply—have been lost.

Economic theory reminds us that increasing the money supply is unnecessary. As Ludwig von Mises explained in Human Action, “The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.” On this view, XMR’s supply would be adequate even without tail emissions. Monero’s monetary policy, however, anchors long-term security to predictable incentives. To endure government pressure and thrive beyond 2140, it must remain a private medium of exchange with miners properly incentivized to secure the network.

At the Monetary Crossroads

As government debts reach unprecedented levels and Central Bank Digital Currencies (CBDCs) threaten to plunge us into a full-blown surveillance state, the need for sound money has never been more urgent. Our freedoms depend on building parallel financial systems backed by a censorship-resistant medium of exchange that preserves its purchasing power.

The long-term success of any cryptocurrency hinges not only on its monetary policies but also on decentralization and network resilience. Regardless of which cryptocurrencies ultimately survive or how protocols evolve, sound money is essential for a prosperous society, as it alone can cultivate savings, resist the State’s despotic impulses, and safeguard liberty.

In the words of Saifedean Ammous, from The Bitcoin Standard:

Whether in Rome, Constantinople, Florence, or Venice, history shows that a sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction.

When money falters, civilization inevitably follows.

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No freedom is so passionately defended in rhetoric, yet so passively surrendered, as the right to privacy. Rooted in self-sovereignty, it is our natural right. If we own our bodies and are free to do as we wish with our private property, then we can logically derive that we possess the right to conceal our personal information and actions from the prying eyes of others—whether governments, corporations, or simply our fellow man. This ability to step outside public view is fundamental to a flourishing civilization. Beyond censorship, beyond the control of the State, privacy facilitates voluntary exchange. A society without financial privacy is a society where freedom and autonomy are absent.

Money in the Digital Age

As privacy erodes across all facets of life, the financial realm has emerged as a critical battleground—one that could usher in a technocratic nightmare. In this new reality, as societies move toward cashless economies, individuals face an opportunity to reconsider their preferred form of money.

Digital currencies can be viewed as concentric rings of exposure, each representing a different level of transparency. As one moves outward through the model, privacy increases, illustrating the transition from total transparency to complete anonymity.

Personal identity is intrinsically tied to each unit of a transparent currency. While proponents claim transparency reduces illicit activity, the consequences for liberty are catastrophic. Through the eyes of the surveillance state, a central bank digital currency (CBDC) is fully transparent. With the push of a button, authorities can punish non-compliance and confiscate the assets of dissidents. Worse still, CBDCs form the backbone of social credit systems, turning economic self-censorship into the norm. Under constant surveillance, individuals must refrain from “unacceptable” purchases or supporting controversial causes.

Severing direct links to identity, pseudo-anonymous coins such as Bitcoin (BTC) and Ethereum (ETH) use alphanumeric strings for addresses. However, both BTC and ETH operate on transparent ledgers, enabling blockchain surveillance firms to trace transactions. If identity can be linked to an address, these blockchains become fully transparent to such firms. That said, BTC users can send coins privately through CoinJoins and mixing services, while privacy-enhancing tools similarly exist for ETH users. For pseudo-anonymous coins, the categorical boundaries between transparency and privacy can be blurry.

Optional privacy can also be built directly into a protocol. Zcash (ZEC), for example, incorporates two address schemes: t-addresses are reserved for transparent transactions, and z-addresses are used for shielded transactions. ZEC’s two-tier architecture has led to the stigmatization of privacy. For instance, Binance rejects deposits from shielded addresses, while Coinbase only permits withdrawals to transparent addresses. Similar to using mixing services, opting into privacy often results in coins being flagged and rejected by exchanges. In practice, optional privacy tends to devolve into transparency, as restrictions imposed by exchanges and merchants lead to users abandoning privacy features.

Unlike transparent or semi-transparent currencies, anonymous currencies like Monero (XMR) have privacy baked into the protocol. Coins that carry no history are inherently fungible, thus, 1 XMR always equals 1 XMR. Regardless of the use case, XMR transactions are private by default.

Transparent, semi-transparent, or anonymous? When privacy is stripped from a medium of exchange, what are the societal implications and how is commerce affected?

Personal Safety

When privacy vanishes, threats to personal safety become an ever-present and unavoidable reality. Drawing on a 2009 XKCD comic, the term “wrench attack” refers to the physical targeting and extortion of cryptocurrency holders through force or threats. As an asset class, crypto is an ideal target for theft. Not only are major crypto-assets highly liquid, but life-changing fortunes can be accessed in minutes with a private key alone.

The first reported wrench attack occurred in 2014. Hal Finney—the recipient of the historic first BTC transaction from Satoshi Nakamoto—was also its first victim. As of July 15, 2025, at least 239 such attacks have been reported worldwide, though it’s safe to assume that many more have gone unreported. A study of the BitcoinTalk message boards identified 62 posts referencing attacks. Citing concerns about security and privacy, fear of further complications, or a lack of faith in law enforcement, most of the contacted victims chose not to report the incident. This reluctance to report is compounded by a troubling history of corruption when law enforcement enters the picture. During the Silk Road investigation of Ross Ulbricht, two US federal agents were charged with stealing BTC. Similarly, in the UK, a National Crime Agency officer involved in the Silk Road 2.0 investigation was arrested for committing the same crime.

As Bitcoin has skyrocketed to new highs in 2025, reported wrench attacks have been on the rise. In May, French authorities charged an organized gang of 26 with carrying out multiple attacks on prominent crypto figures. In June, an Italian tourist was kidnapped and tortured in a New York City townhouse.

Crypto executives and influencers have frequently been the primary targets. Other individuals have been identified through data breaches or by bribing centralized exchanges, which serve as honeypots for personal information.

For thieves, blockchain surveillance software is just another tool that widens the net of potential victims. Advances in AI exacerbate these risks by enabling the construction of elaborate transaction maps from immutable, transparent ledgers—tools that could be used to target the wealthy.

Michael Saylor, CEO of Strategy, sums up the problem of transparency when explaining why his company would not provide proof of BTC reserves:

It actually dilutes the security of the issuer, the custodians, the exchanges, and the investors. It’s not a good idea. It’s a bad idea. It’s like publishing the address and the bank accounts of all your kids and your phone numbers of all your kids, and then thinking somehow that makes your family better.

Saylor’s warning underscores a vital point: privacy is paramount in protecting people and their property. Yet, the consequences of transparency extend far outside security—they seep into the marketplace itself.

The Rippling Effect of Transparency

When financial data becomes visible, it fundamentally reshapes the dynamics of market transactions. Price discrimination—the practice of charging different prices for the same product—becomes even more attractive. Sellers can offer discounts to customers who might otherwise not purchase, while simultaneously raising prices for those with less price sensitivity. Price discrimination itself is neither inherently positive nor negative. However, when money is transparent, sellers are better positioned to capture a greater share of the consumer surplus.

Corporations already predict willingness to pay and engage in price discrimination using the information at their disposal. For example, Target employed geo-fenced price switching on its app when customers entered the parking lots of its brick-and-mortar stores. Orbitz steered Mac users toward pricier rooms. Travel agencies have faced accusations of adjusting fares based on users’ browsing histories.

In an environment where data-driven pricing strategies are commonplace, transparent money deepens the informational asymmetry between buyers and sellers. Public ledgers can expose balances, spending patterns, and transaction histories—fueling more invasive algorithms for personalized pricing.

Aside from pricing, transparency complicates commerce by exposing trade secrets and internal dealings. By monitoring a transparent ledger, corporations can glean insights into the suppliers and strategies of competitors. Along these lines, wallets belonging to founders and whales within the crypto industry are tracked in real time. Markets react sharply when “Satoshi era” Bitcoins awaken after years of dormancy. When Vitalik Buterin, co-founder of Ethereum, sells ETH, he often faces backlash and questions about his commitment to the project.

Privacy-focused coins avoid these pitfalls by concealing personal and financial data. They allow market participants to transact without worrying about price discrimination or exposing sensitive information, ultimately preserving autonomy and laying the foundation for a freer market.

Conclusion

The notion that transparency fosters trust fails to account for the indispensable role of privacy. Privacy is not merely a personal preference—it is the guarantor of fungibility, a cornerstone of sound money. And sound money, in turn, safeguards us against inflation and the creeping shadow of authoritarianism. By preserving personal autonomy, private digital cash removes barriers to voluntary exchange and empowers us to associate, think, and speak without constraint. Visibility stifles; flourishing markets and free societies demand the preservation of privacy.

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Long before the Blockchain Era, a landmark Scottish lawsuit posed a question that still echoes today: Can money carry memory—or must it forget? In 1748, Hew Crawfurd—a lawyer in Edinburgh—signed and recorded the serial numbers of two £20 notes before mailing them to a merchant in Glasgow. When the letter failed to arrive, Crawfurd notified the bank and publicized the theft. Months later, one note resurfaced at the Royal Bank’s office. In Crawfurd v. The Royal Bank, the Court ruled that if Crawfurd could vindicate the banknote, commerce would cease, since the entire history of every note involved in a transaction would need to be disclosed.

Throughout history, money has taken various forms—from livestock to cowrie shells to precious metals. As Carl Menger explained, in barter systems, certain commodities became media of exchange due to their salability. The quality of money depends on certain characteristics: portability, durability, divisibility, recognizability, scarcity, and the often-overlooked fungibility, which has grown in importance in the digital age.

Fungibility—the property making units of a good interchangeable and indistinguishable—exists on a spectrum. At one end, unique assets such as real estate or paintings are inherently non-fungible. At the other end, gold and silver exhibit perfect fungibility, as they can always be melted, refined, and recast. Fiat currencies fall in the middle: fungible under the law but not objectively, as demonstrated by the ruling in Crawfurd v. The Royal Bank.

Cryptocurrencies

In evaluating monetary qualities, there’s no doubt that cryptocurrencies excel in terms of portability, durability, divisibility, and recognizability. Satoshi Nakamoto set the standard for scarcity with Bitcoin’s decentralized protocol and verifiable supply cap of 21 million BTC. But what about fungibility?

As in the case of Crawfurd v. The Royal Bank, a lack of fungibility threatens the usability of a medium of exchange. The Bitcoin blockchain is permissionless, but also transparent. The base unit of Bitcoin—known as Satoshis or Sats—equals one-hundred-millionth of a BTC. Following protocol upgrades (Segregated Witness and Taproot), Sats became identifiable. Using the Ordinals protocol, photos and videos can be inscribed onto individual Sats, forming non-fungible tokens (NFTs). Similarly, rare Sats—such as those used in the transaction that birthed Bitcoin Pizza Day—command a premium among collectors.

While NFTs may enhance value, tainted coins are devalued due to compromised liquidity. Depending on the identity of previous owners or the specifics of past transactions, acceptability may be impacted, thereby muddling economic calculations.

In 2018, the Office of Foreign Assets Control (OFAC) began adding BTC addresses to its Specially Designated Nationals and Blocked Persons List (SDN List). During COVID protests, the Royal Canadian Mounted Police ordered exchanges to block transactions associated with the Freedom Convoy. Elsewhere in the crypto world, Ethereum (ETH) block builders and centralized entities like Tether (USDT) have respectively excluded transactions and frozen wallets in compliance with the SDN List. Coinbase and other exchanges explicitly refuse crypto-assets from sanctioned addresses. As a result, 1 BTC ≠ 1 BTC, 1 ETH ≠ 1 ETH, and 1 USDT ≠ 1 USDT.

When coins are traceable, fungibility breaks down. As AI advances, mapping transaction networks becomes more precise—and more dangerous. Determining criminality remains at the discretion of individual governments. A tainted coin may have funded a heinous act—or simply belong to a dissident opposing prevailing narratives.

Imagine the following scenario: Gil’s down on his luck and holds a yard sale. Bitcoin advocates from around town buy up his belongings. Unbeknownst to Gil, the stranger who bought his hotplate paid with tainted coins. The next day, Gil sends the proceeds to an exchange, only to have his account frozen and the authorities alerted. At best, Gil is left penniless; at worst, he becomes entangled in a legal nightmare for crimes he didn’t commit.

In the absence of privacy, can digital money retain its fungibility? Theoretically, yes—but expecting a society to treat all monetary units as equivalent, even when transaction histories are transparent, is unrealistic. Once money becomes traceable, its history becomes relevant. Where surveillance is possible, censorship inevitably follows. Thus, privacy acts as a shield that ensures monetary units remain indistinguishable and are treated equally.

In a previous article, I explored privacy-preserving services through the lens of demonstrated preference and subjective value theory. People often claim to value privacy. A public consultation of a digital euro—conducted by the European Central Bank—found that 43 percent of respondents identified privacy as their most desired feature. Yet, in practice, privacy preservation in monetary contexts remains limited. As nations push toward cashless societies, maintaining anonymity becomes increasingly difficult.

However, on the fringes of society, where exposure can mean theft, arrest, or worse, privacy is a matter of survival. From this, we can deduce that black markets are populated by those who subjectively rank privacy preservation above all else. Unsurprisingly, dark market users demonstrate their preference for private digital cash.

Dark Markets

Since the Silk Road launched in February 2011, the largest peer-to-peer marketplaces using cryptocurrencies have operated on the dark web. Unlike traditional websites, accessing these markets requires specialized browsers designed for anonymity. For those engaged in illegal activities, privacy is essential—but in truth, anyone who takes the time and effort to access the dark web prioritizes anonymity.

In its 2025 Crypto Crime Report, Chainalysis estimated darknet market transactions at $2.3 billion in 2022 and $2 billion in 2023, partly attributing this decline to a migration from BTC to Monero (XMR). Though mentioned throughout, Monero is excluded from their analysis due to its private nature.

Transaction figures for darknet markets are notoriously difficult to measure. Dread—a darknet Reddit-like forum—designates six drug marketplaces on its “superlist.” Three accept both BTC and XMR; the others—led by Archtyp, with almost 420,000 users as of April 2024—accept only XMR. A separate examination of the transaction logs of Incognito Market—formerly one of the largest narcotics marketplaces—reveals that XMR transactions (265,375) exceeded BTC transactions (244,483), with a noticeable shift toward XMR at the tail end of its four-year run.

Store of Value or Medium of Exchange?

Early ties to the Silk Road led to Bitcoin’s demonization, with politicians branding it a tool for criminals. Over time, blockchain surveillance companies emerged, and governments passed anti-money laundering (AML) and know your customer (KYC) legislation. Bitcoin is no longer perceived as a threat—BTC is traded publicly through exchange-traded funds (ETFs) and fills corporate and government reserves worldwide. After 16 years, Bitcoin has solidified itself as “digital gold,” with its scarcity serving as a hedge against unchecked central bank money printing.

While Bitcoin’s liquidity is unmatched, its effectiveness as a medium of exchange is hampered by its transparent ledger. On any given day, Bitcoin processes 10 to 25 times more transactions than Monero, and as of June 14, 2025, Bitcoin’s $2.09 trillion market cap dwarfs Monero’s $5.75 billion. Bitcoin’s network effects are formidable, and future protocol upgrades may enhance fungibility. However, as of now, Monero has assumed the role that Bitcoin once hinted at in its earliest days: private, peer-to-peer electronic cash. Forked from Bytecoin in 2014 and based on the CryptoNote codebase, Monero was built on a foundation of privacy. Its protocol combines stealth addresses to conceal recipients, RingCT to hide amounts, and Ring Signatures to obfuscate senders. As a result, 1 XMR = 1 XMR.

As the leading privacy coin, Monero continues to challenge the State’s control over money. Predictably, efforts to curtail XMR adoption have been ongoing. Under mounting government pressure, XMR has been delisted from most major exchanges and faces a European Union-wide ban starting in 2027. Meanwhile, the IRS has paid two $625,000 bounties in an effort to break Monero’s privacy, so far without success.

Despite attacks from the State, Monero has proven resilient. Decentralized peer-to-peer trading platforms are gaining adoption, and atomic swaps allow users to exchange XMR for other cryptocurrencies across blockchains without centralized intermediaries. With privacy baked in by default, Monero is intrinsically fungible and truly censorship-resistant.

Conclusion

The State has weaponized money and will do so again. Dissidents have been debanked. Activists and ordinary citizens alike have had funds frozen or seized. The censorship of crypto addresses—coupled with advanced surveillance—shows that financial tyranny is not a future threat but a present reality. A Central Bank Digital Currency (CBDC) would only accelerate this trend, granting governments real-time power to prohibit transactions that defy the dictates of the regime.

As Ludwig von Mises wrote:

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.

Transparent blockchains, by their very nature, are incompatible with sound money. Fungibility is fragile and cannot survive without privacy. Digital assets that aren’t private by default become tools of control, putting our freedoms at risk. In a world where traceable digital payments are becoming the norm, private digital cash stands as a vital bulwark against the State.

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In the serenity that privacy affords, we choose the facets of our lives that we wish to leave untouched by the world. Supreme Court Justice Louis Brandeis, in his Olmstead v. United States dissenting opinion, famously described privacy as “the right to be let alone.” But at a deeper level, privacy is a safeguard for liberty. It’s a pillar of decentralized institutions and a foundation of free societies.

For anyone who harbors ideologies that deviate from those deemed “acceptable,” privacy is not merely a luxury but a necessity. For everyone else, it’s worth remembering that norms are shaped by societal and political pressures, and are thus fluid in nature. No one can predict how their earlier beliefs or actions may be judged by a future society or regime. In light of this, the importance of privacy became even more pronounced when surveillance went digital. An inability to operate beyond the watchful eyes of others threatens one’s freedom to speak and associate openly. In the absence of private spaces, fear of retaliation for holding “unacceptable” beliefs breeds chilling effects, leading to self-censorship.

Over two centuries ago, the Founding Fathers recognized privacy’s importance. Although not explicitly protected by the Bill of Rights, privacy is woven into the First, Fourth, and Fifth Amendments. On the international stage, the UN has declared it a human right. Beyond the confines of legal protections, the desire for privacy is reflected in everyday habits worldwide. Across cultures, people intuitively refrain from total transparency. Whether it’s closing the bathroom door, using blinds and curtains inside their homes, or refusing to hand a stranger their unlocked phone to read their texts and emails, most people choose to shield certain aspects of their lives from public view.

For much of human history, one’s associations, conversations, and transactions were inherently private. Everything changed with the advent of the digital age: surveillance capitalism turned users into products by offering free services, and states broadened their reach under the guise of protecting the populace. Armed with vast amounts of data and ever-improving algorithms, the ability to analyze thoughts and behaviors at scale moved from dystopian fiction to an unsettling reality. With the click of a button, those in power could peer into the deepest recesses of our private lives.

Privacy concerns have been present since the early days of the internet. In 1995, the Pew Research Center found that half of Americans were already worried about computers invading their privacy. As the technology advanced, anxiety over personal data protection continued to grow. By 2020, a Consumer Reports survey revealed that 62 percent of smart product owners in the US were concerned about losing their privacy. A 2023 Harris Poll across multiple countries—Australia, France, Germany, India, Japan, New Zealand, the UK, and the US—found that 75 percent of respondents believed it was important to disguise their digital footprint, and 83 percent expressed a desire to do more to protect their personal information.

Observing behavior, however, paints a different picture. In the nascent days of the internet, entering a credit card number online was perceived as risky. But over the years, social media became ubiquitous, and people grew comfortable sharing anything and everything about their lives online. This trend extends across the broader internet, where privacy is frequently disregarded. Up until 2017, Google scanned emails to serve personalized ads. Now, Google is allowing its AI assistant, Gemini, to do the same for the purpose of generating smart replies. Three-quarters of Americans still use Gmail. As of April 2025, Google Chrome and Microsoft Edge together held 71 percent of the global browser market share. Yet both of these browsers are notorious for their privacy infringements. VPN usage on the surface appears to defy this trend, with 46 percent of Americans using one. However, 43 percent of them rely on free versions that may log IP addresses, raising the risk of data harvesting.

The term “privacy paradox” was coined in a 2001 study to describe the divergence between a person’s expressed concerns about privacy and their actual behavior. Despite voicing worries about exposing personal data, individuals continue to engage with platforms and services that compromise their privacy. Researchers across disciplines have explored attitudes toward privacy, from studying willingness to pay for protection to conducting behavioral experiments. While most studies support the privacy paradox, a few have produced conflicting results. Regardless of the extensive research into this phenomenon, from a praxeological perspective, there never could have been a paradox to begin with. Through demonstrated preference, a person’s real-world choices reveal their true valuations, even if their abstract claims suggest otherwise.

Demonstrated Preference & Subjective Value Theory

In praxeological terms, individuals pursue specific ends through purposeful action, utilizing the means at their disposal. To achieve those ends, each individual subjectively ranks goods and services from the most to the least preferred. Demonstrated preference—which extends subjective value theory—is revealed through observable behavior. The choice a person makes is a concrete illustration of their value scale, where the selected good or service is ranked above all alternatives. Unlike hypothetical scenarios posed in questionnaires, demonstrated preference is grounded in real-world behavior. As explained by Murray Rothbard:

The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action.

Privacy Paradox Revisited

Ask yourself: How much do I value my privacy? How much time and money would I be willing to spend to conceal my personal details from public view? How much do I care about this relative to other things?

Now, imagine that you need to create a new email address. All the email service providers that you’re aware of are ordinally ranked from the most to the least preferred. If making a highly-informed decision is a priority, you have the option of investing time to research and expand your list. The email service that you sign up for will be based on convenience, ease of use, price, privacy, and any other relevant factors. No matter how you answered the above questions about your privacy valuations, in practical terms, your decision represents your demonstrated preference.

The decision is ultimately subjective for each person. It occurs at a singular place and time, using an ordinal ranking that is ephemeral in nature. If a change in circumstances prompts an individual to reassess their previous decisions, they will adjust their rankings in accordance. For example, following egregious breaches of trust, people have become more aware of the risks associated with sacrificing privacy and have altered their behavior. The Cambridge Analytica scandal and Edward Snowden’s revelations led to shifts toward privacy preservation. In the end, there is no paradox—people merely ordinally rank each service and platform at a single point in time. If a situation arises that prompts a reassessment, they will adjust their rankings, prioritizing goods and services that protect privacy, and act accordingly.

Conclusion

The problem with privacy is that it’s often not appreciated until it is gone. Privacy is essential for everyone, even those who believe their actions are beyond reproach. In the words of Edward Snowden: “Arguing that you don’t care about the right to privacy because you have nothing to hide is no different than saying you don’t care about free speech because you have nothing to say.”

If privacy is a precursor to freedom, and if privacy is indeed a natural right, then it’s imperative that we each protect it through our actions. The ramifications of neglecting it cannot be overstated. In a world where our histories are recorded, holding beliefs or engaging in actions that contradict the prevailing narrative can have severe consequences. Punishments for “unacceptable” views have ranged from deplatforming and debanking to deportations and incarcerations. As civil liberties continue to erode in so-called liberal democracies, dissidents over the past few years have been targeted over issues related to covid, wokeism, the Russo-Ukrainian war, and the Israeli-Palestinian conflict. No matter where you stand ideologically, there will always be others who find your beliefs abhorrent—and there’s a real possibility that those very individuals could one day seize the reins of power. The next time you use a service that demands deeply personal information, consider the potential ramifications of neglecting your privacy before demonstrating your preference.

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At the beseeching of congressional Democrats and the fanatical urgings of Nancy Pelosi, who called the extension of the federal eviction moratorium a “moral imperative,” the Centers for Disease Control and Prevention (CDC) has issued a new nationwide ban on evictions for counties with heightened levels of coronavirus community transmission. This latest CDC order comes in spite of President Biden’s candid admission that “the bulk of the constitutional scholarship says it’s not likely to pass constitutional muster.” In The Ethics of Liberty, Murray Rothbard attests that the “right to contract is strictly derivable from the right of private property.” If private property is a keystone for prosperous societies and a fundamental tenant of common law, what happens in the aftermath of the vitiation of millions of private contracts?

A brief recap. In March 2020 under the CARES Act, an eviction moratorium was applied to all dwelling units participating in federal assistance programs. Invoking the Public Health Service Act of 1944, the CDC broadened the moratorium to cover all rental properties countrywide in September 2020. The CDC’s unprecedented unilateral expansion was rationalized as a reasonable measure to combat the spread of COVID-19 by preventing crowded living conditions that would stem from mass evictions and by facilitating self-isolation. This decree, initially slated to end after three months, had been extended on five separate occasions. Rent protection programs have additionally been enacted at the state level. In some states these eviction moratoriums are scheduled to expire over the upcoming weeks. In others, they are set to continue indefinitely.

In consonance with the ethos of a free society, the United States Constitution is a document grounded in natural rights, conceived to protect private property. The Founding Fathers did not include a universal pandemic exception. The Fifth Amendment states that no one shall be “deprived of life, liberty, or property, without due process of law,” but does permit private property to be expropriated with just compensation (e.g., eminent domain). The Fourteenth Amendment guarantees due process protection at the state level. According to the Contract Clause, no state “may pass a law impairing the obligation of contracts.” During the eviction moratorium however, contractual obligations were voided, property was despotically taken with no compensation, and liberty was deprived without a hearing.

For many painstaking months, landlords have been stripped of their rights to freely use their property, while being forced to fulfill legal duties for squatters. Courts at the district level ruled the CDC’s edict unconstitutional, yet the moratorium persisted. In June 2021, the Supreme Court chimed in, allowing the eviction moratoriums to stand in the case of Alabama Association of Realtors v. Department of Health and Human Services. However, Justice Brett Kavanaugh clearly stated that the CDC exceeded its authority, that congressional authorization would be required for a moratorium extension, and that his deciding vote was cast only due to the fact that a few weeks remained before the moratorium was set to expire. Nevertheless, in open defiance of the Supreme Court ruling, the CDC issued their slightly scaled back, 60 day ban on evictions, at the beginning of August.

A dangerous precedent has been established. If eviction moratoriums are deemed a lawful intervention, why shouldn’t the seizing of private property be used to quell future “crises”? Will the current fallout include landlords abandoning the industry, or will rents be raised to offset uncertainty risks as speculated by Jeff Deist? How do members of a society continue to confidently form agreements when the trust associated with contract enforcement erodes?

When taking this all into account, proponents of strict constitutionalism are inevitably forced to reconcile their philosophy in the face of a swelling regulatory state, led by power mongering aspiring autocrats, who perceive the founding documents as ignorable relics. None of this should be overly surprising given that politicians and bureaucrats are perversely incentivized to perpetually expand the size of government. In spite of illusions of separated powers, regardless of whether the reigns are wielded by Democrats or Republicans, when the State is the ultimate arbiter, even in cases involving itself, justice becomes an empty abstraction distributed to gain political favor.

Applying one set of ethical standards to the citizenry and another to the State is hypocrisy and downright immoral. In a system that preserves property rights, a creditor may grant a debtor forgiveness solely for obligations between the two parties. As Lysander Spooner wrote in No Treason: The Constitution of No Authority:

A man’s natural rights are his own, against the whole world; and any infringement of them is equally a crime; whether committed by one man, or by millions; whether committed by one man, calling himself a robber, or by millions calling themselves a government.

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Once a society embraces the division of labor, direct exchange becomes increasingly infeasible. Without money, specialization is constrained; without money, dreams of constructing an advanced society are merely a utopian pipe dream. At its core, money is the lubricant for human relations. It simultaneously solves many problems of cooperation while serving as the basis for economic calculation. As awareness of nonsovereign cryptocurrencies has risen dramatically, questions about the history of money have gained salience. How does money arise? From where does it derive its value? The following sections will expound upon the cumulative development of money, from livestock to bitcoin, by infusing the concept of legitimacy into Carl Menger’s theoretical framework as outlined in On the Origins of Money.

Legitimacy

According to ethereum cocreator Vitalik Buterin:

Legitimacy is a pattern of higher-order acceptance. An outcome in some social context is legitimate if the people in that social context broadly accept and play their part in enacting that outcome, and each individual person does so because they expect everyone else to do the same.

From Buterin’s perspective, legitimacy operates as a hidden force that guides coordinated behavior. Legitimacy manifests itself through numerous avenues. These include brute force, continuity, fairness, process, performance, and participation. In addition to serving as an intrinsic component of blockchain technology, the concept of legitimacy can be applied as a mediating variable to explain the evolution of money.

From Protomoney to Store of Value

Barter societies revolve around economic actors who exchange goods and services directly, without a monetary medium. The impracticality of direct exchange ultimately inhibits societal prosperity and economic progress. Livestock and other agriculture products arose as protomoney within barter societies as early as eleven thousand years ago. In 1200 BC, cowry shells filled the role of a primitive money. Bronze and copper coins did the same two hundred years later in China. Furs, teeth, and wampum were utilized in a similar manner by Native American tribes for centuries.

An axiom within the marketplace is that not all goods possess the same saleability (i.e., the facility of disposing of said good at a convenient time, while it retains its purchasing power). Among modern foragers, ornamentation has been shown to be universal. The practice of collecting rare items, art, and jewelry remains prevalent worldwide today. Collectibles such as those aforementioned nonperishable commodities were not merely symbolic, however. They served a dual purpose, providing a way to transmit value through time and space, thus presenting individuals the ability to hoard value if desired. As Mises wrote in Human Action:

But one must never forget that the characteristic feature of human society is purposeful cooperation; society is an outcome of human action, i.e., of a conscious aiming at the attainment of ends.

A commodity’s transition into a store of value occurs spontaneously, driven by human action, without central planning. In terms of legitimacy, this shift is mainly facilitated through the avenue of participation. Paralleling an exhibition of “dollar voting,” members of barter economies actively participate in elevating the saleability of certain goods.

From Store of Value to Medium of Exchange

Over time, a commodity that achieves store-of-value status can evolve into a medium of exchange. A commodity that becomes a medium of exchange is able to procure any other good or service on the market. This monetary transition is aided by the legitimacy that coincides with the passage of time. If it’s generally accepted that a good has value at time T, through the phenomenon of continuity, one’s confidence grows that it will have value at time T + 1.

To illustrate how legitimacy mediates the first two monetary transitions, imagine a village housing Alice, a potassium-deficient pig farmer, and Bob, a vegan with a banana tree. Without a third party, Alice is unable to strike a deal with her neighbor. As the village expands, more goods enter the scene, and a gold mine is discovered. Gold quickly becomes fashionable for ornamental purposes. In this scenario, it would behoove Alice and Bob to exchange their less saleable goods for those possessing higher saleability. All in the village are individually incentivized to recognize the rising saleability of gold, for doing so would provide a tremendous benefit. Aided by the legitimacy that accompanies participation, gold becomes a store of value. Gold’s portability, divisibility, durability, recognizability, and scarcity boosts the yellow metal’s legitimacy from a performance perspective. With the passage of time, gold’s saleability forms a reinforcing feedback loop wherein legitimacy is further established by continuity. At the end of the second phase, gold fulfills the role of a store of value and a medium of exchange within this village.

Medium of Exchange to Unit of Account

A commodity that transitions into a unit of account has reached a rarefied position. At this stage, all other goods in the market are priced in terms of said unit of account. Per Menger, “[M]oney has not been generated by law. In its origin it is a social, and not a state institution.” Governments in the past piggybacked on the medium-of-exchange status of precious metals and then established minting monopolies with the intention of instilling confidence in regard to the genuineness, weight, and fineness of the money supply. Through the stamping of coinage, governments were able to supply different denominations as well as more efficiently collect taxes. Regretfully, per Rothbard, “the emergence of money, while a boon to the human race, also opened a more subtle route for governmental expropriation of resources.”

The State’s monopoly on the use of violence is an ever-present threat. Legitimacy by brute force allows governments to engage in seigniorage. It similarly gave the US government the power to abandon the gold standard in 1933. Today, the enforcement of legal tender laws by governments stifle competing currencies. The legitimacy that coincides with the ability to incarcerate people facilitates the reckless monetary policies employed by central banks worldwide.

Bitcoin

Since bitcoin’s (BTC) genesis block on January 3, 2009, we’ve been witnessing the evolution of a decentralized digital asset. While BTC has been on the receiving end of condemnations for failing to be useful as a medium of exchange, it’s imperative to recognize that this process takes time, just like it did ages ago with gold. Only recently has bitcoin transitioned from a protomoney into a store of value. If BTC becomes entrenched as a store of value, its volatility will decrease, and it will begin its transformation into a medium of exchange.

As a decentralized protocol, bitcoin has already earned legitimacy through participation and fairness. In the case of the latter, bitcoin has an open-source codebase, along with a transparent immutable ledger. Bitcoin’s participation legitimacy is evidenced by its liquidity, the size of its developer community, and its number of active addresses. With every passing year, confidence in bitcoin’s battle-tested peer-to-peer protocol grows and its brand awareness strengthens. If the Lindy effect is correct, bitcoin’s life expectancy increases proportionally with its current age. Thus, over time, BTC’s legitimacy will be further enhanced through the avenue of continuity if current trends continue.

Participation, fairness, and continuity, are not enough alone, however. Bitcoin’s transition to a medium of exchange will require legitimacy by performance. This ultimately will depend on the implementation and adoption of scalability solutions (e.g., the Lightning Network). Transactions using layer-two solutions do not occur directly on the base layer (blockchain). If perfected, this technology would exponentially increase the number of transactions per second on the bitcoin network.

The final stage in bitcoin’s evolution would necessitate a bitcoinization of our world. In this hypothetical future, large swathes of the population would transact in BTC, with no concerns for fiat exchange rates. For these individuals, the preference for sound money over inflationary fiat would be self-evident. Only time will tell if this revolutionary asset can overcome the higher-order acceptance afforded to the State by brute force legitimacy. Unrestricted currency competition opens up the possibility of bitcoin becoming a unit of account, and potentially a global reserve currency.

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To be a reliable and useful medium of exchange, money must be durable, portable, divisible, and recognizable, but also scarce. The privileged power of the State to manipulate the scarcity of money has had disastrous consequences for national currency systems throughout history. While money, like everything else, is subject to the subjective valuations of consumers—as noted by Mises—money’s exchange value is “the most important kind of value, because it governs the social and not merely the individual aspect of economic life.” Legal tender laws and other regulations imposed on currencies cause value discrepancies to arise.

Indeed, when states intervene to impose “official value” on money, true market preferences can be partly observed in the workings of Gresham’s law. Gresham’s law is conventionally described as “bad” money drives out “good” money, but a more accurate definition per Rothbard is that “money overvalued artificially by government will drive out of circulation artificially undervalued money.” Imagine a specie-based economy that issues a coin containing one ounce of gold. Facing mounting debts, the government substitutes copper for a more valuable metal in the minting process while maintaining the coin’s denominational value. According to Gresham’s law, once citizens recognize the inconsistencies in the precious metal content, they’ll opt to spend their artificially “overvalued” newer coins while hoarding their artificially “undervalued” older coins.

Whereas “overvalued” money was created in the past by physical debasement, “overvalued” money today is the result of reckless monetary and fiscal policy. Over the course of the pandemic, the money supply, M2 according to the Federal Reserve, increased 29.7 percent, from $15.405 trillion in February 2020 to $19.979 trillion in March 2021. Since the advent of the Federal Reserve, the purchasing power of the dollar has dropped by over 96 percent (i.e., $1 today is the equivalent of $26.14 in 1913). Unbridled quantitative easing has further amplified inflation worries and global doubts about the stability of the dollar.

Legal tender laws in the United States require the public to accept payment for debts and taxes at the dollar denomination shown on the bill. This form of coercive price control has established the dollar as the economy’s unit of account. Similarly, burdensome tax regulations bolster the “overvalued” dollar by constructing barriers of use for its rivals.

The Case of Cryptocurrency

We can see the effects of these regulations at work today in how cryptocurrency is used.

According to the IRS, bitcoin and other cryptocurrencies are considered property for taxation purposes. Thus, the act of buying goods and services with BTC is identified as a realization event that requires the purchaser to declare any gains recognized from their BTC cost basis. Disregarding scalability concerns, onerous requirements that force users to track gains and losses for all transactions ultimately prevents BTC from serving as an effective medium of exchange.

On the other hand, if there is real market demand for various cryptos, government regulations designed to discourage the use of anything other than the “official” money will cause the demanded “unofficial” monies to become “undervalued” currency.

Thus, in accordance with Gresham’s law, the in-demand cryptos would be hoarded, rather than circulated at large. In the bitcoin community, for example, this mentality is personified by the Hodl meme encouraging bitcoin users to simply hold, rather than spend, bitcoin. A feedback loop has been generated where greater levels of fiat inflation have led to wealth flooding into BTC, further strengthening the perception that BTC is a reliable store of value. This mentality has been embraced of late by numerous corporations, who have transferred portions of their cash reserves into BTC (e.g., Tesla, MicroStrategy, Square, and MassMutual).

Thanks to so many government restrictions on the use of potential monies that aren’t the dollar, we can only guess as to what the relationship between dollars and bitcoin would be in a functioning marketplace. To find out, it would be best to level the playing field by eliminating legal tender laws and onerous taxation requirements. This would allow individuals to actively assess true differences in purchasing power.

This is unlikely, however, because elected officials depend so much on inflating the supply of dollars for political gain. Whether Democrat or Republican, politicians within our current system overwhelmingly perpetuate the welfare-warfare State—and this would be much more difficult with market-based money not subject to easy inflation by central banks.

Perversely incentivized, these politicians promote expansionary monetary policies that benefit special interest groups while pandering to their electoral base. As noted by Hayek, “[W]ith the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.” Depriving the State of this exclusive power would force accountability first and foremost. If the threat of violence and imprisonment were stripped away, the public could freely evaluate the quality of different currencies and act accordingly.

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As the decentralized revolution gains momentum and cryptocurrency adoption reaches new heights, concerns pertaining to the quality of money are too often ignored. According to a Crypto.com report, the number of bitcoin owners surpassed 71 million in January 2021, but how many of them are aware that bitcoin is not anonymous but rather pseudonymous, or recognize the pitfalls of embracing a currency lacking fungibility? While bitcoin’s provable scarcity signifies a return to the tenets of sound money, its creator’s peer-to-peer vision ultimately falls short without fungibility, because counterparty risk is created. Bitcoin’s fungibility issues come from the history that is attached to the coins. The insertion of trust into transactions by scrutinizing coin history has the potential to splinter the bitcoin network, in the process increasing fees as a result of regulatory compliance costs. More alarmingly, a transparent blockchain inevitably transforms into a surveillance chain on which reputation travels. In order to prevent censorship and protect our natural rights to privacy, a fungible currency is not a luxury, but a requirement.

Money facilitates business on the market by serving as a medium of exchange, store of value, and a unit of account. The Federal Reserve Bank of St. Louis lists six characteristics of money: durability, portability, divisibility, limited supply, uniformity, and acceptability. The latter two of these attributes are directly impacted by a currency’s fungibility.

Fungible assets at their core are interchangeable. On the nonfungible end of the spectrum are fundamentally unique assets such as real estate and artwork. Conversely, precious metals represent physical fungible assets. Gold, for example, can be melted down and swapped without complication. As noted by Menger (1892), the adoption of gold and silver as forms of money throughout history can be partially attributed to the homogeneity of these materials. In order to satisfy Berg’s (2020) fungibility criteria, “each unit of a currency, or any commodity used in a money function, should be indistinguishable from others of the same denomination,” and “an individual unit of said currency should not be reidentifiable through time and change.”

The most widely adopted digital decentralized assets designed to serve as money are bitcoin (BTC), litecoin (LTC), and bitcoin cash (BCH). All of these cryptocurrencies, however, are nonfungible in nature. Each satoshi, the smallest BTC unit, possesses an accessible history on the network’s transparent ledger. Consequently, 1 BTC ≠ 1 BTC.

Imagine selling an automobile you posted on Craigslist to a stranger who, unbeknownst to you, earned their fortune peddling contraband on the dark web. Subsequently, you attempt to deposit the proceeds of the sale, but to your surprise, your financial institution has flagged the transaction and will not accept your “tainted” bitcoin.

According to Mises (1953), “the subjective use-value of money, which coincides with its subjective exchange value, is nothing but the anticipated use-value of the things that are to be bought with it.” Economic calculations become increasingly difficult when ambiguity pervades the medium of exchange. Fungible monies maintain their purchasing power regardless of past use, thus eliminating uncertainty associated with future use. A transacting party’s faith that their money will be accepted by future counterparties ultimately is shaken without fungibility. If we go back to our Craigslist example, the automobile owner would be wise to either require additional information from the buyer or to increase the sale price to offset the risk of not being able to satisfy anticipated value propositions.

The long-term implication of this problem for bitcoin is a fracturing of the network on the basis of anti–money laundering (AML) laws. Regulations of this sort are not only designed to hinder criminal behavior and prevent terrorist financing, but have been implemented by governments to maintain tax revenue. A network split may occur strictly along a clean-dirty dichotomy or, in all likelihood, through the categorization of white, gray, and black coins. Based on the latter hypothesized taxonomy, white, or clean, coins, would be those held in custodial accounts (e.g., Coinbase, Gemini, or Binance). These exchanges employ stringent know-your-customer (KYC) requirements for their users. Gray, or questionable, coins, would be identified as cryptoassets held in noncustodial wallets, where the owner has possession of their private keys. While these privately owned addresses don’t have any direct link to illegal activities, anyone who wanted to move their gray coins onto an exchange would likely be forced to answer invasive questions about their identity and the source of funds. Lastly, any coins used on the dark web or for purchases labeled nefarious would be branded black, or dirty, coins. Coins of this sort would be immediately frozen if deposited into a regulated exchange.

Signs of a splintered bitcoin network can be seen across the globe. In overadherence to Dutch legal requirements, crypto exchange Bitstamp now requires users to provide information on their net worth, nationality, proof of residence, and source of funds prior to withdrawing. Proposed guidelines issued by the Financial Action Task Force (FATF), an influential intergovernmental body, have labeled peer-to-peer transactions between unhosted wallets higher risk. FAFT goes on to recommend enhanced recordkeeping by virtual asset service providers (VASPs) to mitigate risks when interacting with unhosted wallets. On Reddit and Twitter, there are numerous firsthand accounts of exchange bans for using mixers, which are tools designed to preserve privacy. As evidenced by these examples, gray coins are already viewed suspiciously. On the pristine end of the taxonomy, industry executives have claimed that virgin bitcoins, those freshly mined, with no transaction history, sell at a 10 to 20 percent premium. As a whole, it’s clear that cryptoassets of the same denomination are treated differently and that a hierarchy of value has emerged based on a coin’s history.

Regulatory obligations have made the identity of the medium of exchange increasingly salient. An emphasis on coin history has naturally incentivized the formation of companies capable of identifying risks (e.g., Chainalysis or CipherTrace). In many cases, though, users are branded guilty by association, as these companies apply imperfect information in constructing risk profiles for privately owned crypto addresses. If this trend continues, the salability of nonfungible currencies will suffer. In tracing the origins of money, Menger (1892) states that the population selects the most marketable good to use as a medium of exchange. This creates a reinforcing cycle that increases the demand for this type of good. Reductions in the salability of bitcoin will ultimately negatively affect its desirability and its real-world uses.

Privacy is an attribute that people tend to disregard until it’s desperately needed. Institutions have thus far clamped down on financial crimes, but the phenomenon of cancel culture and the rabid silencing of dissident voices across social media is a dangerous precedent that sets the stage for the ubiquitous refusal of financial transactions based on political or social beliefs. When currency units contain a history, financial activity can unearth the ideological leanings of its possessor. Communities under totalitarian regimes in particular are at the greatest risk in this regard.

Markets are attempting to address the issue of fungibility, however. For example, cryptocurrencies such as Monero, Zcash, and Dash all claim to provide crypto users with added layers of privacy and fungibility. Crypto users themselves will determine in the long run which currencies—if any—provide a sufficient amount of privacy and fungibility.

References

Berg, A. 2020. “The Identity, Fungibility, and Anonymity of Money.” Economic Papers 39, no. 2: 104–17.

Menger, Carl. 1892. “On the Origins of Money.” Economic Journal 2, no. 6: 239–55.

Mises, Ludwig von. 1953. The Theory of Money and Credit. New Haven, CT: Yale University Press.

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