Protecting the Sovereign's Money Monopoly

Abstract

Sovereign states have held a monopoly over the production of circulating money for well over a century. Governments, not private entities, issue circulating money. The advent of stablecoins—privately issued digital money that can circulate—raises the question of the sovereign’s money monopoly from the grave. Should private money circulate alongside sovereign money in the 21st century? We argue against coexistence to preserve financial stability and monetary sovereignty.

Through the lens of economic theory, we explore the coexistence question by revisiting the original debates that led to the sovereign’s money monopoly in England, the United States, Canada, and Sweden. In each case, private money first circulated because of a limited money supply—namely, a shortage of specie—and because there were no better alternatives. However, after the development of modern central banking and sovereign fiat money, these governments banned or taxed the circulation of private money to improve financial stability and gain greater control over the money supply. Notably, in the United States, Congress enacted a 10 percent tax on the circulation of private money in 1865 that stayed on the books until 1976, when Congress deleted provisions from the Internal Revenue Code deemed “obsolete” or “unimportant and rarely used” from a tax perspective.

Today, many U.S. lawmakers assume that coexistence is the optimal path forward and are crafting legal guardrails under that assumption. We argue that lawmakers should instead seek to maintain the government’s monopoly by creating a better sovereign alternative in the form of a central bank digital currency (the carrot) and deterring the adoption of stablecoins through a ban or a tax (the stick).

Keywords: financial regulation, sovereign money monopoly, money, stablecoins