In this paper, Atty. Rafael Padilla, Co-Founder and Trustee of BlockDevs Asia, Professor of Law at San Beda Alabang, and author of Fintech: Law and First Principles, looked at the constitutional aspects of cryptocurrencies and why it is legally impossible to ban them.
Free Money: The Constitutional Aspects of Cryptocurrencies
Rafael Angelo M. Padilla
04 May 2022
ABSTRACT: We discuss the various legal and economic aspects of cryptocurrencies. Because thousands of cryptocurrencies vary in terms of purpose, utility and features, the discussions will focus on bitcoin considering that it is the original, most valuable and most widely used cryptocurrency, as well as the fact that it was conceptually designed to function as electronic cash. In particular, this paper will discuss how bitcoin can legally and commercially function as money, and to what extent can a monetary authority like the Bangko Sentral ng Pilipinas (BSP) regulate the use of cryptocurrencies as private money. This paper will also explore a hypothetical scenario where the Congress enacts a statute prohibiting the use of cryptocurrencies as medium of exchange for private transactions, and examine whether such a law would suffer from constitutional infirmities in view of the due process clause and the freedom of speech.
Cryptocurrencies, such as bitcoin, are digital assets whose ownership is recorded on a shared public ledger that is updated concurrently by a decentralized and global network of users. Before the invention of Bitcoin, the first cryptocurrency-based decentralized payment system, any form of electronic payment would need to be carried out through central intermediaries because of the risk of double-spending. Bitcoin proved that it is technically possible for parties to engage in cash-like digital transactions through the internet and even crossing borders without the intervention of trusted third parties.
After the 2008 global financial crisis, it has been observed globally how technology has been converging with financial services. The crisis gave rise to new and innovative ways of delivering financial services, with new business models and commercial practices that have never been envisaged by traditional regulatory frameworks. The launch of Bitcoin in 2009 coincided with this crisis, inspiring many to understand money, economics, and finance from a different paradigm. Some have imagined how technology can usher the creation of new kinds of money, rather than simply employing technology to implement digital versions of the conventional money.
In the context of the growing adoption of cryptocurrencies such as bitcoin, the concept of monetary sovereignty, as the term is conventionally understood by central bankers and those in charge of monetary policy, is explored in this paper. We reexamine the conventional wisdom widely held to be true by the central banking community, i.e., central banks are the agents of the State through which monetary sovereignty is exercised, and assess whether such notion is consistent with constitutional precepts—such as the principle that sovereignty resides in the people and government authority emanates from them.
This paper will not argue in favor of separation of State and money, nor argue against the Bangko Sentral ng Pilipinas’ (BSP) authority to provide policy direction in the areas of money, banking and credit—this is clearly mandated by the 1987 Constitution. Nor do we argue against the constitutionality of legal tender laws, such as Section 52 of the New Central Bank Act. Instead, we revisit the concept of monetary sovereignty, especially in the light of Republic Act No. 8183[efn_note]AN ACT REPEALING REPUBLIC ACT NUMBERED FIVE HUNDRED TWENTY-NINE AS AMENDED, ENTITLED “AN ACT TO ASSURE THE UNIFORM VALUE OF PHILIPPINE COIN AND CURRENCY” (1996).[/efn_note] —the law that repealed the Uniform Currency Act (R.A. 529, 1950), which previously prohibited payment of obligation in currency other than legal tender.
Finally, this paper will reflect on whether privately-issued cryptocurrencies such as bitcoin can function as “free money,” and whether it can empower the people to reassert monetary sovereignty as a construct of freedom. For this purpose, we propose to redefine monetary sovereignty as the individual’s liberty to choose what he or she may deem as a sound form of money for his or her private economic transactions, limited only by the State’s legitimate interest to purvey the use of fiat currency for public transactions (e.g., payment of taxes, public debts, salaries of civil servants, grant of subsidies and social benefits, etc.) and as an instrument of monetary policy.
Scope and limitation of the paper
In terms of scope, we limit our discussions to fungible, convertible [efn_note]“Convertible” in this context refer to cryptocurrencies that can be directly exchanged to fiat currencies and other cryptocurrencies.[/efn_note] and privately-issued cryptocurrencies. Further narrowing the scope, our discussions will principally focus on bitcoin considering that it is the first, most adopted and most valuable cryptocurrency amid tens of thousands of “altcoins.” It is impractical to write a comprehensive treatment of the legal and economic aspects of all types of cryptocurrencies vis-à-vis monetary law in view of their inordinate variations in terms of purpose, design, characteristics, functions and features.
Furthermore, non-convertible cryptocurrencies that function as an internal currency within a closed-loop system or platform (e.g., “in-game” or “in-app” tokens) are also excluded in our scope, along with nonfungible tokens (NFTs) which are unique cryptographic digital assets whose ownership is likewise recorded on the blockchain but are not designed to function as currency or medium of exchange (e.g., cryptoart, cryptocollectibles, profile pictures or “PFP,” etc.). Moreover, this paper will exclude discussions on government-issued cryptocurrencies (e.g. Sovereign or SOV issued by Marshall Islands) and central bank digital currencies or CBDCs (e.g. Bahamas Sand Dollar, People’s Bank of China’s Digital Currency Electronic Payment [DCEP], etc.).
As a final note on the scope and limitation of our paper, it is conceded that the use of privately-issued cryptocurrencies can be the subject of regulation as a valid exercise of police power, such as when the features, functions and characteristics of a particular cryptocurrency require their treatment within the scope of an established legal or regulatory framework. For example, “security tokens” and other digital assets that behave as securities are subject to regulation in accordance with the Securities Regulation Code;[efn_note]R.A. No. 11127 (2000).[/efn_note] crypto-based payment tokens used by payment service providers can be regulated as a payment instrument per National Payment System Act;[efn_note] R.A. No. 11127 (2018).[/efn_note] even the use of cryptocurrencies as a medium of exchange in illegal gambling, sale of controlled substances or contrabands, or to facilitate money laundering, terrorist financing, sanction evasion, proliferation of weapons of mass destruction, and other illicit activities, are outlawed by existing penal laws. This paper will only review the constitutionality of a carte blanche policy banning cryptocurrencies due to the fact that they are privately-issued, or because they can circulate as private money, or because they adversely implicate monetary policy.
Monetary law and the legal nature of money
“The fact that monetary law is neglected has been responsible for many crises in the past, and will probably be responsible for such crises in the future.”E. Hirschber, Monetary Law and Monetary Crisis (1976)
Broadly speaking, monetary law may be regarded as that area of law that treats the rights and obligations affected by changes in the value of money. Hirschber, an avid writer on the subject, characterized monetary law thus: “(s)ince monetary problems and crises affect the whole world, the basic principles and approaches of monetary law are transnational and may be treated as part of the common law of mankind.”[efn_note]E. Hirschber, Monetary Law and Monetary Crisis, IX CILSA 1976, p. 226 (1976).[/efn_note]
“Money” is among the most important and most frequently-used term in legal relations. It appears in the Constitution, statutes, court decisions, administrative issuances, contracts and various legal documents.[efn_note]Arthur Nussbaum, Money in the Law, p. 19 (1950).[/efn_note] In many cases, laws define rights in monetary terms, such as in the case of actions “capable of pecuniary estimation.” If only money were perfectly stable in value, monetary law would be irrelevant. Indeed in times when the currency is relatively stable, “the law finds itself unprepared for unexpected and revolutionary changes in the monetary system.”[efn_note]Phanor J. Eder, Legal Theories of Money, 20 CORNELL L.Q. 52 (1935).[/efn_note] But when the volatility of the value of money is the common phenomenon, monetary law becomes practically significant.[efn_note]E. Hirschber, Monetary Law and Monetary Crisis, IX CILSA 1976, p. 226 (1976). [/efn_note]
Illustrating the prominence of monetary law, it may be observed that one of the articles in the first volume of the Harvard Law Review addressed the issue on whether the Federal Congress of the United States has constitutional authority to endow paper money with legal tender power.[efn_note]James B. Thayer, Legal Tender, Harvard Law Review Vol. 1, No. 2. (1887).[/efn_note] There was also a time when the U.S. Federal Supreme Court’s decisions on the constitutionality of government-issued paper money, the Legal Tender Cases,[efn_note]79 U.S. 457 (1870).[/efn_note] were among the most important yet controversial rulings of the Court.[efn_note]John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 110 (2009). [/efn_note]
In the Philippines, the Legal Tender Cases were cited for the first time by the Philippine Supreme Court in the 1905 case of Gaspar v. Molina to support its ruling that a law requiring judgments rendered by Philippine courts be stated in terms of the new gold-based Philippine currency does not impair the obligation of contracts made prior to its passage.[efn_note]G.R. No. 2206 (1905).[/efn_note] More recently, the Supreme Court had the occasion to describe the legal nature of money in Federal Express v. Antonino.[efn_note]G.R. No. 199455 (2018).[/efn_note] The ponente, Justice Leonen, defined money as “what is generally acceptable in exchange for goods.” It can take many forms, most commonly as coins and banknotes. Despite its myriad forms, its key element is its general acceptability. Laws usually define what can be considered as a generally acceptable medium of payment, as in the case of the legal tender clause (Section 52) of the New Central Bank Act.
The ramifications of monetary phenomena, like inflation, on private rights and obligations should be considered in the study of monetary law.[efn_note]E. Hirschber, Monetary Law and Monetary Crisis, IX CILSA 1976, p. 228 (1976). [/efn_note] Considering its close relation to the problems of currency, it can be said that the purpose and intent of monetary law is to protect public interest and the common good. However, throughout history, there were times when laws were enacted for the benefit of private interests. Observing that currency was the first-ever nationalized industry, Hirschber clarified that currency was nationalized, “not to serve the interests of the public, but those of the rulers.” An example of this is the establishment of nominalistic principle, which legally mandates that “a pound is always a pound and a dollar always a dollar,” even though the coin has already been debased.[efn_note]“This state prerogative over currency has influenced the thinking of the English courts from the nineteenth century to the present day. A unit of currency is always equal to itself as defined by its issuer, therefore, the term pound, appearing in contracts, should be interpreted as having a constant value. The protection of the prestige of currency has also played a part; courts of law were not willing to admit that the national currency had decreased in value. This traditional attitude still pervades the whole body of monetary law. However, during the Civil War in the United States (186 1-65), the courts of law, and even the legislator, adopted a far more liberal attitude which was intended to protect private interests affected by inflation in the North and the ruin of Southern currency. The same happened in Germany during the Great Inflation (1902-24), where a judicial revaluation of obligations affected by galloping inflation, was followed by legislative revaluation.” (Id.) [/efn_note]
Although the theoretical foundations of the principle were developed as early as the sixteenth century,[efn_note]E. Hirschber, Monetary Law and Monetary Crisis, IX CILSA 1976, p. 227 (1976).[/efn_note] the modern justification of the nominalistic principle was formulated by G.F. Knapp who argued that money is simply a creature of law, and law fixes what its value is.[efn_note] Id.[/efn_note] The nominalistic principle enables massive transfer of purchasing power from one private party to another through currency debasement which leads to inflation. Indeed, Morag argued that inflation is an indirect form of taxation.[efn_note] Amotz Morag, On Taxes and Inflation (1965). [/efn_note] Even Benjamin Franklin regarded currency debasement as some kind of “imperceptible tax.”[efn_note]“The only consolation under the evil is, that the public debt is proportionately diminished by the depreciation; and this by a kind of imperceptible tax, every one having paid a part of it in the fall of value that took place between the receiving and paying such sums as passed through his hands. … This effect of paper currency is not understood this side the water. And indeed the whole is a mystery even to the politicians, how we have been able to continue a war four years without money, and how we could pay with paper, that had no previously fixed fund appropriated specially to redeem it. This currency, as we manage it, is a wonderful machine. It performs its office when we issue it; it pays and clothes troops, and provides victuals and ammunition.” Benjamin Franklin’s letters from France, quoted in Justice Bradley’s concurring opinion in Knox v. Lee, 79 U.S. 457 (1870). [/efn_note] But one fundamental difference between tax and inflation is that taxation directly benefits the government, whereas inflation combined with the nominalistic principle also directly benefits private interests.[efn_note]E. Hirschber, Monetary Law and Monetary Crisis, IX CILSA 1976, p. 228 (1976). [/efn_note] The problems arising from currency debasement and inflation, as well as the evils of the nominalistic principle, was even described by Adam Smith in the Wealth of Nations:
“(T)he avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which been originally contained in their coins… By means of those operations the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and to fulfill their engagements with a small quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favorable to the debtor, and ruinous to the creditor, and have sometime produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.”[efn_note]Adam Smith, The Wealth of Nations, Chapter IV, Of the Origin and Use of Money, p. 41 (1776).[/efn_note]
On the legal nature of money, Mises explained that the law understands money not as a common medium of exchange but as a legal medium of payment that discharges obligations. “The principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment.”[efn_note]Ludwig Von Mises, The Theory of Money and Credit, p. 36-37 (1912).[/efn_note] The law’s concern with money as a means to cancel an outstanding debt or to extinguish pecuniary liabilities has broad implications on the legal concept of money.”[efn_note] Id.[/efn_note]
A statutory ban on cryptocurrencies, particularly bitcoin, violates substantive due process
In a hypothetical scenario where Congress enacts a statute that would prohibit the use of privately-issued cryptocurrencies for private economic transactions, the law would be unconstitutional as it would violate the substantive aspect of the due process clause. Such law would fail the test of reasonableness as it would irrationally, arbitrarily and outrageously disregard fundamental economic principles, centuries of lessons from monetary history, and the technological innovations and economic advantages offered by cryptocurrencies especially bitcoin.
Article III, Section 1 of the 1987 Constitution is understood to guarantee not only the procedure but also the substance of life, liberty and property. This is why the due process clause is interpreted both as a procedural and substantive guarantee that restricts the exercise of unreasonable governmental power even when such power is formally authorized by law and the established procedure.[efn_note]Joaquin G. Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, p.118 (2009) [/efn_note] Focusing on its substantive aspect, due process requires that (1) public interest demands government intervention, and that (2) the means employed are reasonably necessary to accomplish a public purpose and not unduly oppressive to individual rights.
The clause which states that “(n)o person shall be deprived of life, liberty, or property without due process of law” is negatively phrased to emphasize how it serves as a strict limitation on the inherent powers of the State. In the context of substantive due process, this means that police power, taxation and expropriation cannot be exercised arbitrarily but must be fair, reasonable and just.[efn_note]Corona v. United Harbor Pilots Association of the Philippines, G.R. No. 111953 (1997). [/efn_note] Indeed, substantive due process is the “epitome of reasonableness and fair play.”[efn_note]Bautista v. Juinio, G.R. No. L-50908 (1984).[/efn_note] Police power in particular must be exercised to achieve a public purpose, employing measures that do not unreasonably interfere with fundamental natural rights of life, liberty and property. It is in deference to these natural rights that the constitutional limits were imposed on the scope of police power.
Economic substantive due process
In relation to due process, the notion of economic substantive due process must be examined as we grapple with the constitutional issue: “would a statutory policy banning privately-issued cryptocurrencies pass the test of reasonableness?” To answer this question, economic concepts such as rational choice theory must also be considered. The rational choice theory suggests that economic actors employ rational thinking to arrive at informed decisions or choices, leading to outcomes that align with their best interests. When rational individuals behave according to their own self-interests, the “invisible hand” ultimately creates advantages for the overall economy.
The doctrine of substantive due process examines the intrinsic validity of a law when it interferes with liberty and property rights.[efn_note] Maynilad Water Services, Inc. v. Secretary of the Department of Environment and Natural Resources, G.R. Nos. 202897, 206823 & 207969 (2019). [/efn_note] There have been cases where courts applied economic principles in their examination of the legal issues concerning substantive due process. In these cases, the rights to liberty and property were interpreted to mean non-interference by the government in the area of private economic relations. As remarked by Justice Brewer of the United States Supreme Court in his dissenting opinion in Budd v. New York,[efn_note] 143 U.S. 517 (1892). [/efn_note] a case involving the constitutionality of a New York statute regulating rates charged by grain elevators: “(t)he paternal theory of government is to me odious. The utmost possible liberty to the individual, and the fullest possible protection to him and his property, is both the limitation and duty of government.”
In the case of Allgeyer v. Louisiana,[efn_note] 165 US 578 (1897).[/efn_note] the U.S. Supreme Court invalidated a Louisiana law prohibiting out-of-state insurance corporations from conducting business in the state without maintaining at least one place of business and an authorized agent in the state. According to the Court, the law violates the due process clause and the liberty to enter into contracts:
“The liberty mentioned in that [Fourteenth] amendment means not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary and essential to his carrying out to a successful conclusion the purposes above mentioned.”
The freedom to contract is an aspect of right to property, according to the U.S. Supreme Court in Coppage v. Kansas:[efn_note]236 U.S. 1, 14 (1915). [/efn_note] “(i)ncluded in the right of personal liberty and the right of private property—partaking of the nature of each—is the right to make contracts for the acquisition of property. Chief among such contracts is that of personal employment, by which labor and other services are exchanged for money or other forms of property. If this right be struck down or arbitrarily interfered with, there is a substantial impairment of liberty in the long-established constitutional sense.”
In the landmark case of Lochner v. New York,[efn_note] 198 U.S. 45 (1905). [/efn_note] the U.S. Supreme Court declared as unconstitutional the Bakeshop Act enacted by the State of New York , which forbid bakers to work more than 60 hours a week or 10 hours a day. In regarding said law as an “unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract,” the Court explained:
“The general right to make a contract in relation to his business is part of the liberty protected by the Fourteenth Amendment, and this includes the right to purchase and sell labor, except as controlled by the State in the legitimate exercise of its police power… There is no reasonable ground, on the score of health, for interfering with the liberty of the person or the right of free contract, by determining the hours of labor, in the occupation of a baker. Nor can a law limiting such hours be justified as a health law to safeguard the public health, or the health of the individuals following that occupation.”
Regulation of money as exercise of police power
It may be said that the regulation of money falls within the scope of police power. Hurst explained that because “the functional meaning and workability of the money system both derive from and materially affect the general context of social relations, legal control of money is established within that legitimate concern of law with the good order of social relations, which has commonly been called the police power.”[efn_note] James Willard Hurst, A Legal History of Money in the United States, 1774-1970 (1973).[/efn_note] However, it must be stressed that the regulation of money must be fair, reasonable and just in line with the doctrine of substantive due process. Further, while police power may be exercised to regulate the use and enjoyment of property, “the power to regulate, however, does not include the power to prohibit.”[efn_note] Office of the Solicitor General v. Ayala Land, Inc., G.R. No. 177056 (2009). [/efn_note] Bearing these constitutional principles in mind, the traditional role of government in the regulation of money was summarized by Seldon thus:
“It has long been a common belief among economists since the classical thinkers of the 18th century that one of the most important functions of government was to create monetary mechanism and to issue money. The debates among economists have been on how far governments have performed this function efficiently and on the means of increasing or decreasing the power of government over the supply of money. But the general assumption has been that government had to control monetary policy and that each country had to have its own structure of monetary units.”[efn_note]Arthur Seldon, Preface to Denationalization of Money, Hayek, p. 3 (1976). [/efn_note]
On the other hand, some economists—students of the Austrian school—believe, that money is not so different from other commodities and that it is better supplied by competition among private issuers rather than by a government that legally enjoys the monopoly to print money.[efn_note]Id. [/efn_note] In explaining the evils of State monopoly over money, F.A. Hayek noted how government intervention was initially justified by the complex attributes of precious metals employed by the market as money:
“(W)hen the genuineness of metallic money could be ascertained only by a difficult process of assaying, for which the ordinary person had neither the skill nor the equipment, a strong case could be made for guaranteeing the fineness of the coins by the stamp of some generally recognized authority which, outside the great commercial centres, could be only the government. But today these initial advantages, which might have served as an excuse for governments to appropriate the exclusive right of issuing metallic money, certainly do not outweigh the disadvantages of this system. It has 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.”[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 21 (1976).[/efn_note]
Revisiting the notion of “monetary sovereignty”
Does the government—including unelected technocrats appointed to steer monetary policy—have constitutional authority to regulate or worse prohibit private money? The regulatory perimeter of the Philippine central bank, BSP, when it comes to private money, such as privately-issued cryptocurrencies, must be demarcated. Does the New Central Bank Act, as amended most recently in 2019,[efn_note]R.A. No. 11211, AN ACT AMENDING REPUBLIC ACT NUMBER 7653, OTHERWISE KNOWN AS “THE NEW CENTRAL BANK ACT,” AND FOR OTHER PURPOSES. (2019). “Amended BSP Charter” for brevity. Despite the relative popularity of cryptocurrencies as of 2019, the Amended BSP Charter is silent on the subject of cryptocurrency and virtual asset service providers (VASP). That said, by administrative fiat, BSP classifies a VASP as a money service business. Money service business is within the regulatory ambit of the BSP, and for this reason, BSP regulates cryptocurrency-based financial activities facilitated by VASPs. See BSP Circular No. 1108 or Guidelines for Virtual Asset Service Providers (2021). [/efn_note] authorize the BSP to prohibit or regulate the use of privately-issued cryptocurrencies via administrative regulation? Would an outright policy banning cryptocurrencies be legally justified by invoking BSP’s constitutional mandate to provide policy direction on money, banking and credit?
With regard to jurisprudence, it has not yet been judicially settled whether “monetary sovereignty” authorizes Congress to enact a law that will prohibit the use of private money in purely private transactions, as seen in other countries[efn_note]See for example the case of Thailand. Suttinee Yuvejwattana and Thomas Kutty Abraham, Thailand Bans Use of Cryptocurrencies as a Method of Payment, Bloomberg, 23 March 2022, https://www.bloomberg.com/news/articles/2022-03-23/thailand-bars-use-of-cryptocurrencies-as-a-method-of-payment. [/efn_note] where the use of cryptocurrencies for payments have been outlawed. If such a law is enacted by Congress, can it withstand constitutional challenges, bearing in mind certain inalienable rights such as the individual’s right to due process,[efn_note] In this paper,, we will explore this question through the lens of economic substantive due process. [/efn_note] and freedom of speech, of expression and of the press?
Economic questions concerning money is among the most complicated, and a wide range of perspective is usually required to answer them. Adding further to the complexity, money, according to Rothbard, “is the economic area most encrusted and entangled with centuries of government meddling.”[efn_note] Murray N. Rothbard, What Has Government Done to Our Money, p. 2 (1963). [/efn_note] A case in point is the concept of monetary sovereignty. In international law, the Serbian Loans Case recognized it “as generally accepted principle that a state is entitled to regulate its own currency.”[efn_note] Case Concerning the Payment of Various Serbian Loans Issued in France (France v. Serbia) (1929). [/efn_note] Based on this decision of the Permanent Court of International Justice (PCIJ), the State’s sovereignty over its national currency and over the internal and external aspects of its monetary systems has been recognized by public international law.[efn_note] Claus D. Zimmerman, The Concept of Monetary Sovereignty Revisited, European Journal of International Law Vol. 24 no. 3, p. 798-799 (2013). [/efn_note]
In the domestic sphere, the version of “monetary sovereignty” as espoused by modern central bankers seems to blur the metes and bounds of monetary law.[efn_note]See for example this statement from the BSP in their publication on Central Bank Digital Currencies (CBDC): “Another benefit of introducing a CBDC is to help preserve monetary sovereignty. Rather than having an alternative means of payments that would become widely used but that is not denominated in domestic currency (e.g., foreign CBDC and cryptocurrencies), introducing a CBDC may be preferred to help preserve central bank monetary sovereignty and its control on its policy objectives.” (BSP, Central Bank Digital Currency for the BSP: Fundamentals and Strategies, p. 19 (2021).[/efn_note] For them, the concept evokes the idea of a sovereign prerogative that grants the government a permanent, exclusive, comprehensive, absolute and inalienable power to create and issue money.[efn_note]Richard H. Timberlake, The Government’s License to Create Money, Cato Journal, Vol. 9, No. 2, p. 302 (1989). [/efn_note] For example, in some papers published by the International Monetary Fund, monetary sovereignty has been described to cover essentially three exclusive rights of the State: (1) the right to issue currency, that is, coins and banknotes that are legal tender within its territory; (2) the right to determine and change the value of that currency; and (3) the right to regulate the use of that currency, or any other currency, within its territory.[efn_note]Francois Gianviti, Current Legal Aspects of Monetary Sovereignty, p. 4 (2004). Describing the nature of monetary sovereignty vis-à-vis international monetary system, Gianviti wrote: “By joining the membership of the IMF, the members have accepted these obligations and, to that extent, limited their monetary sovereignty. In exchange, they have received certain benefits. One of them is that other members too have agreed to limit their sovereignty for the sake of international cooperation and for the common good of all. Another benefit is that in times of crisis they will have access to financial assistance from the IMF if they meet the required conditions.” (p. 2). [/efn_note]
In law and in fact, where does monetary sovereignty actually reside? Could it be implied from the text of Article XII, Sec. 20 of the 1987 Constitution that the people vested this power to the government, particularly to the BSP as the independent central monetary authority? Was monetary sovereignty delegated to Congress, considering its plenary power to write laws, including the law that created the BSP through legislative charter?[efn_note]R.A. No. 7653, as amend by R.A. No. 11211 (2019). [/efn_note] Or do the people continue to enjoy this aspect of sovereignty in its native and original form? In relation to the latter question, can money be founded on what Rothbard calls “freedom principle?”[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 2-3 (1963).[/efn_note] Should there be a free market in money, i.e., free money, based on free-market principles? The answers to these questions will determine whether the government can legally prohibit (either by statute or administrative regulation) the use of privately-issued cryptocurrencies in private economic transactions.
The answers are also important to alleviate any fear, uncertainty and doubt (“FUD”) on the future of privately-issued cryptocurrencies. FUD can negatively influence the adoption of cryptocurrencies as private money as well as its related use cases and applications. Any perceived legal uncertainty can stymie financial innovation and discourage economic opportunities—especially when the potential role of cryptocurrencies and blockchain is taken into account in the advent of the fourth industrial revolution.
When Jean Bodin developed his theory of sovereignty, he cited the right of coinage as one of the most essential parts of sovereign power. By monopolizing the mint, governments soon discovered that the exclusive authority of coinage was an important instrument of power and a lucrative source of gain. The coins served largely as the symbol of might, similar to a flag, through which the ruler invoked his sovereignty.[efn_note] Friedrich A. Hayek, Denationalization of Money, p. 23 (1976).[/efn_note] This ancient royal tradition may have inspired the notion that coinage was a sovereign necessity. But today, such royal prerogative no longer exists. Further, it is a fundamental principle of the Constitution that sovereignty resides in the people—not in the government. Likewise, all government authority emanates from the sovereign people.[efn_note]Article II, Section 1, 1987 Constitution. See also Murray N. Rothbard, What Has Government Done to Our Money, p. 16 (1963). [/efn_note]
The concept of monetary sovereignty understood by the central banking community perpetuates the medieval conception that money, or the value of money, was a creation of the State. It must be remembered that the role of the government in coinage was not originally understood to authorize the creation of money, but only to certify the weight and fineness of the precious metals that universally served as money in economic activities. This role was not so different from establishing and certifying uniform weights and measures.[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 23 (1976). “The pieces of metal were regarded as proper money only if they carried the stamp of the appropriate authority, whose duty was thought to be to assure that the coins had the proper weight and purity to give them their value.” (Id.). [/efn_note] Today, the so-called “monetary sovereignty” claimed by modern governments as one of their functions serves as legal justification to issue fiat currency and endow them with legal tender power to artificially incentivize its general acceptability.
Valor impositus and the State theory of money
Sometime in the Middle Ages, people started to believe a superstition that it was the decree of government that conferred the value upon the money.[efn_note] Id.[/efn_note] The king’s image was stamped on coins, and the myth was propagated that coinage is an essential royal prerogative of the sovereign monarch. The monopoly of the mint allowed the government to supply whatever denominations of coin it wanted, although not desired by the public.[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 57 (1963). [/efn_note] Although experience always proved this assumption to be false, the doctrine of valor impositus[efn_note] “Value can be imposed,” which means that the king can fix the value of coin.[/efn_note] became established as a legal tenet that served as justification of the constant attempts of the rulers to impose the same value on debased coins.[efn_note] Friedrich A. Hayek, Denationalization of Money, p. 23 (1976). [/efn_note] Grimaudet argued that “the value of money depends on the State; that is to say, in a monarchy, upon the prince, and in an oligarchy, upon the State, which alone has the right to coin money, or to have it coined and to stamp a valuation upon it.”[efn_note] Francois Grimaudet, The Law of Payment, p. 11 (1579). [/efn_note] In his book The Natural Law of Money, Brough wrote a detailed account of this superstitious belief in “king’s money” —
“The next step in coinage was a step backward. The coinage came to be known as “ king’s money ;” it bore the effigy of the sovereign; and the pieces were more artistically minted; but they were given names that had no reference to their weight or fineness. This irrelevant naming was misleading, and people soon lost sight of money as a commodity, and came to regard the stamp and denomination as its valuable part. The superstitious awe in which kings were then held made it but a short step from the belief that a king’s touch would cure disease, to the belief that his effigy and superscription gave value to the coin. By this last change in coin which obliterated the meaning of money, the people lost control of their coinage,—that control had passed into the hands of the kings.”[efn_note]William Brough, The Natural Law of Money, p. 17 (1896). [/efn_note]
Valor impositus was self-servingly propagated by legal writers loyal to the monarch in an attempt to integrate into a formal legal framework the well-established practice of currency debasement by absolutist monarchs.[efn_note]Claus D. Zimmerman, The Concept of Monetary Sovereignty Revisited, European Journal of International Law Vol. 24 no. 3, p. 802 (2013). [/efn_note] Centuries later, specifically during the 17th century, rule of law became an established legal concept which tempered the arbitrariness and greed of despotic monarchs.[efn_note]Richard H. Timberlake, The Government’s License to Create Money, Cato Journal, Vol. 9, No. 2 (1989).[/efn_note] In the United States, the key development was the ratification of the Federal Constitution.[efn_note]After the United States gained its independence from England, foreign currency was still in wide circulation in the new country, and the Spanish dollar was generally regarded as a monetary standard. [/efn_note] In England, it was the establishment of the Parliament that paved the way for the regulation of money, which used to be a royal prerogative of the king, to come under the direction of the people.[efn_note]William Brough, The Natural Law of Money, p. 18 (1896). [/efn_note]
However, in the early 20th century, valor impositus was revived by G.F. Knapp, whose State theory of money greatly influenced contemporary legal theory of money[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 24 (1976). Hayek admits that governments “must of course be free to determine in what currency taxes are to be paid and to make contracts in any currency it chooses (in this way it can support a currency it issues or wants to favour).” (Id., p. 31).[/efn_note] that regarded it as a mere creature of law. Also known as chartalism, Knapp’s doctrine that “money is peculiarly a creation of the State” serves as one of the foundations of Keynes’ theory of money.[efn_note]“And the age of chartalist or State money was reached when the State claimed the right to declare what thing should answer as money to the current money of account.” John Maynard Keynes, A Treatise on Money, Vol. 1, The Pure Theory of Money, p. 4 (1930).[/efn_note] Knapp argued that money behaves as a medium of exchange because compulsory payments and contractual obligations must be satisfied in terms of the legally-sanctioned money. Fiat money, i.e., money “by decree,” is perceived to have value because it is the legally required medium for the payment of taxes. By defining what counts as abstract value capable of discharging tax debts, tax law encourages individuals to accept fiat money.[efn_note]Moritz Hütten and Matthias Thiemann, Moneys at the Margins: From Political Experiment to Cashless Societies, p. 29 (2018). [/efn_note] Hayek, in his seminal book Denationalization of Money, rejected the State theory of money and wrote the following counterargument against valor impositus, citing the destruction of the Papiermark when Germany suffered hyperinflation during the Weimar Republic:
“But the superstition that it is necessary for government (usually called the ‘state’ to make it sound better) to declare what is to be money, as if it had created the money which could not exist without it, probably originated in the naïve belief that such a tool as money must have been ‘invented’ and given to us by some original inventor. This belief has been wholly displaced by our understanding of the spontaneous generation of such undersigned institutions by a process of social evolution of which money has since become the prime paradigm (law, language and morals being the other main instances). When the medieval doctrine of the valor impositus was in this century revived by the much admired German Professor Knapp, it prepared the way for a policy which in 1923 carried the German Mark down to one thousand billionth of its former value!”[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 31 (1976). [/efn_note]
As a social institution, money is almost infinitely adaptable.[efn_note]Glyn Davies, History of Money, p. 27 (2002).[/efn_note] While it is the commercial practice of individuals that ultimately determine the generally acceptable medium of exchange, the government has a strong influence on this selection because the government is a very important economic agent in the society and in the market.[efn_note]Ludwig Von Mises, The Theory of Money and Credit, p. 73 (1912).[/efn_note] The influence of an economic agent on the choice of money is “greater in proportion to its share in the dealings of the market.”[efn_note]Ludwig Von Mises, The Theory of Money and Credit, p. 73 (1912).[/efn_note] Aside from its important commercial position in the market, its legal authority to create “money” by fiction of law, the government’s strong influence in the choosing a commercial medium of exchange or payment is further amplified by its authority to direct monetary policy. Article XII, Section 20 of the Constitution provides that the BSP shall provide policy direction in the areas of money, banking, and credit. Very clearly, the government has a powerful—but not omnipotent—function in the development of money, yet neither ancient money nor modern money was ever regarded as mere creature of the State.[efn_note]Glyn Davies, History of Money, p. 26 (2002).[/efn_note]
Origins of money; how market creates money
Money, according to Adam Smith, is a universal instrument of commerce through which goods and services are bought, sold, or exchanged.[efn_note] Adam Smith, The Wealth of Nations, Chapter IV, Of the Origin and Use of Money, p. 41 (1776). [/efn_note] Milton Friedman, a Nobel laureate in economics, similarly regards money as “whatever is generally accepted in exchange for goods and services—accepted not as an object to be consumed but as an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.”[efn_note]Milton Friedman, Money Mischief: Episodes in Monetary History, p. 16 (1992).[/efn_note] While money is usually understood as the generally acceptable medium of exchange, Hayek, another Nobel laureate, observed that it is possible that there can be different kinds of money that are widely accepted within a community.[efn_note] Friedrich A. Hayek, Denationalization of Money, p. 46 (1976). [/efn_note]
Money organically developed from the marketplace because some commodities possessed inherent properties that made them fit as a medium of exchange. The medium was adopted by individuals and it evolved without deliberate or formal action from any collective, circulating everywhere in the world even before rulers thought of decreeing its regulation.[efn_note] William Brough, The Natural Law of Money, p. 1 (1896).[/efn_note] The market’s spontaneous selection of money is consistent with the rational choice theory.[efn_note]he rational choice theory posits that economic actors employ rational thinking to arrive at informed decisions or choices, leading to outcomes that align with their best interests.[/efn_note] Such selection also has its basis on natural law, according to Brough:
“When an individual uses money, he is governed in what he does with it purely by his own interests and he does not concern himself about what becomes of it after it passes out of his possession; thus it circulates indefinitely, impelled always by the motives and interests of individuals acting independently of each other; yet it is found to move and perform its functions with the regularity of a natural law.”[efn_note]William Brough, The Natural Law of Money, p. 2 (1896).[/efn_note]
The marketability, i.e., saleability, of goods greatly varies. There are goods that are more demanded than others, some are more divisible into smaller fractions, some are more durable over extended periods of time, while some are more portable over great distances. All of these advantages enhance greater marketability and it is not coincidence that scarcity, divisibility, durability and portability are among the characteristics of sound money. In every society, the most saleable goods will be eventually selected by the market as its media for exchange.[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 7-8 (1963). [/efn_note] Once selected as medium of exchange, the demand for the goods will increase thereby creating a positive feedback loop that further enhances its marketability, which makes it more viable as a medium of exchange.Id. This virtuous cycle allows the cumulative development of a medium of exchange on the free market, and by which money is naturally established. Austrian economists such as Rothbard posited that money cannot originate in any other way, “neither by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper ‘money’.”Id., p. 9 (1963).
That money is a creature of the market was even acknowledged by some court decisions. In Bronson v. Rodes, the U.S. Supreme Court recognized “the fact, accepted by all men throughout the world, that value is inherent in the precious metals;” “that gold and silver are in themselves values;” and “that form and impress are simply certificates of value, worthy of absolute reliance only because of the known integrity and good faith of the government which gives them.”[efn_note]74 U.S. 229, 249 (1868).[/efn_note] Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as sound money, ushering the gold standard. As monetary asset providing the most stable and saleable medium of exchange, the supply of gold was subject only to market forces, and not to the arbitrary printing press of the government.[efn_note] Murray N. Rothbard, What Has Government Done to Our Money, p. 90 (1963). [/efn_note]
From its earliest form, money was a thing of value in and of itself that people were willing to accept as medium exchange, not because the law compelled them to do so, but because the it had intrinsic value. Cattle (pecus),[efn_note]This is the etymology of the adjective “pecuniary”, which describes whether something can be expressed in monetary terms. [/efn_note] animal skins (e.g. buckskins or “bucks”), salt (sal)[efn_note]“Salary” came from the latin word “salarium,” which originally referred to a ration of salt.[/efn_note] and finally precious metals such as gold and silver became money because they had intrinsic value and because they possess most of the characteristics of a sound monetary asset.
Conjuring money in the era of the Fiat Standard
After precious metals became the dominant form of money in many countries, people discovered that transactions became more efficient when pieces of paper representing gold or silver were exchanged instead of the actual metal (specie). This is how people came to accept paper as the symbol for gold or silver, and this symbol became money. But the core fact, according to Chung, was that “the paper signified something of value; it had value only insofar as it served as the symbol of the underlying thing of value.” It was a basic monetary principle for most part of the world for centuries—until 1971 when the U.S. dollar, the centerpiece of the international monetary system, finally abandoned the gold-exchange standard established by the Bretton Woods Agreement. As Friedman would put it:
“(W)e can simplify our attempt to demystify money by concentrating on the monetary arrangement that, while historically a very special case, is currently the general rule: a pure paper money that has practically no value as a commodity in itself. Such an arrangement has been the general rule only since President Richard M. Nixon ‘closed the gold window’ on August 15, 1971—that is, terminated the obligation that the United States had assumed at Bretton Woods to convert dollars held by foreign monetary authorities into gold at the fixed price of $35 an ounce. Before 1971, every major currency from time immemorial had been linked directly or indirectly to a commodity.”[efn_note]Milton Friedman, Money Mischief: Episodes in Monetary History, p. 15 (1992). This episode is also known as the “Nixon shock.” [/efn_note]
For the past fifty years, major currencies such as the U.S. dollar or the pound sterling which are legally regarded as “money” ceased to be signifiers of a signified thing of value. The symbol ceased from being a mere representation; the simulacrum itself became money[efn_note]John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 146 (2009).[/efn_note] by statutory fiat, ushering what is hopefully a blip in monetary history—the era of the Fiat Standard. At present, money has become “a pure abstraction with its own self-referential value and reality,” and it is conjured without being constrained by any reference to something that has intrinsic value. Fiat money is no longer a symbol; for Chung, it has become its own hyper-reality.[efn_note]Id., p. 149 (2009).[/efn_note]
Hyper-reality of money
The hyper-reality of money is reminiscent of the remarks made by the great classical economist Adam Smith, who once said that “money is a matter of belief” which is also why “credit derives from Latin, credere, ‘to believe’.”[efn_note]Adam Smith, Commanding Heights, When Currencies Start to Float, p. 151.[/efn_note] The modern fiat money is purely an abstraction backed only by two other abstractions: law and faith.[efn_note]John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 159 (2009).[/efn_note] For Friedman, people accept fiat money simply because they are confident that others will; everybody thinks they have value because in everybody’s experience they have had value.[efn_note]Milton Friedman, Money Mischief: Episodes in Monetary History, p. 10 (1992).[/efn_note] But is it possible for fiat money to lose the power to command belief especially when it is created by the State so effortlessly,[efn_note]“History has demonstrated the consequences when a government ceases to exercise restraint over its money supply. Inflation or even hyper-inflation is the certain result because it is a fundamental axiom of economics that growth in money supply is a necessary condition for inflation.” John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 160 (2009).[/efn_note] and when dangerous levels of inflation is a perennial concern in a fiat-based monetary system?[efn_note]John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 161 (2009).[/efn_note]
A widely accepted medium of exchange is critically important for any functioning complex society. But money cannot serve this function unless its nominal quantity is limited.[efn_note]Milton Friedman, Money Mischief: Episodes in Monetary History, p. 42 (1992).[/efn_note] When money can be created endlessly and easily by operating the printing press or by double-clicking a mouse,[efn_note]Agustino Fontevecchia, Bernanke Admits To Congress: We Are Printing Money, Just ‘Not Literally’, Forbes, 13 July 2013 (https://www.forbes.com/sites/afontevecchia/2013/07/17/bernanke-to-congress-we-are-printing-money-just-not-literally/?sh=552a746a109b)[/efn_note] it becomes completely detached from any productive labor or material input.[efn_note]John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 150 (2009).[/efn_note] This hyper-reality of money, i.e., money is no longer a symbol of a thing that has intrinsic value and money is its own reality, has potential catastrophic consequences that could result in speculative mania, financial crises and hyperinflation, which further lead to massive social turmoil and suffering. Monetary history reveals that these economic maladies occur as direct result of unrestrained conjuring of money.[efn_note] Id., p. 152 (2009).[/efn_note] Kindleberger remarked that speculative manias either begin or accelerate through the rapid and unhinged expansion of money and credit.[efn_note] Charles P. Kindleberger, Mania, Panics, and Crashes: A History of Financial Crises, p. 52 (1978). [/efn_note] Friedman, on the other hand, observed:
“Inflation in the range to which we have become accustomed, let alone in the hyperinflationary range, became feasible only after paper money came into wide use. The nominal quantity of paper money can be multiplied indefinitely at a negligible cost; it is necessary only to print higher numbers on the same pieces of paper.”[efn_note] Milton Friedman, Money Mischief: Episodes in Monetary History, p. 190 (1992).[/efn_note]
Natural limits of fiat money
There is a natural limit to the power of the State to conjure fiat money. The confidence and the cooperation of economic actors are necessary in order for money to endure. The law can decree the legal tender status of a currency. An extremely debased currency can discharge a debt and enforced by a court applying the nominalistic principle. But monetary history proves that the market itself will ultimately choose its money and the government is powerless to force the market to accept fiat money as a medium of exchange, as can be seen in the final days of the assignats and mandats during the French revolutionary period;[efn_note]Phanor J. Eder, Legal Theories of Money, 20 CORNELL L.Q. 52, p. 60 (1935). [/efn_note] the demise of the Zimbabwean dollar in 2015; and more recently, the rejection of the bolivar by Venezuelans who prefer any currency other than the official currency marred by hyperinflation. As explained by Mises:
“The law may declare anything it likes to be a medium of payment, and this ruling will be binding on all courts and on all those who enforce the decisions of the courts. But bestowing the property of legal tender on a thing does not suffice to make it money in the economic sense. Goods can become common media of exchange only through the practice of those who take part in commercial transactions; and it is the valuations of these persons alone that determine the exchange-ratios of the market. Quite possibly, commerce may take into use those things to which the State has ascribed the power of payment; but it need not do so. It may, if it likes, reject them.”[efn_note]Ludwig Von Mises, The Theory of Money and Credit, p. 70 (1912)[/efn_note]
Social convention, legal fiat and force of habit may allow the circulation of government money as long as it is afloat. However, it is doubtful whether the most powerful government can force its people to accept as money a worthless substance where there is no economic benefit in doing so.[efn_note]W. Stanley Jevons, Money and The Mechanism of Exchange, p. 3-6 (1875).[/efn_note]
Money does not have to be conjured as legal tender by the government. Just like law, language and morals, money can emerge spontaneously. Such form of market-oriented “private” money are often preferred to government money, but there have been instances where the government has suppressed them.[efn_note]Friedrich A. Hayek, Denationalization of Money (1976).[/efn_note] Indeed, the BSP itself noted that one of the objectives in considering the issuance of a central bank digital currency (CBDC) is “to help reduce or discourage the adoption of privately issued currencies, which may threaten monetary sovereignty…[efn_note]BSP, Central Bank Digital Currency for the BSP: Fundamentals and Strategies, p. 9 (2021).[/efn_note] introducing a CBDC can help preserve monetary sovereignty of the central bank and its control of its policy objectives.”[efn_note] Id., p. 74.[/efn_note] Rothbard gave an account of the government’s propensity to restrain private money and fail miserably:
“Despite never-ending harassment by governments, making conditions highly precarious, private coins have flourished many times in history. True to the virtual law that all innovations come from free individuals and not the state, the first coins were minted by private individuals and goldsmiths. In fact, when the government first began to monopolize the coinage, the royal coins bore the guarantees of private bankers, whom the public trusted far more, apparently, than they did the government.[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 20 (1963).[/efn_note]
Gold remains a monetary asset despite the end of Gold Standard
In the Philippines, whereas Act No. 1045[efn_note]AN ACT FOR THE PURPOSE OF PROVIDING REVENUE AND OF MAINTAINING THE PARITY OF THE PHILIPPINE CURRENCY IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS ONE AND SIX OF THE ACT OF CONGRESS APPROVED MARCH SECOND, NINETEEN HUNDRED AND THREE, BY PROVIDING FOR THE PURCHASE OF MEXICAN DOLLARS AS BULLION, BY IMPOSING A TAX UPON WRITTEN CONTRACTS PAYABLE IN CERTAIN KINDS OF CURRENCIES, AND BY REQUIRING THE PAYMENT OF A LICENSE TAX BY ALL PERSONS, FIRMS, OR CORPORATIONS CONDUCTING THEIR CURRENT BUSINESS, EITHER WHOLLY OR IN PART, IN SAID CURRENCIES, AND FOR OTHER PURPOSES (1904).[/efn_note] introduced a new Philippine currency in 1904 based on the gold standard;[efn_note]Gaspar v. Molina, G.R. No. 2206 (1905).[/efn_note] and whereas the Central Bank Act established the gold value of the Philippine peso in 1948;[efn_note]SECTION 48. Par Value. — The gold value of the peso is seven and thirteen-twenty firsts (7-13/21) grains of gold, ninetenths (0.900) fine, which is equivalent to the United States dollar parity of the peso as provided in Section 6 of Commonwealth Act No. 699. (R.A. No. 265, ).[/efn_note] the New Central Bank Act, enacted in 1993, untethered the Philippine peso from gold by deleting the legal provision on the gold value of peso and by decreeing that the peso shall be liabilities of the BSP and may be issued only against, and in amounts not exceeding, the assets of the central bank.[efn_note] Sec. 51, R.A. No. 7653 (1993).[/efn_note]
Yet despite the decoupling of the Philippine peso from gold, the monetary attributes of gold persists and continues to be recognized even under the New Central Bank Act. For instance, the law authorizes the BSP to hold gold as part of its international reserve.[efn_note] Sec. 66, R.A. No. 7653 (1993).[/efn_note] As of this writing, gold constitutes almost nine percent (9%) of the BSP’s reserve assets.[efn_note]Bangko Sentral ng Pilippinas, Philippines: International Reserves and Foreign Currency Liquidity, as of 28 February 2022, https://www.bsp.gov.ph/statistics/sdds/latest.aspx [/efn_note] The law also authorizes the BSP to buy and sell gold in any form[efn_note]Sec. 69, R.A. No. 7653 (1993).[/efn_note] and to require banks and other financial intermediaries to report current transactions or operations in gold, in any shape or form.[efn_note]Sec. 80, R.A. No. 7653 (1993).[/efn_note] With respect to issuance and negotiation of BSP obligations, the Monetary Board of the BSP determines the interest rates, maturities and other characteristics of BSP obligations; it may, if advisable, denominate the obligations in gold.[efn_note]Sec. 92, R.A. No. 7653 (1993).[/efn_note] When it renders financial advice on the monetary implications of the credit operations by the Philippine government abroad, the law requires the Monetary Board to take into account the country’s gold and foreign exchange resources.[efn_note]Sec. 123, R.A. No. 7653 (1993). [/efn_note]
The conventional wisdom is that owning gold serves as insurance against harsh economic climate and unstable monetary system.[efn_note]James Rickards, The New Case for Gold, p. 57. (2016).[/efn_note] A central bank’s reserve portfolio should ideally include gold because it is one of the rare asset classes that perform well in both inflationary and deflationary environment. Indeed historically gold has done well in inflation and deflation because it represents a real store of value. [efn_note] Id., p. 87.[/efn_note] While some would argue that even gold is relatively volatile especially when measured in nominal dollars, this is only a consequence of the fluctuating value of the dollar and not by the value of gold.[efn_note]Id., p. 85. [/efn_note] Indeed since 2007, central banks have increased gold reserves as a hedge to the U.S. dollar system’s fragility, demonstrating how gold functions as an insurance on monetary disorder and disarray as well as the resurgence of its international monetary role.[efn_note] Nikhil Bhatia, Layered Money, Kindle Edition p. 96 (2021).[/efn_note]
The BSP holds gold as part of its international reserves for various reasons. Gold is an equity asset and it is no one’s liability; this gives its holder a high degree of security because there is no counterparty risk. It is also ideal to hold gold during times of economic uncertainty, giving rise to the notion that gold is a safe haven. Further, gold offers diversification in the reserve asset portfolio because of its low correlation with other assets that the BSP manages. Furthermore, investors hold gold when inflation or expectations of inflation are high, employing the asset as a hedge against accelerating prices. Finally, it is important for the BSP to maintain a portion of its reserves in the form of gold bullion considering that the Philippines is a significant producer of gold.[efn_note]Joni Teves, A Heart of Gold: Gold at the Heart of Bangko Sentral ng Pilipinas Reserve Management, The Alchemist, Issue 52 p. 6.[/efn_note] True enough, a law was even enacted in 2019 to strengthen the Philippines’ gross international reserves through fiscal incentives, i.e., by granting tax exemptions, tax incentives and other privileges in favor of small-scale miners and accredited traders with respect to the sale of gold to the BSP.[efn_note]R.A. No. 11256 (2019).[/efn_note]
Chartalist prerogative: is money a legal creature?
Considering that money serves the common good, public interest can justify its establishment by virtue of law, as any other social institutions. But this does not mean that money has taken its origin as a mere creature of law, exercising the States’ chartalist prerogative.[efn_note] Carl Menger, On the Origins of Money, p . 38 (1892).[/efn_note] Chartalism, the doctrine that money is created by the State, provoked strong objection from Austrian economists such as Mises:
“The concept of money as a creature of the Law and the State is clearly untenable. It is not justified by a single phenomenon of the market. To ascribe to the State the power of dictating the laws of exchange, is to ignore the fundamental principles of money-using society.”[efn_note]Ludwig Von Mises, The Theory of Money and Credit, p. 69 (1912).[/efn_note]
The distinguished legal commentator and English jurist Blackstone regarded money as a universal medium or common standard by which value may be measured, and that the government’s role in regulating money is limited by this purpose:
“(E)very particular nation fixes on it its own impression, that the weight and standard (wherein consists the intrinsic value) may both be known by inspection only. The coining of money is in all states the act of the sovereign power; for the reason just mentioned, that its value may be known on inspection.”[efn_note]William Blackstone, Commentaries on the Laws of England, p. 266 (1765).[/efn_note]
For more than 2,000 years, the State’s exclusive prerogative over money was limited to the monopoly of minting coins of gold, silver or copper.[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 22 (1976).[/efn_note] Since coins initially circulated by weight, their exchange could be facilitated by standardizing their size and by stamping them with a seal of weight and fineness.[efn_note] Richard H. Timberlake, The Government’s License to Create Money, Cato Journal, Vol. 9, No. 2, p. 303 (1989).[/efn_note] It was during this era that the prerogative came to be accepted without question as an essential attribute of sovereignty—embellished with some mystery inspired by the ostensible sacred powers of the monarch.[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 22 (1976). [/efn_note]
In its origin, money is a social institution, not a State institution nor a creation of the law.[efn_note]Carl Menger, On the Origins of Money, p . 51 (1892). Menger also wrote: “however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law.” (Id.)[/efn_note] Carl Menger, a lawyer, economist and regarded as the father of the Austrian school, explained that while government intervention on matters concerning money is an important State function, such measures did not decree precious metals to formally become money, “but have only perfected them in their function as money.”[efn_note] Id., p . 52 (1892).[/efn_note] It is the marketplace, not the government or the law, that creates money. Rational economic actors attribute monetary value by deciding the most marketable good that can serve as a medium of exchange. “Man himself is the beginning and the end of every economy,” and so it is when deciding what he should use as money.[efn_note]Id. [/efn_note] It is not the State, but the common practice of all those who have dealings in the market, that creates money.[efn_note] William Brough, The Natural Law of Money, p. 6 (1896).[/efn_note] The great classical economist, David Ricardo, made a similar observation in his commentaries on the subject of currency:
“In England, gold was not considered as a legal tender for a long time after it was coined into money. The proportion between the values of gold and silver money was not fixed by any public law or proclamation, but was left to be settled by the market. If a debtor offered payment in gold, the creditor might either reject such payment altogether, or accept of it at such a valuation of the gold as he and his debtor could agree upon.”[efn_note]David Ricardo, Principles of Political Economy and Taxation, p. 221-222 (1821).[/efn_note]
The legal fiction that there is only one statutorily defined currency that serves as “money” may have satisfied the professional work of a lawyer and the duty of a judge because of the simplicity of one medium of payment to extinguish obligations. But for Hayek, this gave rise to a substantial harm as it also paved the way to the misconception purveyed by chartalists that only “money” issued by government may be sued, or that there must always be one kind of object which can be referred to as the “money” of the country.[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 49 (1976).[/efn_note]
The Legal Tender
The concept of “legal tender” is closely tied to the government’s monopoly in the issue of money. In ancient times, a common measure adopted by kings to raise money required them to take advantage of their monopoly of the mint. They would abstract from the coinage portions of precious metals and substitute them with cheaper metal. When resistance was made to receiving such debased money, its circulation was enforced by legal fiat, under the guise of legal tender power.[efn_note]William Brough, The Natural Law of Money, p. 18 (1896).[/efn_note] The State theory of money imagines legal tender in its modern iteration as a government-issued currency that is indispensable in the daily conduct of economic transactions.
In strict legal sense, “legal tender” signifies a kind of money that a creditor cannot refuse in discharge of a debt due, tendered in money issued by government.[efn_note] Friedrich A. Hayek, Denationalization of Money, p. 30 (1976).[/efn_note] Case law defines “legal tender” as “that currency which has been made suitable by law for the purposes of a tender of the payment of debts.”[efn_note]Peralta v. Serrano, G.R. No. L-16523 (1960).[/efn_note] This legal tender power is statutorily defined by Section 52 of the New Central Bank Act: “notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private.”
In popular imagination, the term “legal tender” implies vague notions that suggest a compelling State interest for the government to conjure money. This is a remnant of medieval ideas, such as valor impositus, that it is the State that confers value on money, not some inherent property possessed by a commodity.[efn_note] Friedrich A. Hayek, Denationalization of Money, p. 30 (1976). [/efn_note] In the Philippines, jurisprudence has rejected the doctrine of valor impositus in the case of Pan American World Airways v. PAA Employees’ Association.[efn_note]G.R. No. L-18345 (1964).[/efn_note] The Supreme Court, sitting en banc and voting unanimously, ruled that “the purchasing power or value of money or currency does not depend upon, cannot come into being, be created or brought about by, a law enacted by the legislative department of the Government.”
Pursuant to Section 50 of the New Central Bank Act, the BSP exercises the sole power and authority to issue currency within the territory of the Philippines. The term “currency” as used in the New Central Bank Act is statutorily defined by Section 49 to mean “all Philippine notes and coins issued or circulating in accordance with the provisions of this Act.” Section 48 provides that the unit of monetary value in the Philippines is the “peso,” which is represented by the sign “P.” The Philippine peso can be issued by the BSP only against, and in amounts not exceeding, the assets of the central bank. Such notes and coins are liabilities of the BSP, which shall be a first and paramount lien on all assets of the BSP, and are fully guaranteed by the Government of the Republic of the Philippines.[efn_note] Sec, 51, Sec. 53, R.A. No. 7653 (1993).[/efn_note]
Incidental to the BSPs sole power to issue Philippine peso, the law prohibits any person or entity, public or private, to put into circulation notes, coins or any other object or document which in the opinion of the Monetary Board, might circulate as Philippine currency, nor reproduce or imitate the facsimiles of Bangko Sentral notes without prior authority from central bank.[efn_note]Sec. 50, R.A. No. 7653 (1993). [/ef Moreover, the Monetary Board was authorized by Section 50 to issue such regulations as it may deem advisable in order to regulate the circulation of foreign currency or of currency substitutes as well as to prevent the reproduction of facsimiles of Bangko Sentral notes. Foreign currency refers to any currency issued by a sovereign authority other than the local currency, Philippine peso. On the other hand, a currency substitute is an instrument that represents a specific currency by which the holder can eventually receive money in the currency bearing on their face.[efn_note]Bastida v. Commissioner of Customs, G.R. No. L-24011 (1970). [/efn_note]
To complement the legal tender clause under the Central Bank Act,[efn_note]Sec. 54, R.A. No. 265 (1948).[/efn_note] The Uniform Currency Act[efn_note]R.A. No. 529 (1950).[/efn_note] was enacted in 1950 to prohibit the payment of obligation in gold or in currency other than Philippine peso. The law declared any contractual term that gives the creditor the right to demand payment in gold or any currency other than Philippine peso as contrary to public policy, null, void and of no effect.[efn_note]Sec. 1, R.A. No. 529 (1950).[/efn_note]
Recognizing the individual’s freedom to contract, as well as to spur economic developments and address the challenges presented by globalization, the Congress enacted R.A. No. 8183 in 1996 to expressly and totally repeal the Uniform Currency Act.[efn_note]Sec. 2, R.A. No. 8183 (1996)[/efn_note] Section 1 of the law recognized that parties may agree that their obligation or transaction may be settled in any other currency at the time of payment. The law even mandated the Bangko Sentral ng Pilipinas and the Department of Finance to conduct an intensive information campaign on the repeal of the Uniform Currency Act.[efn_note] Sec. 3, R.A. No. 8183 (1996).[/efn_note]
With the repeal of the Uniform Currency Act, the law now recognizes the parties’ autonomy to agree and choose private money, including bitcoin or any other cryptocurrency, as medium of payment or for the settlement of contractual obligations.
Bitcoin: cryptocurrency, digital asset and hard money
Decentralized money: purpose, nature and features of Bitcoin
The intended purpose of Bitcoin,[efn_note]Bitcoin” refers to the decentralized payment network. On the other hand, “bitcoin” refers to the digital asset that serves as native unit of account within the network. In other words, “Bitcoin” refers to the blockchain, while “bitcoin” refers to the cryptocurrency.[/efn_note] the first cryptocurrency, and how it technically operates as electronic cash were described by its inventor, Satoshi Nakamoto, in the abstract of the Bitcoin white paper:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending.
We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.”[efn_note]Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (https://bitcoin.org/bitcoin.pdf) (2008).[/efn_note]
While technical in nature, the abstract reflects valuable insights regarding the psychology of money and community, and the economic incentives required to effect rules that compel its participants to behave in the greater interest of the community.[efn_note]Michael Casey & Paul Vigna, The Age of Cryptocurrency, p. 120 (2016 Ed.). [/efn_note] Casey and Vigna simplified the concept by also referring to the artifact that is blockchain:
“Bitcoin’s blockchain ledger is a long chain of blocks, or groupings, of transactions occurring around the same time. The chain will continue to grow indefinitely so long as the system keeps operating. This chronological structure is crucial because it confers legitimacy on the oldest transactions, the idea being that later-dated attempts by a user to re-spend the same bitcoin balance is treated as illegitimate. By creating a time-stamped sequence of expenditures and receipts among every participant in the bitcoin economy, the system keeps track of where everybody’s balances are at any given moment, as well as the identifying information attached to every bitcoin—and fraction of bitcoin—ever created, spent or received.”[efn_note] Id., p. 123.[/efn_note]
One of the key operational features of Bitcoin is decentralized verification, which allows Bitcoin to eliminate the need for trusted intermediaries. Such verification is accomplished by requiring transactions to be recorded by every node within the network so that they all share one common ledger of all balances and transactions.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 171 (2018). [/efn_note] Ammous explained how transaction verification works in bitcoin’s peer-to-peer network:
“In order for a node to commit a block of transactions to the ledger, it has to expend processing power on solving complicated mathematical problems that are hard to solve but whose correct solution is easy to verify. This is the proof-of-work (PoW) system, and only with a correct solution can a block be committed and verified by all network members.”[efn_note]Id., p. 172.[/efn_note]
Burniske and Tatar noted the purpose of decentralized verification that employs military-grade encryption, and what this feature means to the technology:
“Every transaction recorded in Bitcoin’s blockchain must be cryptographically verified to ensure that people trying to send bitcoin actually own the bitcoin they’re trying to send. Cryptography also applies to how groups of transactions are added to Bitcoin’s blockchain. Transactions are not added one at a time, but instead in ‘blocks’ that are ‘chained’ together, hence the term blockchain… cryptography allows the computers building Bitcoin’s blockchain to collaborate in an automated system of mathematical trust. There is no subjectivity as to whether a transactions is confirmed in Bitcoin’s blockchain: it’s just math.”
Bitcoin as hard money
The present macroeconomic environment makes the case for a scarce, digital, decentralized, non-fiat form of money that could store value and serve as a hedge against unrestrained quantitative easing by some of the most influential monetary authorities. Quantitative easing (QE) refers to what used to be an unorthodox[efn_note]But today QE seems to have become the new norm in the monetary policy of the United States, Japan and other developed countries.[/efn_note] monetary policy that involves a central bank or monetary authority purchasing financial instruments from financial institutions usually as a last-resort measure to inject money and credit into the economy and hopefully stimulate productive activities. Interestingly, the QE programs by many central banks—from the 2008 global financial crisis up to the COVID-19 pandemic—also coincided with the rise of bitcoin and other cryptocurrencies. With respect to the COVID-19 pandemic, the move to reignite the money printing machines came immediately after the U.S. stock market crashed in March 2020 at the onset of the lockdowns, community quarantines, and business and work suspensions.[efn_note] Id. Will Heasman, Bitcoin as a Hedge Against Coronavirus-Led Economic Chaos, The Bitcoin Reserve Journal, 26 April 2020 https://journal.bitcoinreserve.com/bitcoin-as-a-hedge-against-coronavirus-led-economic-chaos/[/efn_note]
The epic scale of money printing by many central banks, particularly by the U.S. Federal Reserve, should be contrasted with Bitcoin and its unique attributes that enable its protocol to enforce an immutable monetary policy. While central banks unleash enormous level of QE, quantitative hardening takes place in Bitcoin protocol where new supply of bitcoin is programmatically reduced every four years in an event known as “the halving,” a native feature that is a core aspect of Bitcoin’s monetary policy.[efn_note]Phil Bonello, Bitcoin’s Quantitative Tightening vs. Central Banks’ Quantitative Easing, Grayscale Insights, p. 2 (2020).[/efn_note] The latest quadrennial halving event occurred in May 2020, coinciding with the COVID-19 pandemic. During a halving, the amount of newly minted bitcoins, issued as a reward to miners when a block is confirmed, gets cut in half. Miners are natural sellers of bitcoins and because of the halving, they would have less quantity to sell. There is therefore a tendency that the imbalance between the surging demand and the diminishing supply could result in a parabolic appreciation in the value of bitcoin,[efn_note]Id., p. 7 (2020).[/efn_note] as what happened between November 2020 to October 2021.
Increasingly, bitcoin is being considered by individuals and institutional investors (e.g. investment banks[efn_note]Ben Winck, Guggenheim Says it Could Invest up to $530 million in a Bitcoin Trust as the Cryptocurrency Leaps to Record Highs, Markets Insider, 30 November 2020 (https://markets.businessinsider.com/currencies/news/guggenheim-fund-bitcoin-investment-cryptocurrency-market-rally-grayscale-trust-btc-2020-11-1029849060). [/efn_note], hedge funds[efn_note]Will Hadfield and Emily Nicolle, Hedge Funds, Not Hipsters, May be Powering Bitcoin’s Second Big Rally, Financial News, 20 November 2020 (https://www.fnlondon.com/articles/hedge-funds-not-hipsters-may-be-powering-bitcoins-second-big-rally-20201120).[/efn_note] and large enterprises[efn_note]Joana Ossinger, MicroStrategy Buys More Bitcoin at Average Price Above $19,400, Bloomberg, 04 December 2020 (https://www.bloomberg.com/news/articles/2020-12-05/microstrategy-buys-more-bitcoin-at-average-price-above-19-400).[/efn_note]) as an inflationary hedge against a depreciating U.S. dollar.[efn_note] According to Michael Saylor, Chairman, President and Chief Executive Officer of MicroStrategy (MSTR), a U.S. publicly traded business intelligence company: “the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin (are) persuasive evidence of its superiority as an asset class for those seeking a long-term store of value.” [/efn_note] Notably, bitcoin is also a decentralized asset just like gold as long as it is self-custodied by its owner.[efn_note]Will Heasman, Bitcoin as a Hedge Against Coronavirus-Led Economic Chaos, The Bitcoin Reserve Journal, 26 April 2020 https://journal.bitcoinreserve.com/bitcoin-as-a-hedge-against-coronavirus-led-economic-chaos/ [/efn_note]
The rapid adoption of bitcoin seems to suggest that communities around the world are seeking alternatives to the U.S. dollar and fiat currencies as money that can effectively store value.[efn_note]James Rickards, The Death of Money: The Coming Collapse of the International Monetary System, p. 254 (2014). [/efn_note] Bitcoin represents a decentralized network and system that enable undistorted economic activity, and it does this by embedding a fixed monetary supply that is distributed through market consensus mechanism. It is also through this consensus mechanism that Bitcoin abolishes the need for active control, administration, intermediation and governance, while creating a voluntary alternative financial system[efn_note]Parker Lewis, Bitcoin Fixes This, 30 August 2019, https://unchained-capital.com/blog/bitcoin-fixes-this/[/efn_note] that features a monetary unit programmed and engineered to execute its protocol.
Utility value of Bitcoin
Bitcoin’s value is fundamentally driven by what the technology can offer the users of the network. Bitcoin’s utility value refers to what the underlying blockchain is utilized for, which triggers demand both for (1) its use as a decentralized payment system and (2) its native unit of account (numéraire), bitcoin.
The Bitcoin network is used to transact bitcoins and therefore much of the value is driven by demand to use bitcoin as a medium of exchange. Bitcoin can also be employed as a savings technology because of its capacity to store value, hence a significant percentage of mined bitcoins is also demanded for this use case.[efn_note]Chris Burniske & Jack Tatar, Cryptoassets, p. 117 (2018). [/efn_note]
Bitcoin’s digital nature gives it an inherent advantage in terms of value transfer, liquidity and exchange. As a digital asset, bitcoin has no physical form which allows it to be moved seamlessly—resembling how the internet can move the 1s and 0s to convey electronic messages and information.[efn_note]Id., p. 122 (2018). [/efn_note]
Economic fundamentals of Bitcoin
Bitcoin incorporates game theory and economic incentives that make “double-spending” or fraud way more expensive than obtaining rewards when helping secure the network.[efn_note]Id., p. 205.[/efn_note] The digital and distributed nature of Bitcoin also allows it to benefit from a network effect with each additional user enhancing its value. As more users trust the system, more trust accrues to the system.[efn_note]Jeff Booth. The Price of Tomorrow: Why Deflation is the Key to an Abundant Future (p. 206), Stanley Press (2020).[/efn_note]
The network validators in Bitcoin, known as miners, gather blocks of transactions together and compete to verify them by expending processing power to solve mathematical problems through a proof-of-work system. To encourage miners to participate in the network, these miners receive a fresh supply of bitcoins along with transaction fees.[efn_note]Winston Moore and Jeremy Stephen, Should Cryptocurrencies be Included in the Portfolio of International Reserves Held by Central Banks? Cogent Economics & Finance, p. 2 (2016).[/efn_note] This incentivizes existing mining operators to maintain the security of the network; it also attracts more miners to participate thus making Bitcoin more robust. However, the amplified hash power supporting the network has no bearing on the output of bitcoins that can be mined. Instead, such increase in hash power only triggers the Bitcoin protocol’s difficulty adjustment.[efn_note]Ria Bhutoria, Bitcoin Investment Thesis: An Aspirational Store of Value, Fidelity Digital Assets, p. 7 (2020).[/efn_note]
The “hardcoded” difficulty adjustment in mining makes it a trustworthy technology that would restrict bitcoin’s supply schedule from unpredictably rising. This makes bitcoin fundamentally different from other asset classes. Whereas typically the rise in the value of a commodity—such as gold—incentivizes more resources to be dedicated to its production thereby increasing its supply, in the case of bitcoin, allocating more resources (in terms of energy and equipment) to mine bitcoins will never result in the production of more bitcoins; Bitcoin’s design makes this technically impossible. Adding more miners will only increase the processing power required to commit valid transactions to the Bitcoin network, which makes it more secure and harder to attack.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 173 (2018).[/efn_note] Ammous aptly describes this economic feature while comparing gold to bitcoin:
“Gold became the prime money of every civilized society precisely because it was the hardest to produce, but Bitcoin’s difficulty adjustment makes it even harder to produce. A massive increase in the price of gold will, in the long run, lead to larger quantities being produced, but no matter how high the price of bitcoin rises, the supply stays the same while the safety of the network only increases.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 173 (2018).[/efn_note]
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Because new coins are only produced with the issuance of a new block, and each new block requires the solving of the proof-of-work (PoW) problems, there is a real cost to the production of new bitcoins. As the price of bitcoins rise in the market, more nodes enter to compete for the solution of the PoW to obtain the block reward, which raises the difficulty of the PoW problems, making it more costly to obtain the reward. The cost of producing a bitcoin will thus generally rise along the market price.[efn_note] Id.,. 179.[/efn_note]
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No matter how many people use the network, how much its value rises, and how advanced the equipment used to produce it, there can only ever be 21 million bitcoins in existence. There is no technical possibility for increasing the supply to match the increased demand. Should more people demand to hold Bitcoin, the only way to meet the demand is through appreciation of existing supply. Because each bitcoin is divisible into 100 million satoshis, there is plenty of room for the growth of Bitcoin through the type of asset well-suited for playing the role of store of value.”[efn_note]Id., p. 198.[/efn_note]
Bitcoin’s monetary policy fixed a supply schedule that is “perfectly inelastic” and it effectively makes bitcoin resistant to supply shocks. This is because supply will always be unaffected by any changes in production capacity (i.e., increase in hash power) even in response to surging demand that drives the price of bitcoin higher. In contrast, even gold has never been immune to supply shocks despite the fact that it has been used as a store of value for millennia.[efn_note]ia Bhutoria, Bitcoin Investment Thesis: An Aspirational Store of Value, Fidelity Digital Assets, p. 7 (2020).[/efn_note]
Bitcoin is antifragile; systemic hedge
The antifragile nature of Bitcoin is another advantage that makes it a suitable monetary asset. Bitcoin epitomizes Nassim Taleb’s idea of antifragility because of bitcoin’s ability to gain strength from adversity and disorder. The Bitcoin network is not only secure and therefore practically impossible to hack, it is antifragile both in technical and economic terms. Technically speaking, while attempts to kill Bitcoin have so far failed, many of them simply made the network more robust by allowing coders to identify weaknesses and patch them up. Every thwarted attack on the network is a notch on its belt, another testament to participants and outsiders of the security of Bitcoin’s blockchain.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 230 (2018). “The rise of quantum computers could eventually pose an actual security threat to Bitcoin’s encryption, where private keys could be determined from public keys, but there are already known methods that the Bitcoin protocol can adopt when necessary in order to become more quantum resilient, since the blockchain can be updated when there is broad consensus among participants.” (Lyn Alden, 2020[/efn_note]
From an economic perspective, the invention of Bitcoin created a novel independent alternative framework for international settlement that does not rely on any central intermediary. By independence, it means that the Bitcoin network operates separately from the existing financial infrastructure.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 205 (2018).[/efn_note] Bitcoin features an independent monetary policy that is safeguarded by a decentralized network of computers that maintain the Bitcoin blockchain through proof-of-work.[efn_note]Ria Bhutoria, Bitcoin Investment Thesis: An Aspirational Store of Value, Fidelity Digital Assets, p. 3 (2020).[/efn_note] Bhutoria explained the importance of proof-of-work in fortifying bitcoin’s property as a store of value:
“Proof-of-work is an important design element that enforces bitcoin’s fixed supply by making transactions irreversible. Proof-of-work provides evidence that a significant amount of computational work has taken place, though verifying that work took place is quick and easy relative to the effort and time it took to conduct the work.”[efn_note]Id., p. 10.[/efn_note]
The independent nature of Bitcoin also makes it an effective systemic hedge against the fragility of the U.S. dollar-centric international monetary system. As observed by Neuman: “bitcoin held in self-custody runs on an entirely separate financial system than the traditional one, making it a systemic hedge. In other words, Bitcoin is not only a hedge against inflation, it’s a hedge against failure of modern financial infrastructure such as banks, clearing and settlement networks, foreign exchange markets and payment rails.”[efn_note]Nick Neuman, Bitcoin: More Than An Inflation Hedge, Bitcoin Magazine, 14 July 2020 (https://bitcoinmagazine.com/articles/bitcoin-more-than-an-inflation-hedge). [/efn_note]
“Bitcoin is the supply schedule”
Bitcoin has been regarded as a new store of value and investment asset that is akin to gold due to its low correlation with traditional asset classes. But because of bitcoin’s digital attribute, it also features a mathematically-guaranteed scarcity and optimal mobility, which gives bitcoin some advantages compared to gold.
The supply schedule of Bitcoin is defined mathematically and set in code at the genesis of the protocol. Bitcoin provides for a maximum of twenty one (21) million units by 2140, and it gets there by cutting the rate of supply inflation every four (4) years. As of 2020, the supply schedule is at two percent (2%) annually, and in 2024 it will decrease to one percent (1%) annually.[efn_note]Chris Burniske & Jack Tatar, Cryptoassets, p. 115 (2018).[/efn_note] This inflation schedule is practically immutable[efn_note] Saifedean Ammous, The Bitcoin Standard, p. 178 (2018).[/efn_note] and is essential to Bitcoin’s monetary policy, or in the words of Carter: “Bitcoin’s supply schedule cannot change, because Bitcoin is the supply schedule. Any alteration produces something that is decidedly non-Bitcoin.”[efn_note]Nic Carter, Don’t Fear the Reaper, Medium, 24 August 2020 (https://medium.com/@nic__carter/dont-fear-the-reaper-8bbb42358efb)[/efn_note] Nineteen (19) million bitcoins have been mined as of April 2022.
The predefined supply restrictions of Bitcoin is a key factor that makes the digital asset an optimal store of value. Indeed as fiat currencies perpetually expand in supply while contracting in terms of purchasing power, bitcoin has so far experienced a large increase in real purchasing power despite limited growth in overall supply.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 181 (2018).[/efn_note]
While Bitcoin has existed for less than two decades, the digital asset is also quickly becoming more liquid as the adoption of cryptocurrencies as a new asset class become more mainstream and as the trading volume of cryptocurrencies continues to increase.[efn_note]Winston Moore and Jeremy Stephen, Should cryptocurrencies be included in the portfolio of international reserves held by central banks? Cogent Economics & Finance, p. 8 (2016).[/efn_note] Indeed during the 2007-2008 global financial crisis, Bitcoin has not yet launched and investors flooded into the age-old safe haven asset, gold, which almost tripled in price in two years.[efn_note] The price of gold initially fell in response to crash of asset prices and the financial meltdown, but gold’s value eventually increased from $682 in October 2008 to $1,912 in September 2011.[/efn_note] But now bitcoin offers an alternative safe haven that is even optimized for use in today’s digital world.[efn_note]Paul Vigna and Michael Casey, The Age of Cryptocurrency, p. 297 (2015).[/efn_note] Coupled with the growing correlationship between gold and bitcoin, bitcoin may exhibit a similar pattern to that of gold following the 2008 financial meltdown—but in greater magnitude.[efn_note]Id. [/efn_note]
Technological developments such as the Lightning Network enhance bitcoin’s property as an alternative currency because it makes the asset “more alive” or useful as a medium of exchange for payment transactions. Bitcoin can be transacted globally and domestically without being hampered by slow and cumbersome confirmation process.[efn_note]Nikhil Bhatia, The Bitcoin Second Layer, Medium, 08 August 2018, https://medium.com/@timevalueofbtc/the-bitcoin-second-layer-d503949d0a06 [/efn_note] Gold and bitcoin are both scarce assets yet the Bitcoin network’s ability to allow finality of settlement in a natively electronic execution gives it a massive advantage over gold amid a rapidly developing digital economy.[efn_note]Nikhil Bhatia, The Triumvirate of Liquidity, Medium, 25 June 2020, https://medium.com/@timevalueofbtc/various-writings-for-tantra-labs-b0b7ddae52d8 [/efn_note]
In this era, bitcoin and other cryptocurrencies will naturally become attractive for digital natives, offering a peer-to-peer alternative or “opt-out” to the prevailing monetary system.[efn_note]Nomi Prins, Collusion: How Central Bankers Rigged the World, p. 250 (2018). [/efn_note] Fiat currencies have been in circulation since the collapse of Bretton Woods in 1971; sooner or later many of them would be inflated down to triviality by governments faced by constrained public finances. Bitcoin offers a recourse that can overcome the challenges of both the gold standard and the fiat standard due to its limited supply that is hardcoded in the software.[efn_note]A.Seetharaman, A.S.Saravanan, Nitin Patwa3 & Jigar Mehta, Impact of Bitcoin as a World Currency, Accounting and Finance Research https://doi.org/10.5430/afr.v6n2p230 (2017).[/efn_note] As stated by its inventor, Satoshi Nakamoto: “(t)he nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.”[efn_note]Re: Transactions and Scripts: DUP HASH160 … EQUALVERIFY CHECKSIG https://satoshi.nakamotoinstitute.org/posts/bitcointalk/126/ (2010).[/efn_note]
The supply schedule is enforced automatically by code without any intervention from the government or any central intermediary. The supply schedule is well known to the public at large, and the quantities as well as the growth rates of bitcoins can be verified with certainty on the network’s publicly shared ledger, and therefore this alternative system cannot be impacted by monetary policies conjured by the Federal Reserve and other influential central banks or international monetary agencies.[efn_note] A.Seetharaman, A.S.Saravanan, Nitin Patwa3 & Jigar Mehta, Impact of Bitcoin as a World Currency, Accounting and Finance Research https://doi.org/10.5430/afr.v6n2p230 (2017). [/efn_note] Just like gold serves as a safe haven asset, holding bitcoin serves as an effective hedge against macroeconomic risks arising from the vulnerabilities of the prevailing monetary system.
Cryptocurrency software, specifically Bitcoin, is free speech
Article III, Section 4 of the 1987 Constitution guarantees the freedom of speech and of expression: “(n)o law shall be passed abridging the freedom of speech, of expression, or the press.” The economic concept of productive information can offer some guidance in assessing whether a statutory ban on cryptocurrencies might be constitutionally offensive to the freedom of speech or expression. Productive information allows existing resources to be moved to more productive uses or to discover new methods of organizing resources for more productive uses.[efn_note]Robert Cooter & Thomas Ulen, Law & Economics, Sixth Edition, p. 357 (2016).[/efn_note]
In a modern monetary economy, almost all exchanges of commodities among distinct economic agents are traded against money, instead of labor or commodities (i.e., barter), and almost all loans are denominated in monetary term and not in commodities. This means that almost all market transactions in a monetary economy involve money as a medium of exchange or payment, as a unit of account and as standard for deferred payment.[efn_note]Jagdish Handa, Monetary Economics, 2nd Edition, p. 3-4 (2009).[/efn_note] In view of the importance of money in the economy, it must be considered whether a ban on privately-issued cryptocurrencies would restrict access to productive information on the soundest money that can efficiently lubricate economic activities as well as maximize the creation or conservation of wealth.
One of the key operational features of Bitcoin is decentralized verification, which allows Bitcoin to eliminate the need for trusted intermediaries. Such verification is accomplished by requiring transactions to be recorded by every node within the network so that they all share one common ledger of all balances and transactions.[efn_note]Saifedean Ammous, The Bitcoin Standard, p. 171 (2018). [/efn_note] Such recording involves the transmission of messages that are text among the nodes in the network, where cryptographic protocols are executed in text to verify the authenticity and identity of the sender and recipient of the message. The messages sent between nodes in the bitcoin network are readable and printable. There is indeed no point in any bitcoin transaction that Bitcoin ceases to be a text.
Article III, Section 4 guarantees freedom of the press without prior restraint. Prior restraint refers to any official governmental restrictions on the press or other forms of expression in advance of actual publication or dissemination.[efn_note]Joaquin G. Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, p. 233 (2009)[/efn_note] Bitcoin is a piece of software that can be printed as a text on paper, generating blocks of human readable text and therefore covered by the constitutional right to free speech, of expression, or of the press. As software, mathematics, and speech, Bitcoin and the publication of certain information[efn_note]Note for example: “The solution we propose begins with a timestamp server. A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, such as in a newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.” Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, p. 2 (2008).[/efn_note] through its decentralized network should be considered as a constitutionally-protected right.[efn_note] Nikhil Bhatia, Layered Money, Kindle Edition p. 95 (2021). [/efn_note]
Bitcoin enables decentralized verification of the identity of the owner of a cryptographic key—a block of text—which can unlock a ledger entry in the Bitcoin network. This software is essentially a messaging system that is protected by the constitutional right to free speech, of expression, or of the press, from the source code that generates the software clients that enable message-signing to the text generated, sent, received or processed by the compiled clients. In some respects, Bitcoin’s operation is not so different from what email, text messaging and internet-based software does, that is to relay messages. In Bernstein v. US Department of Justice,[efn_note]922 F. Supp. 1426 (1996).[/efn_note] the United States Federal Court of Appeals ruled that software code is a type of speech that is protected by the First Amendment, and the government’s regulation preventing the code’s publication was unconstitutional. While not a binding precedent, Bernstein is regarded as a landmark case in the United States. The decision supports the view that any law or regulation that will prohibit or ban or require the licensing of cryptocurrency software such as Bitcoin would be repugnant to the constitutional protection for free speech, of expression, or the press.[efn_note]Peter Van Valkenburgh, Electronic Cash, Decentralized Exchange, and the Constitution, https://coincenter.org/entry/e-cash-dex-constitution (2019)[/efn_note] The particular medium through which ideas are expressed is generally immaterial to the protection, and even if it is a gibberish or visual chaos.[efn_note]Id., p. 33.[/efn_note] To deny statements made in coding languages the same protections granted to statements made in English would make no more sense than to deny novels protection when they are written in French, symphonies because they are written in musical notation, or scientific papers because they tend to be filled with arcane graphs and formulae.[efn_note]Id., p. 35.[/efn_note] Computer code is literally a written series of symbols themselves, i.e., letters and numbers or, once compiled, 0s and 1s. While it is true that people will use computer source code to perform actions, the act of writing and sharing the code is an entirely separate act from the act of executing the code. [efn_note] Id., p. 36. [/efn_note]
In Brown v. Entertainment Merchants Association,[efn_note] 564 U.S. 786 (2011).[/efn_note] the U.S. Supreme court ruled that that video games were protected speech and even violent ones could not be banned from sale: “Like the protected books, plays, and movies that preceded them, video games communicate ideas—and even social messages—through many familiar literary devices (such as characters, dialogue, plot, and music) and through features distinctive to the medium (such as the player’s interaction with the virtual world).”[efn_note] Id.[/efn_note]
However, it must be clarified that just because the code is protected expression does not mean that it cannot be regulated. This would depend on the nature of the speech and the level of scrutiny that the regulation concerning the speech or expression will face.[efn_note]Peter Van Valkenburgh, Electronic Cash, Decentralized Exchange, and the Constitution, p. 39 https://coincenter.org/entry/e-cash-dex-constitution (2019)[/efn_note] While cryptocurrencies such as bitcoin are published to express facts that advance human knowledge and the conduct of human affairs, such publication is entirely separate from the execution of the code by users when they conduct electronic cash transactions. Nevertheless, the publication of the code is protected as plain speech and therefore laws regulating such publication must be subject to strict scrutiny review.[efn_note]Id., p. 45. [/efn_note]
Under strict scrutiny review, a law or regulation will be deemed unconstitutional unless it is “narrowly tailored to serve a compelling state interest.”[efn_note]Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990).[/efn_note] A narrowly tailored policy should advance the stated interest as a matter of fact, and it should not restrain a substantial amount of speech that is not connected to the stated interest. There should also be no less restrictive means to achieve the interest. The government fails to demonstrate a compelling state interest if the law or regulation appears incapable of achieving that interest. Lastly, the government’s interest cannot be an interest that would benefit a particular scientific and political ideas over others, regardless of whether it is sincerely compelling for the government.[efn_note]Peter Van Valkenburgh, Electronic Cash, Decentralized Exchange, and the Constitution, p. 47, citing Eugene Volokh’s article ““Freedom of Speech, Permissible Tailoring and Transcending Strict Scrutiny,” 144 U. Pennsylvania L. Rev. 2417 (1997) https://coincenter.org/entry/e-cash-dex-constitution (2019).[/efn_note] Applying these lessons in resolving the constitutional issue of banning cryptocurrency software, Valkenburgh argued why a statutory ban will discourage any debate or discussion on a technology that could offer a safety valve for the protection of human rights :
“Electronic cash and decentralized exchange software includes a broad class of published research and innovations with far-reaching potential to alter the way we organize society. Its developers and advocates genuinely believe that these scientific and engineering advances will, on net, improve the human condition and better guarantee human dignity and individual autonomy than alternative centralized and surveillance-accommodating tools for payments and exchange.
A primary motivation behind the development of this technology is the global decline of cash transactions (which are inherently private and lacking in intermediaries). This decline has been matched with the rise of powerful, private financial technology intermediaries that can systematically surveil their users and arbitrarily exclude them from economic life simply by closing their account. Such private surveillance and arbitrary power, argue electronic cash advocates, contravenes the rule of law. In nation states with weaker human rights guarantees, governments can and are actively partnering with these intermediaries to obtain greater control over their populations. If cash disappears, advocates claim, only electronic cash and decentralized exchange technologies can serve as a safety valve against imminent payments-technology-enforced totalitarianism.
One does not need to personally subscribe to these views in order to grasp the gravity of the constitutional law at hand. It is sufficient to believe that electronic cash and decentralized exchange software developers earnestly believe these views and publish their software to express them (rather than for some other cynical purpose). If this much is true, then bans on software publication wade dangerously into the territory of stifling a vibrant and consequential debate”[efn_note]Peter Van Valkenburgh, Electronic Cash, Decentralized Exchange, and the Constitution, p. 47-48 https://coincenter.org/entry/e-cash-dex-constitution (2019).[/efn_note]
Cryptocurrencies are radically new and this is why existing laws did not envisage it, let alone prohibit or regulate it. In the absence of any law that prohibits cryptocurrencies such as bitcoin, it is therefore legally allowed.[efn_note]Id., p. 46 (2019).[/efn_note] As of this writing, no lawmaker in the Philippines has yet proposed a ban on cryptocurrency software. However, should a law or regulation be enacted to achieve this purpose, it would give rise to constitutional issues in view of Article III, Section 4 of the Philippine Constitution.
Cryptocurrency software is constitutionally protected speech just like any computer code. Such law banning the publication of cryptocurrency software constitutes prior restraints on speech because the government will restrict publication or distribution of speech in advance of such publication or distribution.[efn_note]Id., p. 47.[/efn_note] Laws and regulations imposing prior restraint are likely unconstitutional and therefore face strict scrutiny. As observed by the U.S. Supreme Court in the case of Bantam Books v. Sullivan, “any system of prior restraints of expression comes to this Court bearing a heavy presumption against its constitutional validity.”[efn_note]372 U.S. 58 (1963).[/efn_note]
The government may argue that the prevention of crime, terrorism, or money laundering presents a compelling interest that will justify the banning of cryptocurrency software. But such ban would not prevent money launderers, terrorists, or criminals from using previously published or international versions of cryptocurrencies or peer-to-peer software. The narrow approach to address crime, terrorism, and money laundering is to intensify investigation, pursuit, and apprehension of money launderers, terrorists, and criminals, not to ban dissemination of tools that criminals may use in their crimes. For Valkenburgh, “a ban on electronic cash would self-evidently be an attempt to stifle the development of these tools and the beliefs that motivate that development. Such a ban thus privileges certain scientific and political ideas over others, and that cannot be an acceptable government interest.”[efn_note]Peter Van Valkenburgh, Electronic Cash, Decentralized Exchange, and the Constitution, p. 48 https://coincenter.org/entry/e-cash-dex-constitution (2019).[/efn_note] Applying the overbreadth doctrine, a governmental purpose may not be achieved by means which sweep unnecessarily broadly and thereby invade the areas of protected freedoms.[efn_note]Joaquin G. Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, p. 306 (2009). [/efn_note]
Relationship between productive information and freedom of expression
Freedom of expression is essential for the search of truth. This is consistent with the marketplace idea which posits that the power of thought can be tested by its acceptability in the competition of the market.[efn_note] Joaquin G. Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, p. 231 (2009).[/efn_note] Productive information is information that allows existing resources to be moved to more productive uses or discovers new methods of organizing resources for more productive uses.[efn_note]Robert Cooter & Thomas Ulen, Law & Economics, Sixth Edition, p. 357 (2016). [/efn_note]
In relation to productive information, society also has a strong interest in the free flow of commercial information.[efn_note]Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council 425 U.S. 748 (1976). [/efn_note] As observed in the case of Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, “(s)o long as we preserve a predominantly free enterprise economy, the allocation of our resources in large measure will be made through numerous private economic decisions. It is a matter of public information that those decisions, in the aggregate, be intelligent and well informed. To this ends, the free flow of commercial information is indispensable.”[efn_note]Id. [/efn_note] Indeed in the case of Pharmaceutical and Healthcare Association of the Philippines v. Duque,[efn_note] G.R. No. 173034 (2007).[/efn_note] the Supreme Court found that an absolute ban on advertising breast milk substitute is unduly restrictive and more than necessary to promote the government’s interest of ensuring the health of infants and young children. In his separate opinion, Chief Justice Puno explained the development of commercial speech, i.e., speech that proposes an economic transaction, as constitutionally-protected speech:
“The advertising and promotion of breastmilk substitutes properly falls within the ambit of the term commercial speech — that is, speech that proposes an economic transaction. This is a separate category of speech which is not accorded the same level of protection as that given to other constitutionally guaranteed forms of expression but is nonetheless entitled to protection.
A look at the development of jurisprudence on the subject would show us that initially and for many years, the United States Supreme Court took the view that commercial speech is not protected by the First Amendment. It fastened itself to the view that the broad powers of government to regulate commerce reasonably includes the power to regulate speech concerning articles of commerce.
This view started to melt down in the 1970s. In Virginia Pharmacy Board v. Virginia Citizens Consumer Council, the U.S. Supreme Court struck down a law prohibiting the advertising of prices for prescription drugs. It held that price information was important to consumers, and that the First Amendment protects the “right to receive information” as well as the right to speak. It ruled that consumers have a strong First Amendment interest in the free flow of information about goods and services available in the marketplace and that any state regulation must support a substantial interest.
Central Hudson Gas & Electric v. Public Service Commission, is the watershed case that established the primary test for evaluating the constitutionality of commercial speech regulations. In this landmark decision, the U.S. Supreme Court held that the regulation issued by the Public Service Commission of the State of New York, which reaches all promotional advertising regardless of the impact of the touted service on overall energy use, is more extensive than necessary to further the state’s interest in energy conservation. In addition, it ruled that there must be a showing that a more limited restriction on the content of promotional advertising would not adequately serve the interest of the State. In applying the First Amendment, the U.S. Court rejected the highly paternalistic view that the government has complete power to suppress or regulate commercial speech.
A statutory ban on cryptocurrency would be unconstitutional because it would curtail the freedom of an individual to express, enjoy and receive productive information. Freedom of expression protects the right to receive information with the same intensity as the right to speak, as ruled in the Virginia Pharmacy Board case.[efn_note]425 U.S. 748 (1976).[/efn_note] To illustrate, individuals realize that the risk involved in holding money, especially sound money, will be remote as compared to the risk they run in holding any other good on which they do not possess any special information.[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 85 (1976).[/efn_note] Their inability to access cryptocurrencies in view of the statutory ban could hamper their ability to convey productive information on their choice of a sound money, as well as the expression and communication of that choice to a larger community, society and market.
According to Cooter and Ulen, productive information can be employed to produce wealth. Efficiency “demands giving people strong incentives to discover productive facts.”[efn_note]Robert Cooter & Thomas Ulen, Law & Economics, Sixth Edition, p. 357 (2016). [/efn_note] The State should therefore take special measures to reward individuals who purvey productive information,[efn_note] Id.[/efn_note] and not suppress such information. Money has no substantial meaning unless people use it; usage can be facilitated if money is available for communication.[efn_note] James Willard Hurst, A Legal History of Money in the United States, 34-35 (1973) [/efn_note] However, Hayek observed that the government usually has a strong incentive to suppress the use of foreign currency or private money that competes with the legal tender, urging him to propose the denationalization of money which could be a “crucial reform that may decide the fate of free civilization:”[efn_note]Friedrich A. Hayek, Denationalization of Money, p. 22 (1976). [/efn_note]
“If the public understood what price in period inflation and instability it pays for the convenience of having to deal with only one kind of money in ordinary transactions, and not occasionally to have to contemplate the advantage of using other money than the familiar kind, it would probably find it very excessive. For this convenience is much less important than the opportunity to use a reliable money that will not periodically upset the smooth flow of the economy—an opportunity of which the public has been deprived by the government monopoly. But the people have never been given the occasion to discover this opportunity. Governments have at all times had a strong interest in persuading the public that the right to issue money belong exclusively to them.”[efn_note]Id. [/efn_note]
For Posner and Weyl, because the individual’s valuation is a private information, “the genius of the market is its capacity for disseminating this information from consumers to producers through the price system.”[efn_note] Eric A. Posner and E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society, p. 25 (2018). [/efn_note] The success of an economic activity hinges on the actor’s ability to estimate correct future prices. Estimation needs to factor in current prices and appreciation of market trends. Of course, future prices will be uncertain to some extent because the factors that will finally determine them will be largely unknown to most economic actors. Nevertheless, the prices function precisely to swiftly express or communicate signals or changes that the individual does not know but to which his plans must be adjusted. This price system works because current prices are fair indications of what future prices might be, subject only to accidental deviations.
Money should be part of an organic self-steering mechanism by which individuals are constantly incentivized to self-determine their activities based on abstract signals of prices. When it comes to money, currency prices also fluctuate based on supply and demand, just like any other commodity.[efn_note]William Brough, The Natural Law of Money, p. 6 (1896). [/efn_note] To allow the price system to work, freedom of prices “necessarily implies freedom of movement for the purchasing power of money.[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 33(1963).[/efn_note]
Freedom of expression, according to Bernas, promotes individual self-realization and self-determination.[efn_note]Joaquin G. Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, p. 231 (2009).[/efn_note] The spontaneous evolution of human actions create institutions where individuals discover patterns of behavior that help them attain their goals more efficiently. Central to this evolution is the development of money, which made the division of labor possible and satisfaction of human wants attainable.[efn_note]Douglas E. French, Foreword, On the Origins of Money, 2009 edition (2009).[/efn_note] Exchange is the lifeblood, not only of the economy, but of human civilization itself.[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 5 (1963).[/efn_note] The establishment of money-prices on the market allows a civilized economy to develop, because they allow merchants to calculate the consequences of their exchange transactions. As discussed by Rothbard:
“Businessmen can now judge how well they are satisfying consumer demands by seeing how the selling-prices of their products compare with the prices they have to pay productive factors (their “costs”). Since all these prices are expressed in terms of money, the businessmen can determine whether they are making profits or losses. Such calculations guide businessmen, laborers, and landowners in their search for monetary income on the market. Only such calculations can allocate resources to their most productive uses—to those uses that will most satisfy the demands of consumers.”[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 11 (1963).[/efn_note]
Bitcoin embodies the concept of free money because it gives individuals the ability to denominate value independent and away from a government-sanctioned standard measure of value. A person might opt in for bitcoin because of political ideals, or as a nonviolent protest against the incumbent financial system, or a conviction that technology will usher a new form of money. Whatever the reason, an individuals is naturally endowed with the freedom to choose how the fruits of their labor or enterprise are measured or valued.[efn_note]Nikhil Bhatia, Layered Money, Kindle Edition p. 95 (2021).[/efn_note]
In a hypothetical scenario where Congress enacts a statute that bans privately-issued cryptocurrencies, the law will suffer from constitutional infirmity as it would violate the substantive aspect of the due process clause. Such law would fail the test of reasonableness as it would irrationally, arbitrarily and outrageously disregard fundamental economic principles and centuries of lessons from monetary history, and the technological innovations and economic advantages offered by cryptocurrencies especially bitcoin.
The rational choice theory posits that economic actors employ rational thinking to arrive at informed decisions or choices, leading to outcomes that align with their best interests. The market’s spontaneous selection of money is consistent with this theory. When a person uses money, he or she is driven purely by his or her own interests and he or she is not concerned with what becomes of it after it passes out of his or her possession. Money circulates indefinitely as long as the market chooses it as the most saleable medium of exchange, impelled always by the motives and self-interests of individuals acting independently of each other.
In the era of the Fiat Standard, the conventional wisdom is that money must be formally managed and centrally planned; money cannot be entrusted to the spontaneous market forces. This view flies in the face of money’s origins. Money arose organically as a product of human interaction in economic markets, “not only without an assist from political authorities, but often inspite of them.”[efn_note] Richard H. Timberlake, The Government’s License to Create Money, Cato Journal, Vol. 9, No. 2, p. 319 (1989). [/efn_note] The natural emergence of money suggests not only the possibility of a market-determined monetary system, but also its desirability and soundness.[efn_note] Id.[/efn_note] Even by declaring that an artificial monetary unit can be tendered for the liquidation of pecuniary obligations, the State’s influence on the choice of money is limited, which choice ultimately belongs to the market.[efn_note]Ludwig Von Mises, The Theory of Money and Credit, p. 74 (1912). [/efn_note]
The concept of legal tender demonstrates the unique role of law on monetary matters. A piece of paper or even a database entry can become money simply because the law says so. Something becomes a medium of exchange because people are obliged by law to accept it as payment, regardless of the inherent soundness of the thing, and not because anyone wants it as money.[efn_note] John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 114 (2009).[/efn_note]
The chartalist prerogative of the State to monopolize the monetary system based on purported “monetary sovereignty” is a mere legal fiction detached from market and economic realities. A disturbing aspect of the legal tender power concerns what it symbolizes, which is the assertion that legal process must prevail over market process in determining what should be money.[efn_note]James Willard Hurst, A Legal History of Money in the United States, p. 184 (1973). [/efn_note] Sovereignty resides in the people, and this sovereignty is seen in free, private, competitive markets for money.[efn_note]Richard H. Timberlake, The Government’s License to Create Money, Cato Journal, Vol. 9, No. 2, p. 320 (1989).[/efn_note] As Rothbard would put it “(u)nder freedom, the commodities chosen as money, their shape and form, are left to the voluntary decisions of free individuals. Private coinage, therefore, is just as legitimate and worthwhile as any business activity.”[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 47 (1963).[/efn_note] Free individuals are in the best position to smoothly supply their economic wants. In money as in any other human activities, “liberty is the mother, not the daughter, of order.”[efn_note] Id., p. 48.[/efn_note]
The monetary system based on Fiat Standard is a product of the analog age. Fiat currencies managed by central banks—without backing of gold or other precious metals—proliferated after the Bretton Woods system collapsed in 1971 following the Nixon shock.[efn_note]Niall Ferguson, The Ascent of Money. 2nd Ed., p. 401 (2018). [/efn_note] This Fiat Standard has allowed central banks to resort to unrestrained money printing as a monetary policy tool to resolve economic and financial crises. The U.S. Federal Reserve’s unprecedented levels of quantitative easing has resulted in the greatest expansion in the supply of U.S. dollar. On the other hand, the extraordinary monetary and fiscal stimulus in the time of COVID-19 has accelerated interest in bitcoin, making it easier for the new asset class to be regarded as a safe haven.[efn_note]Will Heasman, Bitcoin as a Hedge Against Coronavirus-Led Economic Chaos, The Bitcoin Reserve Journal, 26 April 2020 https://journal.bitcoinreserve.com/bitcoin-as-a-hedge-against-coronavirus-led-economic-chaos/[/efn_note] Truly, financial and economic crises are compelling advertisement for the notion of digital money.[efn_note]Niall Ferguson, The Ascent of Money. 2nd Ed., p. 401 (2018).[/efn_note] The continuous debasement of many fiat currencies, specifically the U.S. dollar, highlights the mischief that the invention of Bitcoin sought to remedy.[efn_note]The “genesis block” of Bitcoin carried the following text, which might suggest the impetus behind the invention of Bitcoin: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”[/efn_note] Unlike fiat currencies, Bitcoin’s supply schedule cannot be artificially increased.[efn_note]Will Heasman, Bitcoin as a Hedge Against Coronavirus-Led Economic Chaos, The Bitcoin Reserve Journal, 26 April 2020 https://journal.bitcoinreserve.com/bitcoin-as-a-hedge-against-coronavirus-led-economic-chaos/ [/efn_note]
The fear of uncontrolled inflation following the unprecedented dilution of the U.S. dollar—the centerpiece of the present international monetary system, is one of significant factors forcing investors into safe-haven assets. There is now a rapidly growing number of individuals and institutions that regard bitcoin as an “insurance policy” that would assure cover against the unknown consequences arising from the economic crisis sparked by the COVID-19 pandemic and the havoc wreaked by the unconstrained money printing.[efn_note]Ria Bhutoria, Bitcoin Investment Thesis: An Aspirational Store of Value, Fidelity Digital Assets, p. 17 (2020).[/efn_note]
Bitcoin creates a peer-to-peer system that is decentralized in nature and cannot be manipulated by anyone. Bitcoin permanently fixes the supply of its native currency at 21 million bitcoins. As of April 2022, 19 million bitcoins have been mined. As an open, distributed ledger, it offers security and trust by verifying transactions through consensus instead of validation by a central intermediary.[efn_note]Jeff Booth, The Price of Tomorrow: Why Deflation is the Key to an Abundant Future (p. 200-201). Stanley Press. (2020). [/efn_note] The immutable and programmed scarcity of bitcoin provides assurance that the value exchanged to hold bitcoin will be preserved into the foreseeable future.[efn_note]Parker Lewis, Bitcoin Obsoletes All Other Money, 24 January 2020 https://unchained-capital.com/blog/bitcoin-obsoletes-all-other-money/[/efn_note]
The Bitcoin ecosystem is expanding and maturing in many areas of its economy, such as in banking, trading, remittance, payments, lending and derivatives. As it grows, Bitcoin could eventually evolve as a widely-accepted global settlement system that could compete with the current international monetary system.[efn_note]Tur Demeester, The Bitcoin Reformation, Adamant Research, p. 13 (2019). [/efn_note] Indeed as pointed out by Bhatia, bitcoin “gives people around the world the first genuine alternative to their national currencies, a trend which is impossible to reverse now that over 100 million people own it globally.”[efn_note]Nikhil Bhatia, Layered Money, Kindle Edition p. 95 (2021). [/efn_note]
Article III, Section 4 guarantees freedom of the press without prior restraint. Prior restraint refers to any official governmental restrictions on the press or other forms of expression in advance of actual publication or dissemination.[efn_note]Joaquin G. Bernas, The 1987 Constitution of the Republic of the Philippines: A Commentary, p. 233 (2009).[/efn_note] Bitcoin is a piece of software that can be printed as a text on paper, generating blocks of human readable text and therefore covered by the constitutional right to free speech, of expression, or of the press.
A statutory ban on cryptocurrency will also be unconstitutional because it would curtail the freedom of an individual to express, enjoy or receive productive information. The people’s inability to access cryptocurrencies in view of the statutory ban could hamper their ability to convey productive information on their choice of a sound money, as well as the expression and communication of that choice to a larger community, society and market.
Whatever standard free money will provide, it is quintessentially important that the standard is not enforced by government fiat.[efn_note]Murray N. Rothbard, What Has Government Done to Our Money, p. 35 (1963).[/efn_note] Fortunately, R.A. No. 8186 recognizes the freedom of the parties to agree that their obligation or transaction may be settled in any currency other than the legal tender at the time of payment. The law therefore opens the door for parties to opt-out from fiat money, and instead opt-in for a sound and free money. Whether that sound and free money is bitcoin or any other cryptocurrency, it is the market that should determine this important economic choice.
Today’s fiat money bears little resemblance in form and in substance to money from 100 years ago, and it would be wrong to assume that today’s fiat money will continue to be our money in the future.[efn_note]John J. Chung, Money as Simulacrum: The Legal Nature and Reality of Money, Hasting Business Law Journal, p. 121 (2009).[/efn_note] Nevertheless, there are fundamental properties or characteristics that will make one form of money “harder” and more acceptable than the other. Even without government intervention, the market on its own can determine which sound money will best perform as a medium of exchange, store of value and unit of account. Whatever the market chooses as the money of the future—whether that should be bitcoin or something else, the market’s choice is important because the future of money will have a bearing on the future of liberty.
This paper is published on BitPinas: Free Money: The Constitutional Aspects of Cryptocurrencies
Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.