In a now-archived 2010 post on Bitcointalk, Hal Finney cited economist George Selgin as someone who had “worked out the theory of competitive free banking in detail,” noting that Selgin believed such a system would be “stable, inflation-resistant, and self-regulating.” This statement by Hal Finney was one of the earliest public connections between Bitcoin and classical free banking theory.

In an exclusive interview with CCN, Selgin revisits that early mention and expands on how Bitcoin-backed free banking might provide a scalable and resilient monetary framework. One he believes is just as relevant today as when Hal Finney first proposed the idea back in 2010.

Hal Finney’s Vision of Bitcoin and the Role of Free Banking

Selgin admits he never spoke to Hal Finney directly but remembers being cited in the early Bitcoin forums. “I think Hal was already thinking ahead, realizing Bitcoin needed a second layer,” Selgin says.

Rather than rely on a finite 21 million coin supply for all transactions, Selgin argues that Bitcoin-backed banks could issue “substitutes,” essentially IOUs, to make transacting easier. “That’s the basis of what we had with gold and paper money in Scotland or Canada,” Selgin notes, referencing historic examples of free banking systems that operated with minimal regulation, notably in Scotland before 1845 and in Canada up until 1935.

What Is Free Banking and Can It Work With Bitcoin?

“Free banking” doesn’t mean a lack of rules, it means freedom from central bank monopolies and heavy-handed regulation. In such systems, multiple banks issue their own notes or tokens, backed by reserves, and settle obligations among each other without central oversight.

In a fiat regime, that base money is dollars. In a Bitcoin regime, it would be BTC. And unlike today’s heavily regulated banks, Selgin explains, “in a true free banking system, banks could offer circulating media, not just banknotes, but today they could offer tokens, right? They could offer stablecoins. 

They’re still part of a Bitcoin standard, but they have certain advantages like having a lower transmission cost which is less costly than gold coins but it also has advantages over actual Bitcoin.”

Selgin explains that “as early as the 1830s in Scotland, the gold reserve ratios were often less than 2% of the bank’s liabilities. So they were very slim, and yet we’re talking about some of the banks that were considered the most stable in the world. The banking system was very stable.”

He believes a Bitcoin-based free banking system could follow a similar path.

Can Fractional Reserve Banking Work Without Central Banks? Selgin Thinks So

Selgin believes this is possible, but with a twist. In a competitive environment, banks aren’t forced to hold large reserves. Instead, they’re constantly tested by other banks via clearinghouses. Selgin states that “If one bank owes another more than it receives, that bank settles the difference in reserves.”Employing this format ensures that “this market discipline kept banks honest.”

This stands in stark contrast to today’s moral hazard problem, where large banks take risks knowing they’ll be bailed out. 

Selgin explained how in a free banking economy “banks have to honor their contracts, of course, and they should be closed down if they don’t. But otherwise the government neither props them up through bailouts and insurance, nor hampers them with artificial limits on their activities.”

Bitcoin Scalability: Could Free Banking Be a Better Solution Than Lightning?

Bitcoin has long faced criticism that it doesn’t scale well. The Lightning Network offers one solution but Selgin thinks free banking is another viable and possibly superior option.

“Bitcoin is not as cheap to move as people think. Banking systems can move money with near-zero friction,” Selgin says, especially in Europe where instant payments are the norm. “If you had Bitcoin banks issuing digital IOUs, stable, Bitcoin-backed units, it could work like Lightning, or even better.”

Unlike Lightning, bank IOUs could carry interest, offer integrated accounting, and be denominated for easier day-to-day use.

Why Bitcoin Banks Don’t Exist Yet: Selgin Explains the Real Barrier

According to Selgin, the reason Bitcoin-backed banks haven’t emerged by 2025 is simply because there is not enough demand for Bitcoin as a medium of exchange.

“No one’s going to set up banks unless people want to use Bitcoin substitutes to actually buy things,” he says. “Bitcoin is still seen primarily as an investment, not as money.”

Selgin explains that Bitcoin’s success as an investment medium may unintentionally slow its progress as money, explaining that “the greater the expected rate of return on Bitcoin, the less people want to spend it. And the less they want to spend it, the less useful it is as a medium of exchange.”

This creates a paradox as the more Bitcoin is expected to rise in value, the less incentive there is to spend the BTC and if the BTC isn’t being spent, less infrastructure is built around it.

Selgin explained that “if Bitcoin is not used as a medium of exchange, that in turn feeds into the lowered prospects of Bitcoin banks being established because there’s not enough need.”

Still, Selgin says we already have the tools to make Bitcoin scalable. “If Bitcoin ever becomes a widely used currency, free banking could solve the rest.”

Is Bitcoin Money, a Commodity or Something New? 

Selgin introduced the concept of Synthetic Commodity Money in a 2012 paper later revised in 2013, he argues, Bitcoin is not fiat and it’s not a traditional commodity either but mimics some aspects of both.

Selgin explains how Bitcoin is “a scarce, algorithmically controlled asset, not backed by a government and not used for any physical purpose. That’s what makes it unique.” He later explained how “Bitcoin has the scarcity of gold without being natural and the programmability of fiat without the trust problems.”

Still, he remains cautious about calling it “money.”

“In places like Bitcoin Beach? Sure, it’s money,” he says. “But in most of the world, it’s still too early.”

Will Bitcoin Always Stand Alone? The Case Against a ‘Digital Silver’

As the focus shifted to the historical role of gold and silver, it naturally led to a discussion about Bitcoin’s potential companions, such as Litecoin, often described as digital silver. Selgin, however, remained focused on what makes Bitcoin unique.

“I don’t know why others haven’t taken off the way Bitcoin has,” he said, acknowledging the broader ecosystem without dismissing it. “But I wouldn’t say Bitcoin needs a silver counterpart the way gold once did.”

Attention then turned to whether Bitcoin could function as a general unit of account, for instance, if 100 sats equaled 1 USD, it might make everyday transactions more intuitive. Selgin acknowledged the idea had merit, but offered a thoughtful caution, stating, “well, it all depends on whether BTC goes that high and if people think it’s going to go even higher, then they’ll keep hodling it.”

Even If Bitcoin Isn’t Spent, It’s Still Worth Having

Still, Selgin sees lasting value in what Bitcoin already does today. 

Even if it never becomes a globally dominant medium of exchange, Selgin affirms its place in history as a censorship-resistant, borderless value transfer system.

“Bitcoin is worth having, even just for that.”

About the Author

Andrew Kamsky

Andrew Kamsky is a chart analyst and writer with a background in economics and ACCA certification. He has held roles at a Big Four firm, a fintech bank, and a listed bank specializing in currency hedging. His work explores Bitcoin, macro trends, and market structure. Outside finance, he's passionate about music, travel, and neon design.

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