The UK should privatise the pound and replace it with a cryptocurrency like bitcoin, according to a paper published Wednesday by the free-market Institute of Economic Affairs.

Kevin Dowd, a professor of finance and economics at Durham University, says that although bitcoin isn't the first example of private money, it is the first that governments can't shut down. Therefore, he says, authorities should admit that it's here to stay, and allow competition on a level playing field between all alternative forms of money.

That might include allowing taxes to be payed in cryptocurrencies such as bitcoin and dogecoin, or even fully privatising the pound, selling off the right to mint the currency to the highest bidder.

"Let's suppose that bitcoin became a very prominent currency," Dowd told the Guardian. "[To ensure a level playing field], the government itself would accept bitcoin in tax payments. So, in effect, the government should not be favouring its own currency, or any particular currency, through any of its unique powers. Nor have regulations against them.

"The natural analogy is with some of the old, bad, monopolies like British Gas or British Telecom. Telecom is a very good example: for a long time, we had a government monopoly, which stifled innovation, and the service was poor. Once that got opened up, competition opened, new innovation prospered, and we got all sorts of innovation that we couldn't possibly anticipate, and we're a lot better off for it."

Dowd places bitcoin at the pinnacle of a historical trend of government crackdowns on attempts to create private money. The Liberty Dollar, a physical, gold-based private mint, and e-gold, a digital, gold-based e-currency, both ended up with their creators and proprietors in court, the former on charges of counterfeiting, and the latter over allegations of money laundering.

But Dowd argues the charges were politically-motivated protectionism. "Counterfeit 101 is that you try make the fake look like the real thing," he says, "and the whole business model was predicated on saying that [the Liberty Dollar] is superior to US currency."

Because Bitcoin is decentralised, it's significantly harder to crack down on using the courts – "you could shut the whole web down, but they can't do that," Dowd adds – and so governments can't stop its rise. If it does become popular, they will have to deal with it some other way.

There's a lot standing in the way of cryptocurrencies before they reach that success, however. For one thing, Dowd writes, "to displace existing state currency they not only have to perform the basic functions of money at least as well as state money, they probably also need qualities that transcend the way in which state money works."

For some advocates of bitcoin, as well as for Dowd himself, those qualities come in the form of protection from inflation: the cryptocurrency will only ever have 21m coins created, ensuring that it will always "hold its value" (though also, critics claim, rendering the bitcoin economy prone to deflationary slumps).

For others, they come from the purely digital nature of the currency. Venture capitalist Marc Andreessen describes it as the financial equivalent of the internet, saying "The internet was a new way to transmit data. Bitcoin's a new way to transmit money. It's going to take a long time. The good news it's a big opportunity. Money is a very big deal, and so if you can build a new way to deal with money, it's very important and valuable. It just takes time."

But if anything is certain, it's that bitcoin itself is unlikely to replace the pound. "Given the way bitcoin is designed… a bubble-bust cycle is very much a possiblity," writes Dowd. "In the longer run, Bitcoin is almost certain to fail – and this is no bad thing. The pioneers in any industry are rarely the ones who last: who remembers Betamax from the early days of the video industry?"

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