The Nature of Money and Possibility of Cryptocurrency Money
Can forms of cryptocurrency become money? To pursue this question, it
is necessary first to be clear on what is meant by money, and on what
precisely is required for something to be, or to become money. The concern of this opening chapter is precise with this issue, to identify conditions that must be met for a form of cryptocurrency to qualify as money
A form of money, just like any other social phenomenon, is
a property of a particular community, and so typically possesses various community-specific features. Many communities have produced money, however, and the concern
here is with commonalities of all the numerous forms.
In this regard, the most obvious common or shared
feature is that by which money can everywhere be
identified or recognized. This is its property of being
employed as a general means of payment, of being
useable to discharge any debt in the community in
which the money is produced.
If, say, in any specific money community, an individual
participant requests a seller, a loaf of bread, or perhaps a meal, then, when the bread is handed over, or
after the meal has been consumed, the buyer is in debt
to the seller. It is an identifying property of money that,
in all such transactions (excepting in cases where a
specific alternative agreement on means of payment has
been reached in advance of debt being occurred), the
money can be used to settle the resulting debt
A basic condition for a general means of payment to
existing in any community is that the latter has a system
of value accounting that includes, as a component, a
(community-specific) unit of value. This is simply a unit
of value measurement or assignment -- such as pound
sterling, US dollar, euro -- in terms of which all goods,
services, or assets in a community will have their assessed values expressed. Clearly, all items of money must also be denominated in the same units as the
debts if the money is to be used to cancel them. So,
money will itself be a feature of a system of value accounting that includes a unit of value (or account) as
an additional accepted component.
If the nominal property of any money, i.e. that by which
it is identified, lies in its being accepted as a general
means of payment, a furthermore fundamental feature
that grounds this property is the manner of the money’s incorporation as a component of the community’s
system of value accounting. Most social phenomena
(not just money) are in fact constituted through processes whereby certain kinds of things are incorporated into community systems as components. In all
cases, the phenomena are created by processes of social
positioning, whereby selected kinds of things are allocated to positions, thereby constituting them as
different types of phenomena qua system components,
and whereupon their uses, qua positioned items or
system components, are governed by community-accepted sets of rights and obligations. To see this, it is
enough to think of the creation and acceptable uses of
means of transport, motorways, car parks, traffic
lights, passports, schools, and hospitals, etc.
Money is simply a specific conforming instance of this
general process of social reality constitution. The creation of money involves the
community acceptance of a money
position within the community’s
value accounting system and the
allocation of a certain kind of
thing (currently, it is typically
bank debt – see below) to the money position, producing money as a
system component. As part of this
positioning process, rights and
obligations are allocated to community members, determining
that holders of instances of the
money have the right to use it to
cancel their debts, and correspond
-
ing creditors typically have a
matched obligation to accept the
money if it is offered
The ability of money to serve as a
general means of payment is, then,
grounded in its additional property of being positioned (in the community’s system of value accounting) in such a manner that its uses
are governed by the noted rights
and obligations.
As with all social phenomena, the
existence of money is seen, finally, to depend on community acceptance. However, the notion of
acceptance that is key here should
be interpreted not as involving
any necessary agreement or contentedness of community participants with the situation, only as
a willingness to go along with it,
at least for the time being. Typically, this general acceptance, in
the case of money, takes the form
of preparedness to go along with
the declarations of designated
bodies to whom authority has
been delegated. In modern societies, this delegated authority
takes the form of the government
or central bank.
Purchasing Power and Trust
To this point, the concern has been on the nature and
constitution of money per se. However, the focus of
primary interest here is on more than money per se and
specifically on money that functions successfully. Additional nominal property for successful money is
that (as well as being a general means of payment) it
has generalized purchasing power.
The manner in which money is constituted as a component of a community’s system of value accounting
ensures, as we have seen, that a participant who holds
money has the right to use it to discharge any debts
already held. However, there is no agreement entailed
that participants must become creditors in the first
place, that they must allow others to run up debts with
them that can be discharged using the money. In countries with hyperinflation, is not unusual to see signs
displayed saying goods or services can be acquired only
if there is an advance agreement (i.e. prior to a debt
being created) for payment to be made in a foreign
currency. Thus, a restaurateur, say, will allow customers to order a meal and so acquire a debt if they in effect
take out a contract in advance to pay by something
other than the local currency
So, successful money is in a place where participants
can easily use it to make purchases, meaning that sellers, etc., are ready to become creditors in the knowledge
that the money will be used to discharge the debts that
so arise. For this to be the situation, community participants must trust in the money. Trust is key to the
successful functioning of any money.2 Specifically,
community participants must trust that if they hold
items of money, others will be willing to take such
money from them, a condition of which being that no one expects items of money to lose value in the meantime. In short, to function successfully, money must
be trusted as a stable store of liquidity, a store of liquid
(i.e. easily transferable) value.
The dominant worry of recent monetary history is that
money will lose value, as is markedly the case in episodes of countries experiencing hyperinflation. But an
additional concern that can arise, one that will be seen
to be especially relevant when considering the possibilities for cryptocurrencies, is that the money instead
appreciates in value. In the face of an anticipated decline in its value, participants will not want to hold
money; however, in the face of an expected appreciation
in its value, participants will not want to let go of it.
Either development undermines the usefulness of money for performing its canonical functions.
C.Money as Positioned Bank Debt
Currently, the money position was indeed already regarded as a store of value and became so positioned
precisely to instill trust in the money so hold. This is
bank debt.
Here the term debt is understood to be an obligation
held by a debtor to satisfy a creditor. It is internally
related to a credit, where the latter, technically and
legally speaking, means a specific right to payment or
satisfaction. Credit and debt, in other words, are two
aspects of the same social relation - a credit/debt (or
debt/credit) relation - connecting a creditor and a debtor; you cannot have one aspect without the other.
Credit is simply this relation viewed from the perspective of the creditor; it is debt from the point of view of
the debtor. In fact, in classical accounting terms, this
credit/debt relationship was seen as an exchange of
credere (‘to trust’) for debate (‘to owe’),3
which concluded in the exchange of real underlying assets. Simply
put, two entities bind themselves, at a specific point in
time, to remain bound to, and trust each other, over
the course of the agreement
How does bank debit/credit (positioned) as money work?
Two forms of bank debt are involved, commercial and
central bank debt. If, for example, a commercial bank
makes a loan to a customer, it records the amount of
that loan in the customer’s account. The entry is shown (or resulting increase in any entry) marks an amount
of money thereby acquired by the customer. In the case
of the loan, this money is created on the spot. It is done
so through the formation of a debt of the bank to the
customer. But the result is automatically an amount of money. For,
since bank debt was at the relevant
point in history first positioned as
money, all new items of bank debt
come into the world already positioned as money. That is, just as a
child of members of the UK Royal
Family arrives in the world already
positioned as royal, or indeed a
child born in the UK of two UK citizens arrives in the world already
positioned as a UK citizen, so, currently, all instances of bank debt
arrive in the world already positioned as money.
Of course, not all money held in an
individual’s deposit account was
created by loans. But all the money
there recorded takes the form of
commercial bank debt positioned as
money.
The ability to create new debit/credit as money generally lies in the
power of commercial banks and the
central bank. The central bank can
create money by extending loans to
commercial banks in the form of the
latter’s reserves. Many indeed refer
to the two cases as producing commercial bank money and central bank
money respectively, the two together being bank money.
So, the occupant of the money position currently relied upon to instill
trust in money formed out of it is
bank debt (a kind of thing that to
serve its intended role usually also
requires a degree of continuous state
backing, an orientation that can involve but does not reduce to reliance upon, laws of legal tender).
Finally, as is the current situation
with bank debt, the item positioned as money is not observable,
a necessary additional feature of a
community’s system of value accounting is a set of markers or
identifiers of money, or of those
that hold it. In the case of commercial bank money, its markers
are electronic entries in the community participant’s bank account.
In the case of central bank money,
the markers may take the form of,
first, cash, in particular where the
money is held by the public, and,
second, electronic markers, indicating money held as deposits at
the central bank, including commercial bank reserves. So strictly
speaking, neither electronic records nor cash is money but rather are markers of it.
To summarise, a community’s money
possesses generalized debt-discharging power and, when it functions
successfully, generalized purchasing
power. The first of these powers are grounded in money’s property of being positioned as a component of a
community’s system of value accounting in a manner such that its
uses are governed by a specific set of
community-accepted rights and obligations, in particular, that debtors
have a right to discharge their debts
using the money and the corresponding creditors have an obligation to
accept the money when offered. The
second of these powers, i.e., generalized purchasing power, is grounded
in a community’s trust in it as a stable
form of liquid value, a trust that, typically at least, is grounded in turn in
the trust-instilling capacity of money
backed up by the support of the state-backed banking system.
D. The Possibility of Forms of Cryptocurrency as Money
It follows that there are two basic properties that must
be possessed by a form of cryptocurrency that is to
function successfully as a community’s money. First, it
must be accepted throughout the community as being
a component of its system of value accounting and its
use is governed by rights and obligations that serve to
render it a general means of payment. Second, the money so formed must be trusted as a stable store of liquid
value, grounding the property of it being a general form
of purchasing power. The basic question to pursue,
then, is whether systems based on forms of cryptocurrency can be devised wherein these two basic conditions
are met.
If the latter is identified as the essential features of a
successfully functioning money, the forgoing outline
does also point to additional factors to consider. For
example, all cases of money have been seen to take the
form of a component of a community’s system of value
accounting closely related to other components of the
same system. This being so, it may be the case that, in
order to replace one form of community money with
another, it is necessary to replace or transform other
internally related components of the system of value
accounting. For example, had the UK joined the Euro-pean Monetary System, then not only would a different
form of central bank debt have been involved, but the
markers of money referred to as cash would have
changed, as indeed would the unit of account (from
pounds sterling to euros)
Forms of cryptocurrency do indeed come as (sub)
systems in themselves. To consider the most familiar case, that of Bitcoin, it seems this label is indeed
best used for a whole subsystem rather than any one component. In actual practice, the term Bitcoin tends
to be used variously: for the proposed system as a
whole, a revised unit of account, and both a money
position and its occupant (to the extent that they are
distinguished).
An additional matter to consider is the nature of the
community for which the money is intended. For, with
all social phenomena being found to be community-relative, the possibilities of a form of cryptocurrency
being accepted as money will depend on the specific
community that is being considered. The central focus
here is a national community like the UK. But it may be
that forms of cryptocurrency can serve, and perhaps
have already served, as money in some relatively small
communities, especially illegal ones concerned with
activities like the buying and selling of illicit goods
online.
At present, general acceptance in modern national or
international communities requires authorization by
central authorities. Fundamental to the monetary
workings of such communities at present are banking
systems that issue, seek to control/regulate, and endeavor to maintain a stable value of, money. Prima
facie, developments like Bitcoin not only do not make
any appeal to regulators and bankers, but the very
reason for their design is to bypass them, to leave these
institutional factors out of the value accounting system
entirely. At the heart of it all is a desire to create a
peer-to-peer electronic system of buying and selling
that does not require the necessary mediation or intervention of any financial institution or other agency.
As Nakamoto (2008) indicates in the opening sentence
of the paper introducing bitcoin
To gain general acceptance, then, any such proposed
cryptocurrency system must prove to be either 1) so
widely popular or backed by organizations so powerful
(as is presumably the intention, for example of Facebook’s Libra, with the proposed launching of its own
global cryptocurrency backed by significant assets) that
the state or states involved is/are unable to resist it; or
2) adapted/oriented so as to work through existing financial and government institutions, in which case its
use would not be, as originally intended, to displace
existing institutions and processes but to facilitate the
working of the existing systems in some way.
More can be said too on the task of achieving trust. As
noted, an essential challenge is to achieve a situation
wherein a form of cryptocurrency is trusted as a stable
store of liquidity. This is the central form of trust to be
achieved. However, other forms are essential too, albeit in ways, or for reasons, that depend on the particulars of the money form.
Certainly, all forms of money are open to abuse. Money
in the form of a positioned valuable commodity was
subject to clipping (the practice of cutting small pieces
from, especially, gold or silver coins, with cut-off pieces, often used to make counterfeit coins; this being a
practice thought to be so undermining of the money
process of Britain in the seventeenth century that clipping was deemed a matter of high treason, punishable
by death). And, there are continuous (more or less successful) attempts to produce counterfeit versions of
modern cash. Further, with the rise of electronic records
of money, there are attempts to defraud through the
duplication of these records. Without institutional intervention to prevent this under the current system, it
would be possible for one and the same electronic record
of money to be used to ground two or more expenditures
(the so-called double spending problem). Cryptocurrencies involve peer-to-peer verified blockchain technologies designed just to avoid this sort of fraud. Community participants must trust that such efforts are
usually successful
But these context-specific and contingent technical
issues of trust generation aside, most significant of all
is whatever the form of money developed, there must
be a trust that the money so formed would prove to be
a stable form of the liquid value. In the case of a form of cryptocurrency, with no pre-existing record of attained
trust (prior to its being positioned as money, were this
to happen), and with potentially the displacement of
all (state or bank) administrators who under the current
system help stabilize a money’s value through regulating actual transactions, the task of attaining the requisite sort and levels of trust would not be straightforward. Specifically, the task of creating a form of
cryptocurrency that could be, and prior to positioning
would be expected to be, a stable form of liquid value
is a significant challenge.
One final matter that might be raised here is the question of whether more than one form and if so, how
many forms, of cryptocurrency, could simultaneously
be constituted as money. For, if one form managed to
overcome all the obstacles including acceptance by the
state (and so for example accepted by the state as a
means of discharging tax debts) then presumably many
forms could do so
E. Conclusion
Money is commonly identified as that component of a
community’s system of value accounting that is accepted throughout the community to serve as a general
means of payment and, when functioning successfully,
as a general form of purchasing power. Its property of
being a general means of payment is grounded in the
money being accepted as a component of the system,
governed by a specific set of rights and obligations that
work precisely to ensure that it serves this function.
Typically, this allocates to debtors the right to have
their debts settled by handing over money (of the appropriate value) and to creditors the obligation to accept
it. Money’s property of possessing generalized purchasing power is grounded in the community’s trust in
it as a stable form of the liquid value. Such trust, in part,
has typically been achieved by positioning money as a
specific kind of thing that has the capacity to instill this
trust. How this works in practice is contingent and
varies over time.
The challenge, then, for those seeking to render form(s)
of cryptocurrency as money lies both in getting it positioned as a legitimate general means of payment
(governed by relevant rights and obligations ensuring
this) and so also trusted in the sense that if positioned
as money it can serve as a store of the liquid value.
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