Back in January, the International Monetary Fund published a report “Virtual Currencies and Beyond” which concluded that a currency such as bitcoin does not fulfil the economic roles associated with money. It is not a reliable store of value because of its volatility, although I personally could be persuaded over time that in some scenarios volatility could decrease to a point where it could become an acceptable store of value for some communities. The report goes on to note that bitcoin has very restricted use as a medium of exchange, and my interpretation of the widely available usage figures is that it remains primarily a tool for speculation (there is very little retail use, almost all bitcoin purchases are in Yuan and and almost all trading is currently carried out on two Chinese exchanges). As the IMF further point out, bitcoin does not seem to be used as an independent unit of account against which other currencies might be measured. Taken together these points suggest that bitcoin is better understood in economic terms as a peculiar kind of digital commodity rather than as money.
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I have a hard time seeing bitcoin as money and I’m not alone. In particular, regulators do not really know what to do with. Writing in the Southwest Journal of Monetary Economics, Charles Evans “The Blind Economists and the Elephant” attributes the problem in classifying Bitcoin to the multiple facets and the way each looks to different constituencies.
This confusion results from the fact that specific regulators oversee specific subsets of regulated activities. It is understandable that they would side with Easterbrook (1996) and view Bitcoin in terms of a preexisting category over which they have authority (Brito & Castillo 2013), rather side with Lessig (1999) and take a laissez faire, hands-off approach—in the post- USA PATRIOT Act, post-Dodd-Frank Act regulatory state (Zarate 2013)—until legislators draft new statutes or create some new regulatory agency to oversee this weird new stuff that defies conventional definitions.
An excellent point. The different regulators regulate on the basis of their own perspective and there is no holistic view or logical regulatory position on cryptocurrency (which is what the World Bank meant by “virtual currency”). Evans goes on to make an interesting comment that I think illustrates a very fundamental point about the interplay between technology and money.
Black (1970), Fama (1980), Greenfield & Yeager (1983), and Hall (1982a, 1982b) speculate that the historical functions of money—medium of exchange, store of value, unit of account, and measure of value—can be separated and that each function can be performed by different means.
I do too. One of the first things I ever wrote for a client on the topic of electronic money, a couple of decades ago, included the observation that technology would allow us to separate these functions and implement each of them in a different way, another example of the “back to the future” dynamic of a more interconnected world. We might find it odd to use London Loot as a medium of exchange and Islamic e-Gold as a store of value and US Dollars as a mechanism for deferred payment, but our phones won’t. As the former Governor of the Bank of England Mervyn King wrote in his recent book “The End of Alchemy”, money is a particular historical institution that developed before modern capitalism and owes a great deal to the technology of an earlier age. There is no reason why money should continue to work the way it does in response to technological change and no reasonable person would expect it to.
Will money as we know it be replaced by bitcoin? I sincerely doubt it, but I’m very much looking forward to hearing law lecturer Tatiana Cutts present her views on whether bitcoin is money at our 19th annual Tomorrow’s Transactions in Forum in London on 20th and 21st April. As always, the Forum (this year sponsored by our friends from WorldPay, VocaLink and Oslwang) will be limited to 100 people, so head on over to register for a place right now. Thanks to the amazing generosity of the sponsors, it’s only £295 for both days – you’d be mad to miss R3, Intel, Ripple, Barclays, Mondo, Fidor, Equens, Clearmatics, the FCA, Shell, Samsung Pay, World Remit, Visa Europe, Curve and many others in an environment of genuine discussion, debate and learning. See you there.