Why gold never was and Bitcoin never will be money
Let’s begin with a classical account of how gold became representative money and then fiat money. The simplified version goes something like this: First, money was something that had intrinsic value -- say, a precious metal. Then we started using pieces of paper that acted as tickets which could be exchanged for this precious metal, metal which was held safe at the bank (representative / fiduciary / convertible money). And finally we were left with just the (inconvertible) pieces of paper. Economists have concluded that these pieces of paper — fiat money — are a "bubble": they trade above their intrinsic value only because people trust that the next person will also accept them at this inflated value, ad infinitum.
"People accept money as such because they know that others will," said Milton Friedman — a greater-fool theory of sorts, or "funny money," as it’s also known.
Crypto theorists latch on to this story by a) blaming supposed shortcomings of modern money on having departed from commodity money and b) claiming that crypto can solve this by offering a digital alternative to gold.
We would like to offer a different account of events by running them through the Accounting View (AV).
The Accounting View
First off, the AV solves the valuation problem by stating that the seller receives nothing of value from the buyer, and that currency or bank accounting is used to record this fact. The AV thus confirms the absence of intrinsic value. The seller accepts the money as a record proving to society — and to its dedicated accountants (banks) — that value has been delivered on this occasion.
The accumulated history of such events is preserved in each trader’s bank balance, whereby a positive trade history (net credit balance) conveys a right to receive goods in future, whereas a negative trade history (net debit balance) conveys an obligation to give up goods. Accounting — money — thus ties together past, present and future actions by providing us with the necessary memory to put them in relation.
Also, as we explained in our paper, an object, say gold, cannot simultaneously be both money and a commodity. As soon as it is used as money*, its purpose becomes recordkeeping, as described above. Conversely, if it changes hands as a valuable object (bullion), this becomes a quid pro quo barter transaction and not monetary. Nothing is recorded.
So, modern money is not "funny", nor is the distinction between "money as a valuable object" and "money as a token representing a valuable object" valid. The former was never a thing and the latter is a misrepresentation of the way money functions.
Instead, we can describe both traditional commodity standards as well as modern money with the Accounting View (AV). After doing so, we will see whether cryptocurrencies fit in the same framework.
Commodity Standards through the Accounting View
A commodity standard is an accounting practice aimed at keeping the price of a particular commodity stable so that it acts as a yardstick for expressing prices of other goods. For example, a monetary authority (say, the King) might proclaim that henceforth a pound of grain is worth £1 and that all trades shall henceforth be measured in terms of this lb / £. Prices of other goods then vary according to supply and demand but are always expressed in terms of the lb/£.**
The authority can maintain such a standard — i.e. keep the price of grain stable by — among other things, purchasing a strategic reserve of it and then acting as a market maker by selling it to and buying it back from the market as needed. The King, in other words, must have a granary to ward off price fluctuations.
Irrespective of the measure one chooses to tie the unit of account to, the recordkeeping / accounting itself can come in different shapes and materials. While accounting is the logic that underpins money, there are different ways of doing the actual recording. The most basic form is a physical book in which trades of “goods for nothing” are recorded.
Scene 1) Set in a temple market of ancient Sumeria: John gives an apple to Lucy. They agree an apple is worth the equivalent of ½ lb of wheat. So the book records a debit of £1/2 on Lucy’s tab and a credit of £1/2 on John’s. Lucy is now liable to give up something of equal value. Or perhaps she already had £1/2 credit or more from a previous trade to her name.
Fast forward 5’000 years and the same scene is imaginable in a digital marketplace using a modern payment app. The fundamentals are the same but the book is now digital and book entries happen on a touchscreen.
The alternative to such centralised bookkeeping is decentralised, or tokenised, bookkeeping. I.e. coins or paper money. The fundamentals remain intact but updates to personal accounts take place at the point of trade, rather than at the central market in Sumeria or at your bank. Lucy hands John 50P for the apple, so John’s credit goes up by 1/2£ and Lucy’s is diminished by the same amount.
In all of these examples, the fact that a grain standard is in place does not imply that people must walk around with bushels of wheat in their pockets to purchase things. Nor must trades involve grain. In fact, exchanging goods for bushels of wheat would not be a monetary exchange, as there would be no recordkeeping involved. Money is not the wheat, nor is it the coin or the paper. Money is the recordkeeping. Money is the accounting. Which brings us to our modern monetary systems.
Modern money
A modern monetary standard is an accounting practice designed to keep the price of a basket of consumer goods stable, as expressed in the common unit of account. Its aim — price stability — mirrors that of a commodity standard, but the reference is now a basket rather than a single commodity.
While strategic reserves of commodities (notably gold) still exist, modern currencies rely primarily on monetary policy and macroprudential regulation such as setting interest rates, intervening in foreign currency markets, and defining the conditions under which banks operate.
Some would include fiscal policy which involves buying and selling goods and services using the public bank account. So it is analogous to how commodity standards are managed, except that it isn’t limited to one commodity.
Unlike in the King's example above, modern units of account, being abstract and intangible, can not just be proclaimed. At conception, any new modern unit must reference another unit and will ultimately trace back to a historic commodity standard. A recent example is the ECU (precursor of the Euro), whose exchange rate was defined as a ratio of a weighted mix of the national currencies and the target currency***.
In other words, “fiat” money can not actually be “fiated” into existence without reference. Rather modern money evolved — just not quite in the way standard theory suggests.
The three universal building blocks
To recap: any monetary standard, ancient or modern, rests in three fundamental building blocks.
Money keeps count of (accounts for) trades of “goods for nothing”. This is what money does and therefore, in essence, what it is. Money is accounting — not something that is itself transacted.
To count trades, you need a numerical connection to real goods and services. You need a unit of account. Whether concrete as in a commodity standard or abstract as in modern currencies.
If you're not only counting in your head, you need an accounting technology, a means of recording, such as books, coins, paper or bits & bytes. Actually technologies, as various technologies can coexist within the same currency. A $ bill is as much a record of past transactions as a $ credit in your bank account.
Thus, in a slight departure from W. Stanley Jevon’s standard definition, whereby money has four (sometimes three) functions (medium of exchange, unit of account, store of value, payment of debts), we propose that this trifecta of attributes is both consistent with and sufficient for analyzing all historical and current monies — and can serve as a litmus test for things that claim to be money. Accordingly, we can apply it to cryptocurrencies such as Bitcoin.
Are Cryptocurrencies Money?
Are blockchains a type of accounting that can record transactions of “goods for nothing”? The answer is probably: “maybe they can”, but also: “no they don’t”.
Look up what blockchains in cryptocurrencies actually do: they record cryptocurrency transactions. This means that the change of ownership of the ledger itself is immutably recorded on the blockchain when it changes hands. It’s like passing along an ever-growing book with entries that read, “This book is now mine — signed [name/code].”
Technically, that entry could also read “Oliver purchased something from Antti for ₿0.4”, thereby simultaneously recording a debit of ₿0.4 for Oliver and a credit of ₿0.4 for Antti. In that case, a blockchain would function as a rudimentary bank - recording debits and credits. But as things stand, this is not what cryptocurrencies do leading to the conclusion that they are not money! There is no debit side!
If they aren’t money per se, perhaps cryptocurrencies are new units of account? Judging by symbols such as ₿ some seem to think so. But the purpose of a unit of account is to provide a common numerical denominator with which to compare otherwise incommensurable goods. One cannot just invent one without referencing either another existing currency or a commonly valued commodity.
It’s like inventing a new unit for measuring length. If you’re dissatisfied with meters and feet, you can proclaim “feeters” or “meets”, but they’re meaningless without definition. Are they a fraction of a meter or a foot? Do they relate to something in nature? And once defined, will they remain stable over time?
Only if Antti could purchase the equivalent of an apple by being debited ₿0.4 in future, could ₿ perhaps be considered a unit of account. But this is not how cryptocurrencies work. Prices of in ₿ are not recorded on the blockchain, nor do they determine ₿’s value in terms of goods. Instead, its value is determined on speculative markets where it is measured in conventional units such as $, £ or ¥. So no, ₿ is not a unit of account either!
This leaves one remaining possibility: that cryptocurrencies are merely a new technology existing currencies could use. Could the dollar, for example, make use of the blockchain? Technically, yes — though why one would wish to is another question. It would still require proper recordkeeping as per the above, and your bank statement would still read $ or £, not ₿. So while possible, that’s clearly not what crypto advocates have in mind when they “buy” ₿.****
Are cryptocurrencies "digital gold"?
There remains one last possibility, outside the realm of moneyness: that they are akin to digital gold.
Considering gold itself (unlike grain, for example) has limited real-world use beyond jewellery (and formerly coinage), most of its value is arguably speculative. People believe others will value it tomorrow, and because it doesn’t spoil, it is valuable today.
Gold’s use value likely peaked when it was the recordkeeping technology of choice (coins) but declined once cheaper technologies (paper etc) gained trust.
Crypto is similar in that its value is mostly speculative, though its usefulness as a recordkeeping technology remains unproven.
Conclusion
For now we can state confidently that commodity money and modern money function in essentially the same way, whereas cryptocurrencies are entirely different beasts. Judging by the classical story outlined at the beginning, this might not be immediately obvious. But that story itself is underdefined and thus a poor test for determining whether something qualifies as money or not.
The Accounting View, by contrast, shows clearly why cryptocurrencies are not currencies.
Antti & Oliver
*This is the case whenever the face value of the currency exceeds the bullion value of the coin.
**Standardised weights of grain were used as customary measuring units for trade throughout ancient times and were often what defined subsequent currency units and their respective embodiments as coinage / precious metals. See e.g. https://en.wikipedia.org/wiki/Grain_(unit)
***To calculate the value of the ECU (XEU) with respect to another currency (say, USD), divide each of the twelve amounts of national currency in the ECU basket (see table above) by the corresponding exchange rates of that country vis-à-vis the target currency (DEM/USD, FRF/USD, GBP/USD, etc.). Then add these twelve numbers together to obtain the USD/XEU exchange rate. from: https://fx.sauder.ubc.ca/ECU.php
****We’re open to the possibility that this is what so-called stablecoins are or what central bank digital currencies (CBDCs) could be.
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