Thinking about crypto as money

There are a number of people in the financial world who make derisory remarks about cryptocurrencies ever becoming accepted as ‘real money’. Their arguments point to its volatility, which they say makes it impossible “for cryptocurrencies to serve what traditional economics describes as the three functions of money: 1) a medium of exchange, 2) a store of value, and 3) a unit of account,” as Michael J. Casey writes at Coindesk.

Casey suggests that this argument doesn’t work if “the three functions framework is based on a flawed, or overly narrow, definition of money.” He points us towards a book by Felix Martin ‘Money: The Unauthorized Biography’, in which the author says that historically people have had a flawed view of money as a “thing”, i.e. a banknote, but he says that it is really “a socially invented governance system for tracking transfers of property and clearing debt in a commonly trusted manner.” Martin believes we have “fetishized” money as something to be owned and accumulated, rather than seeing it as a means to an end.

In Martin’s view a nationally accepted currency, such as the dollar, is merely a tool that makes it easier to carry out transactions “across a community of otherwise untrusting strangers.” Casey says this makes cash similar to a decentralized, peer-to-peer record-keeping device. Still, it is difficult to challenge the dominant thinking about national currencies, which are effectively a system of social organization and control in sovereign states. But is this the only way to think about money?

Cryptocurrrencies do challenge the sovereign state narrative about money, simply because they are “censorship-resistant, geography-agnostic value transfer systems.” They provide rules and a framework of trust for users without needing to draw their authority from governments, although as Casey mentions, crypto users still have to follow the laws of their governments around cryptocurrencies.

Casey also argues that while some see Bitcoin as a replacement for the dollar, there is a bigger picture to consider, and that is the potential of digital assets to dispense with the need for universal common currencies altogether. As he correctly says, we are a long way from that happening. However, if interoperability protocols and transaction processing can be scaled in a properly decentralized manner, allowing cross-chain atomic swaps in mass numbers without having to trust intermediaries, something like a global system of fractionalized digital value exchange could be realised.

According to Casey, central banks in Singapore and the United Arab Emirates are already exploring interoperability solutions for their central bank digital currencies (CBDCs). This is a move that threatens the status of the dollar as the world’s reserve currency. If this happens, crypto could become a universal unit of account. Casey concludes by pointing out that if the dollar’s role is diminished then “the role of bitcoin, ether, NFTs and other digital assets could increase.” And how we think about money will have changed as well.

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