The opinions and opinions expressed in this article are those of the author.
Electronic money and cryptocurrencies, particularly Bitcoin, have returned to the fore. Bitcoin was recently legalized in Ukraine and introduced as legal tender in El Salvador. The question is whether cryptocurrencies are currencies or “money”?
The question is not technological but legal. This is because money is a legal institution, although economists and even lawyers today are generally not very aware of it.
Legal monetary systems explained
In the modern monetary system, money is a legal debt created by borrowing. This theoretically applies to cash: the banknote is a debt represented on a piece of paper and owed by the central bank to the respective holder.
It also applies in very real terms to the economically much larger bank money, which is money held in commercial bank accounts.
Bank money is created by granting a loan to the customer of the bank, either through an individual loan agreement or by using a credit card. The amount granted is credited to the customer’s account being a âJanus-faceâ debt.
On the one hand, the loan remains a debt of the customer of the bank because the bank does not cede anything, but lends against interest (and can sue and enforce this debt).
On the other hand, the amount of the credit becomes a circulating credit, that is to say real money because the customer of the bank transfers the amount of credit from his account to the seller to pay for the purchase of a car. The seller can then use the amount received for another purchase.
If the bank customer repays his loan in full, he is technically destroying the money because he is paying off the debt that the money represents – not specifically the amount he uses to buy the car, but in macroeconomic terms.
Legally speaking, the buyer pays a purchase debt along with another debt. It’s the law that says it counts as a payment. If a customer withdraws their entire deposit from their account to get cash, the bank’s debt to them is repaid and the money in the bank is converted to cash.
The bank must (ultimately) acquire the cash from the central bank and minimize its credit balance on its central bank account by the amount of cash withdrawn (the central bank’s debt to the commercial bank therefore becomes smaller) .
This is another reason why commercial banks are interested in cashless payment transactions.
What counts as money and who can create it?
This mechanism of the monetary system is in itself independent of the technology used because the system is a legal construction. What matters is what counts as money and who is allowed to create and issue it. This is ordered by law.
Thus, cash can certainly be electronic because central bank debt does not have to be represented by a banknote but can exist in the form of a computer record.
This is always the case with bank money; no bank today still writes its accounts in paper books with a fountain pen. Theoretically, a commercial bank could represent its circulating credits functioning as money by its own issued notes, and until the 19th century this happened before it was abolished (except in Scotland, for example).
Electronic money is cash because it is created (and owned) by the central bank.
Electronic banking money is bank money because it is created (and owned) by a commercial bank under the law.
Even if, for example, Blockchain crypto-technology (as with Bitcoin) was used, it would not change anything conceptually.
The problem is more practical because customers would then have to distinguish between a bank or credit card (bank money) and a charge card, which would likely be very similar plastic cards.
Cryptocurrencies Do Not Perform Key Money Functions
However, the difference between traditional forms of money and Bitcoin is that the money is created and issued by legally authorized banks. In the case of bank money, this legal authorization is admittedly quite vague and implicit.
While the particularity of Bitcoin is precisely the elimination of banks as intermediaries, which is supposed to give Bitcoin the appearance of a kind of anarchic freedom.
As traditional money no longer has any intrinsic value (like gold), its value consists only of an exchange value, that is to say in the recipient’s belief that he can again exchanging inherently worthless money for something with use value.
This characteristic would not be different from Bitcoin, but the necessary belief (bankers like to speak of “trust”) is very widely promoted by the legal authorization and the financial supervision of banks and the judicial enforceability of the debt called money.
In contrast, the exchange value or reliance on Bitcoin as a completely unregulated means of payment is questionable and very risky, which makes it less suitable as a medium of exchange.
It is therefore largely an object of speculation. Traditional currency can be too (as seen in the foreign currency speculation), but this is not at all comparable to the extreme price swings of Bitcoin, which therefore excludes it as a store of value.
Bitcoin therefore does not fulfill two of the three functions of money (medium of exchange, unit of account, store of value). In addition, Bitcoin does not mean freedom from banks but allows banks to come under banking supervision through subsidiaries trading in Bitcoin.
Economist Friedrich A. von Hayek called for a free currency market in the 1980s, but is that unrealistic? The internet, for example, is now dominated by companies like Amazon, Google, and Facebook, and the cryptocurrency market will grow similarly.
The creation of Bitcoin is not only ecologically disastrous, Bitcoin is also reminiscent of an old gold backed currency with its technological limit of just under 21 million Bitcoins.
There is a lot to reform in the monetary system, but certainly not via Bitcoin.
- _Andreas Rahmatian is Professor of Commercial Law at the University of Glasgow, UK _