Expanding definitions and Obsoleting Industries

I’ve already explained why we can’t figure out if bitcoin is “really” a currency. But I think there is a lot more to say — because those 3 characteristics of money (Unit of Account, Store of Value, and Medium of Exchange) are not the only things that make money useful.

What else is needed?

Principally, gold stopped being used as currency directly because it was too hard to carry around as a currency — especially safely! But the gold standard was abandoned because the supply was too inflexible. Country’s economies started to expand much faster than their metal-backed currency, so that the value that existed was in excess of the medium of exchange for that value, and their needs for credit couldn’t be easily supplied with gold. This clarifies that these three tasks are not all a currency can do, nor is it the only thing we might care about. In fact, much before digital currencies, there were lots of things that we need that traditional forms of money don’t provide. Instead, systems were created to fill in the gaps, and these systems sprouted entire industries that software is getting ready to eat.

For example, we frequently need a system for measuring, processing, and communicating transactions. This is traditionally done by bookkeepers (not even necessarily accountants). I’ll refer to it as a “ledger of transactions” (4). Bookkeeping employs a couple hundred thousand people and costs around $50bn in the US alone. Under modern accounting principles, using third party verifiers, this system also allows an owner to provide a “proof of worth” (5) for a company or an individual. That’s accounting, (audit, not tax) and it employs another couple hundred thousand people and costs $100b. Both of these are bonuses that blockchain ledger currencies like bitcoin can provide, for example, using merkel hash tree signed proofs. Because of this, traditional businesses and currencies must rely on those large, expensive systems instead.

Next, we have more ancillary, non-currency systems that provide “tokens of ownership” (6) for non-currency goods, like real estate deeds or stock certificates. In order for these to be liquid and saleable, a “verifiable exchange market” (7) is needed, such as a county clerk for real estate, so that people can reliably sell their property without worrying that someone else will appear with a different deed to the property. If you’ve ever bought a house, you know the “title search” fee of $250+ you pay, instead of a 1 line query of a distributed blockchain database. And then you probably still need title insurance, in case the search missed anything.

The verifiable exchange can also provide a “transaction price log” (8) like the stock market’s ticker, where everyone can see the value of the goods currently being traded, and therefore be able to make decisions about whether to buy and sell. And all three of these can be accomplished using on-chain blockchain tokens, which track ownership, and the blockchain can show the prices paid for them.

We also want a “system of credit” (9) that allows for transactions that are contingent, risky, or require a future payment. This last is closely related to, and requires, a unit of account — but credit cards and most other typical forms of credit use outside systems for their unit of account. This is a feature that blockchain based currencies don’t do well, yet. Some smart contract platforms seem poised to allow, for example, collateralized loans, but the key difficult with extending credit via blockchain is that unsecured credit requires known identities, which blockchains don’t do. (If I lend money to you, then you stop paying me back and just start using a new wallet for your money, it’s not clear what recourse I have.)

Further, built on top of these systems, we have complex systems for many other features of the modern economy that are enabled by these various services and characteristics of money and related market systems. For example, fractional reserve banking relies on a “system of credit” for loans so that banks can have assets in excess of their reserves. For this to be trustworthy, we need (but don’t fully have) a robust “proof of worth” for these banks.

We have a repurchase agreement (“repo”) market that allows “tokens of ownership” (6) to assist the “system of credit” (9) which helps ensure liquidity on the basis of owned assets.

The Future

This large set of needs, combined with a healthy dose of historical path dependence, leads to the current complicated set of systems that are all intertwined. But as one 2016 Nobel laureate said, “The times, they are a changin’.”

Cryptocurrencies and Smart contracts have the ability to do all of these things. Definitions don’t dictate reality, they reflect it. Cryptocurrencies can do things currencies cannot, and focusing on the definitions is a red herring.

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