Ciao Brett, thank you for this post. I love the way you explain things and I would like to share some thoughts with you.
First: in your story you can easily change the word "Bitcoin" with "Euro". So the camera is still costing 5k and still the price in euro, which depends on the exchange rate US$/€, will go up and down while the one in $ will remain fixed. At the same time on another online store based in Italy the price for the same camera in € is 4k and doesn't change. But the shop offers its clients the possibility to pay in US$ and this price is moving up and down while the one in € never moves. Can we say that nor US$, nor € are "money"? Obviously not. So what makes these two currencies "money"?
Second: back on Jan 1st 2001 in Italy we abandoned the italian lira and adopt the €. For several months or years we weren't able to think to prices of what we found at the supermarket in €. We normally translated those prices we read in € back in Lire and only after the translation we were able to take our decision as buyers. After a certain period we got used to prices in € and we were no longer obliged to do a mental translation. How this inability transformed in new ability effects our perception of € as money?
Third: in Switzerland few know that there are two currencies: the Swiss Franc and the Wir franc <https://en.m.wikipedia.org/wiki/WIR_Bank>. Wir franc is a complementary currency which exists since 1934. No other country accepts Wir franc but in Switzerland you are allowed to have banking account in Wir, borrow Wir franc, etc. Is Wir franc money and why?
Forth: Is it possible that the reason why bitcoin seems not money to you is because there is no sovran state which use bitcoin as its currency? And what about if a State tomorrow will announce that it's new currency is bitcoin? I mean it's only currency is bitcoin. Would this announcement trasforma bitcoin in real money?
Thank you very much again for the time you spend on your very smart newsletter.
Hi Marco, all those interactions with euros and dollars you described are examples of FX transactions. The FX market is a zone of swapping one currency (that is used as a primary pricing system in one region) for another (which is used as a primary pricing system in another). Something only gets to be on the FX market, however, if it is used as a primary pricing system somewhere. This is why, for example, Apple shares are not found on the FX market, despite the fact that you can pass Apple shares to someone in countertrade 'payment' for something. There is no supermarket in the world that prices anything in Apple shares. By constrast, if you find yourself immersed in the euro system your entire pricing framework in a supermarket will be in euros. If you then wish to buy something from outside that geographic region you will have to go via the foreign exchange market, which has a 'swapping' element to it. The crucial point from here is to establish whether Bitcoin is on the FX market, and to do that you only have to ask yourself whether it is used as a primary pricing system in any supermarket in the world. The answer to that is 'no'. It is no more a pricing system than a bottle of Coca Cola is, but its high countertradability means it feels more 'moneylike' than Coca Cola, even though though both Bitcoin and Coca Cola are priced objects rather than pricing systems.
On your second question. What you are describing there is the phenomenon I mentioned above, where I said "it is almost impossible to assess a price without having pre-established notions of what you might expect other things to cost". Your brain was recalibrating the network of prices. The same thing happens when you arrive in a new country as a tourist and see prices in the supermarket there. The local people in that country would intuitively understand the pricing relationships while your brain is still trying to calibrate itself to the new measure.
On WIR. Sure, the WIR is a currency. I don't have time to go into the details of why but it is within a credit money paradigm and there are many alternative credit money systems that can definitely be classed as money.
To answer your last question, the answer is no. I work on many non-state systems that can be classed as money, and it is not the lack of state that stops Bitcoin being a monetary system - it is the design of Bitcoin itself, which is fundamentally unsuited to a dynamic economy, and it explicitly designed to operate as a limited edition collectible to be used for speculation. Now, it is true that any state can certainly announce that 'its new currency is Bitcoin' but for such a state to truly 'anchor' Bitcoin into a real economy, and override the international speculative market in Bitcoin, it would need to be a very powerful state. El Salvador, for example, has tried to say that its currency is Bitcoin, but that is largely a PR move on their part and I very much doubt that the El Salvadorian state is strong enough to provide an international anchor for Bitcoin. The fundamental issue, however, is that even if a state managed to shoehorn Bitcoin into being some kind of currency, the Bitcoin system is so inflexible that it is doubtful that it would survive very long in that position
You said elsewhere that you think the primary function of money is the standard of value function, which is what this article is fundamentally about. But money-as-we-know-it has the standard of value and medium of exchange functions fused. In days of old, minted coins didn't even have prices on them, because their value was determined my the sovereign, and liable to change. In this case according to your definition, even those coins weren't money, because pure money is a pure measure.
So I find it very hard to say much definitive about money because its very essence seems to depend on context. So I wouldn't call bitcoin money, but I don't have a problem with 'using bitcoin as money' meaning that I can settle debts with it and move it around.
In fact I've notice that every market could be said to have its own money. As Marco points out below, the Euro is just a barter object when something is priced in dollars. This is because a dollar priced object signifies a dollar marketplace where the Euro is not money. I can also imagine non-market contexts when money itself seems to be used more like an object for countertrade...
Hi Matthew. I would never argue that 'money is a pure measure'. I see all these 'functions of money' that people talk about as secondary effects derived from primary features of money (that's why I always critique the 'functions of money' paradigm). I do not reject the idea that different things can induce those secondary features, but redeemable units of credit are very good it at. It is hypothetically possible that Bitcoin might be shoehorned into the role of a 'measure' at some point but it is terrible at that job precisely because it has no primary essence: it is just a movable digital object with moneylike branding pasted over it, which means there is no actual basis from which it can begin to function as a measure
On your last points, check out the answer I gave to Marco. I am not against the idea that there are complex countertrade elements at play in international FX transactions, but that doesn't mean Bitcoin is in the same category. The FX market is a zone of internetwork interfacing in a politically divided world. The only reason that people (in full knowledge that Bitcoin primarily induces thoughts of what it can be sold for) can be tricked into thinking it is actually on the FX market is because it has moneylike branding pasted all over it
Apologies this reply is very rushed so hope it makes sense
Big fan of your stuff (obviously, subscriber here), but I feel that your countertrade example doesn't go deep enough. It hinges on a sort of collective psycho-social acceptance of one currency over another. You don't account for the real base of the financial system. It isn't fiat, which is just a number system (Roman, Arabic, etc). Currency at its most basic level is an agreement on the most accurate way to account for the transfer of time. The fungibility of time and its sharing is the key to the entire economic system. The single biggest problem with any scarcity-based currency ($BTC, Gold, whatever)- its inflexibility. Imagine a financial response to the pandemic if the only monetary tool was gold. Catastrophe. While kinetic time declined, potential time increased, and the fiscal and financial responses created a cooperative load balancing. Example: Farsighted logistics companies frequently pay trucks to run empty between two cities, just to maintain future capacity. With a finite monetary base, future capacity can't really be funded. Especially if it's a decentralized system. The various holders of the DeFi currency would've demanded higher interest rates to compensate for risk! This would've destroyed the economy. Crypto has a potentially potent role. Arguably, it's a far, far better store of value of gold. Why that's so is a longer, more controversial convo.
Thanks for the insightful comment. I am however a little skeptical about the idea of time being the base of the economic system. No amount of giving me time will do anything in the absence of labour. If anything, the key base of the economic system is *labour*, applied over time to the planet.
You're also perhaps going a little bit too far into the 'money as measurement system' idea. There's nothing about a measurement system that implies it has active power: for example, the fact that I can use a tape measure to measure the dimensions of some future house I want to build does not mean that the tape measure somehow has active power to make some building plan spring to life. Measurement by itself is passive, and measurement is one part of an exchange process. To account for why the thing being used to measure also has power you need a different explanation.
In this sense, I'd also push back against the idea that fiat is 'just a number system'. The fiat system is very explicitly built in large part out of the legal liabilities of banks, which in turn are locked into the system of tax credits issued out by governments... but this is a much bigger topic for another time.
I do resonate, however, with your intuition about scarcity-based systems being inflexible. Absolutely. There is something fundamentally off-kilter about expecting a static commodity money system to somehow be able to deal with a dynamic economic system subject to uncertainty
Hi, Brett. I came with another argument how to show that money create environment which prices goods and services. If there is some slight mistake on the banknote of some kind, you would still be able to pay with it like with other money. But when collectors find that there is some rare issue of banknote with some mistake on it, they would immediately buy that for more than the nominal cost of banknote is.
So you can either pay with it while the banknote remains part of the environment ascribing the value to other goods, or you can "rip" it from the environment, make it "luxury" good and sell for much more. Or maybe speculate on it. And this is the difference between money and goods. I know you know the difference, but this possible duality due to mistake really helped me make sense of how it works.
Thanks for the insightful comment Ondřej. There are actually many good examples of this: in one of my first subscriber pieces I looked at the Tenino 'Wooden Dollar', which is essentially a US-dollar backed voucher that can be used in a local region in Washington. Technically it is redeemable 1:1 with the dollar, but the fact that it has a novel body (being made out of wood) means that collectors try to buy them up, thus transforming it from a local money system into an object priced within the monetary system
First off, thank you for your work, you're incredibly generous with your knowledge and I appreciate it. I do have some quick questions for if you have the time/inclination. Are assets like Dai or USDC still primarily counter-tradeable collectibles or are they comparable to bank-money/deposits/poker-chips? If they are just collectibles, is this solely due to their function(they aren't used to compensate labor or buy goods within a closed system) or is there something about the form of these Cryptos that prevent their use as bank-money? How about CBDCs like the digital Yuan, are these state-money, are they still collectibles, or are they a different thing entirely? Lastly, In the States there's some movement on the left(though mostly just talk) to push to allow our postal service to offer bank services, have you written on this? If not, do you have an opinion on postal banking? Can banking be a public utility in the same way that cash is or is this a terrible/impossible idea? Again, thank you so much, your work has made this topic so much more accessible to me.
Hey James, certainly USDC docks into the US dollar system as a third-tier chip issuer, so they are definitely comparable to bank-money (or more accurately, something like Paypal-money, which is backed by bank-money). As for Dai, that's a more complex one that I need to do a deep dive into at some point - DAI has a unique structure and is using countertradeable assets to mimic something like Paypal units, so is a kind of hybrid.
CBDCs are very strongly state money. They are something entirely different, and I would never characterise them as collectibles. Bear in mind that CBDC already exists - it's normally just called 'reserves', and is the digital incarnation of state money, the physical incarnation being cash
As for postal banking, it is an area I've come across, and I have a history of working with alternative and community banking movements. There is a certainly positive potential there, and I will try write further about this in due course
Thanks, Brett! Your work has been instrumental in motivating me to redirect the energy that I was previously investing in waiting for god Blockchain to save us. Like a man cursed, I spend my days seeking out and consuming new ways to reinvent our monetary system for a more equitable and sustainable future. You've awaken a voracious curiosity in me.(I apologize for using this response as a writing warmup)
Ciao Brett, thank you for this post. I love the way you explain things and I would like to share some thoughts with you.
First: in your story you can easily change the word "Bitcoin" with "Euro". So the camera is still costing 5k and still the price in euro, which depends on the exchange rate US$/€, will go up and down while the one in $ will remain fixed. At the same time on another online store based in Italy the price for the same camera in € is 4k and doesn't change. But the shop offers its clients the possibility to pay in US$ and this price is moving up and down while the one in € never moves. Can we say that nor US$, nor € are "money"? Obviously not. So what makes these two currencies "money"?
Second: back on Jan 1st 2001 in Italy we abandoned the italian lira and adopt the €. For several months or years we weren't able to think to prices of what we found at the supermarket in €. We normally translated those prices we read in € back in Lire and only after the translation we were able to take our decision as buyers. After a certain period we got used to prices in € and we were no longer obliged to do a mental translation. How this inability transformed in new ability effects our perception of € as money?
Third: in Switzerland few know that there are two currencies: the Swiss Franc and the Wir franc <https://en.m.wikipedia.org/wiki/WIR_Bank>. Wir franc is a complementary currency which exists since 1934. No other country accepts Wir franc but in Switzerland you are allowed to have banking account in Wir, borrow Wir franc, etc. Is Wir franc money and why?
Forth: Is it possible that the reason why bitcoin seems not money to you is because there is no sovran state which use bitcoin as its currency? And what about if a State tomorrow will announce that it's new currency is bitcoin? I mean it's only currency is bitcoin. Would this announcement trasforma bitcoin in real money?
Thank you very much again for the time you spend on your very smart newsletter.
Take care of yourself,
Marco
Hi Marco, all those interactions with euros and dollars you described are examples of FX transactions. The FX market is a zone of swapping one currency (that is used as a primary pricing system in one region) for another (which is used as a primary pricing system in another). Something only gets to be on the FX market, however, if it is used as a primary pricing system somewhere. This is why, for example, Apple shares are not found on the FX market, despite the fact that you can pass Apple shares to someone in countertrade 'payment' for something. There is no supermarket in the world that prices anything in Apple shares. By constrast, if you find yourself immersed in the euro system your entire pricing framework in a supermarket will be in euros. If you then wish to buy something from outside that geographic region you will have to go via the foreign exchange market, which has a 'swapping' element to it. The crucial point from here is to establish whether Bitcoin is on the FX market, and to do that you only have to ask yourself whether it is used as a primary pricing system in any supermarket in the world. The answer to that is 'no'. It is no more a pricing system than a bottle of Coca Cola is, but its high countertradability means it feels more 'moneylike' than Coca Cola, even though though both Bitcoin and Coca Cola are priced objects rather than pricing systems.
On your second question. What you are describing there is the phenomenon I mentioned above, where I said "it is almost impossible to assess a price without having pre-established notions of what you might expect other things to cost". Your brain was recalibrating the network of prices. The same thing happens when you arrive in a new country as a tourist and see prices in the supermarket there. The local people in that country would intuitively understand the pricing relationships while your brain is still trying to calibrate itself to the new measure.
On WIR. Sure, the WIR is a currency. I don't have time to go into the details of why but it is within a credit money paradigm and there are many alternative credit money systems that can definitely be classed as money.
To answer your last question, the answer is no. I work on many non-state systems that can be classed as money, and it is not the lack of state that stops Bitcoin being a monetary system - it is the design of Bitcoin itself, which is fundamentally unsuited to a dynamic economy, and it explicitly designed to operate as a limited edition collectible to be used for speculation. Now, it is true that any state can certainly announce that 'its new currency is Bitcoin' but for such a state to truly 'anchor' Bitcoin into a real economy, and override the international speculative market in Bitcoin, it would need to be a very powerful state. El Salvador, for example, has tried to say that its currency is Bitcoin, but that is largely a PR move on their part and I very much doubt that the El Salvadorian state is strong enough to provide an international anchor for Bitcoin. The fundamental issue, however, is that even if a state managed to shoehorn Bitcoin into being some kind of currency, the Bitcoin system is so inflexible that it is doubtful that it would survive very long in that position
Thank you, Brett!
You said elsewhere that you think the primary function of money is the standard of value function, which is what this article is fundamentally about. But money-as-we-know-it has the standard of value and medium of exchange functions fused. In days of old, minted coins didn't even have prices on them, because their value was determined my the sovereign, and liable to change. In this case according to your definition, even those coins weren't money, because pure money is a pure measure.
So I find it very hard to say much definitive about money because its very essence seems to depend on context. So I wouldn't call bitcoin money, but I don't have a problem with 'using bitcoin as money' meaning that I can settle debts with it and move it around.
In fact I've notice that every market could be said to have its own money. As Marco points out below, the Euro is just a barter object when something is priced in dollars. This is because a dollar priced object signifies a dollar marketplace where the Euro is not money. I can also imagine non-market contexts when money itself seems to be used more like an object for countertrade...
Hi Matthew. I would never argue that 'money is a pure measure'. I see all these 'functions of money' that people talk about as secondary effects derived from primary features of money (that's why I always critique the 'functions of money' paradigm). I do not reject the idea that different things can induce those secondary features, but redeemable units of credit are very good it at. It is hypothetically possible that Bitcoin might be shoehorned into the role of a 'measure' at some point but it is terrible at that job precisely because it has no primary essence: it is just a movable digital object with moneylike branding pasted over it, which means there is no actual basis from which it can begin to function as a measure
On your last points, check out the answer I gave to Marco. I am not against the idea that there are complex countertrade elements at play in international FX transactions, but that doesn't mean Bitcoin is in the same category. The FX market is a zone of internetwork interfacing in a politically divided world. The only reason that people (in full knowledge that Bitcoin primarily induces thoughts of what it can be sold for) can be tricked into thinking it is actually on the FX market is because it has moneylike branding pasted all over it
Apologies this reply is very rushed so hope it makes sense
Big fan of your stuff (obviously, subscriber here), but I feel that your countertrade example doesn't go deep enough. It hinges on a sort of collective psycho-social acceptance of one currency over another. You don't account for the real base of the financial system. It isn't fiat, which is just a number system (Roman, Arabic, etc). Currency at its most basic level is an agreement on the most accurate way to account for the transfer of time. The fungibility of time and its sharing is the key to the entire economic system. The single biggest problem with any scarcity-based currency ($BTC, Gold, whatever)- its inflexibility. Imagine a financial response to the pandemic if the only monetary tool was gold. Catastrophe. While kinetic time declined, potential time increased, and the fiscal and financial responses created a cooperative load balancing. Example: Farsighted logistics companies frequently pay trucks to run empty between two cities, just to maintain future capacity. With a finite monetary base, future capacity can't really be funded. Especially if it's a decentralized system. The various holders of the DeFi currency would've demanded higher interest rates to compensate for risk! This would've destroyed the economy. Crypto has a potentially potent role. Arguably, it's a far, far better store of value of gold. Why that's so is a longer, more controversial convo.
Thanks for the insightful comment. I am however a little skeptical about the idea of time being the base of the economic system. No amount of giving me time will do anything in the absence of labour. If anything, the key base of the economic system is *labour*, applied over time to the planet.
You're also perhaps going a little bit too far into the 'money as measurement system' idea. There's nothing about a measurement system that implies it has active power: for example, the fact that I can use a tape measure to measure the dimensions of some future house I want to build does not mean that the tape measure somehow has active power to make some building plan spring to life. Measurement by itself is passive, and measurement is one part of an exchange process. To account for why the thing being used to measure also has power you need a different explanation.
In this sense, I'd also push back against the idea that fiat is 'just a number system'. The fiat system is very explicitly built in large part out of the legal liabilities of banks, which in turn are locked into the system of tax credits issued out by governments... but this is a much bigger topic for another time.
I do resonate, however, with your intuition about scarcity-based systems being inflexible. Absolutely. There is something fundamentally off-kilter about expecting a static commodity money system to somehow be able to deal with a dynamic economic system subject to uncertainty
Hi, Brett. I came with another argument how to show that money create environment which prices goods and services. If there is some slight mistake on the banknote of some kind, you would still be able to pay with it like with other money. But when collectors find that there is some rare issue of banknote with some mistake on it, they would immediately buy that for more than the nominal cost of banknote is.
So you can either pay with it while the banknote remains part of the environment ascribing the value to other goods, or you can "rip" it from the environment, make it "luxury" good and sell for much more. Or maybe speculate on it. And this is the difference between money and goods. I know you know the difference, but this possible duality due to mistake really helped me make sense of how it works.
Thanks for the insightful comment Ondřej. There are actually many good examples of this: in one of my first subscriber pieces I looked at the Tenino 'Wooden Dollar', which is essentially a US-dollar backed voucher that can be used in a local region in Washington. Technically it is redeemable 1:1 with the dollar, but the fact that it has a novel body (being made out of wood) means that collectors try to buy them up, thus transforming it from a local money system into an object priced within the monetary system
Great piece!
Interesting set of examples and valiant effort.
A much simpler way to explain is that cryptocurrencies are nerd art or collectibles.
Art and/or collectibles have value but they aren't currency.
That’s ridiculous. There are circa 20m identical bitcoins and 0 identical works of art
How many copies exist for the more famous Rodin statues?
Then there are the valuable mass produced collectibles like stamps, coins and cars.
Each bitcoin is actually unique - a unique cryptographic identifier plus a unique blockchain record. The fact that it is digital, is irrelevant.
My latest piece nuances out the countertrade argument. I argue that the collectibles are limited edition numerical nouns https://brettscott.substack.com/p/the-hole-in-bitcoins-heart
Well put. They are basically Electronic beanie-babies.
First off, thank you for your work, you're incredibly generous with your knowledge and I appreciate it. I do have some quick questions for if you have the time/inclination. Are assets like Dai or USDC still primarily counter-tradeable collectibles or are they comparable to bank-money/deposits/poker-chips? If they are just collectibles, is this solely due to their function(they aren't used to compensate labor or buy goods within a closed system) or is there something about the form of these Cryptos that prevent their use as bank-money? How about CBDCs like the digital Yuan, are these state-money, are they still collectibles, or are they a different thing entirely? Lastly, In the States there's some movement on the left(though mostly just talk) to push to allow our postal service to offer bank services, have you written on this? If not, do you have an opinion on postal banking? Can banking be a public utility in the same way that cash is or is this a terrible/impossible idea? Again, thank you so much, your work has made this topic so much more accessible to me.
Hey James, certainly USDC docks into the US dollar system as a third-tier chip issuer, so they are definitely comparable to bank-money (or more accurately, something like Paypal-money, which is backed by bank-money). As for Dai, that's a more complex one that I need to do a deep dive into at some point - DAI has a unique structure and is using countertradeable assets to mimic something like Paypal units, so is a kind of hybrid.
CBDCs are very strongly state money. They are something entirely different, and I would never characterise them as collectibles. Bear in mind that CBDC already exists - it's normally just called 'reserves', and is the digital incarnation of state money, the physical incarnation being cash
As for postal banking, it is an area I've come across, and I have a history of working with alternative and community banking movements. There is a certainly positive potential there, and I will try write further about this in due course
Thanks, Brett! Your work has been instrumental in motivating me to redirect the energy that I was previously investing in waiting for god Blockchain to save us. Like a man cursed, I spend my days seeking out and consuming new ways to reinvent our monetary system for a more equitable and sustainable future. You've awaken a voracious curiosity in me.(I apologize for using this response as a writing warmup)
Glad my work has been of help!