If Bitcoin Isn’t Money, What Is It?

The Governor of the Bank of France, Francois Villeroy de Galhau, stated at the Paris Fintech Forum in June that there is no such thing as a cryptocurrency, only crypto-assets. I get what he’s saying. Brett Scott just made a similar remark, which he is always thoughtful about. “Swapping a dollar-priced Bitcoin collectible for dollar-priced items does not fundamentally affect the foundation of the monetary system,” he wrote, just as a child trading an action figure for a football “does not undermine the Federal Reserve (which prints dollars in which both are valued).” It certainly does not.

Bitcoin artifacts.
(C)2021. Helen Holmes

I have to say, Francois and Brett are correct. While some people (correctly, in my opinion) saw Bitcoin as more of a protest movement than a viable alternative to Bretton Woods, and others saw it as a way around a broken international monetary system, I’ve always maintained that Bitcoin is not money, but rather a new type of digital asset with money-like characteristics in certain circumstances.
Some people even see it as a new beginning. I met a lot of folks in the early days of Bitcoin who saw crypto-assets as the foundation for an alternative economic system, a kind of trustless base layer for a worldwide “internet of value” that would sweep away global corporatism’s sclerotic institutions and unleash a new wave of capitalism. These folks frequently mentioned a new gold standard, which I don’t understand because society had long since concluded that a gold standard was not the best way to operate modern economies. There is no evidence that this alternate approach is gaining traction. We see “a never-ending flood of ‘freedom porn'” from cryptocurrency aficionados on social media, but the crypto-asset markets are thin, opaque, and controlled in reality, according to Concoda.
So, if crypto-assets aren’t a protest movement, a new gold standard, or a new currency, what exactly are they?
Alternatives to Bitcoin
Asking why people buy and sell crypto-assets is one method to address that issue. I’ve often wondered whether most people who dabble in the realm of cryptocurrencies regard them as weapons to destabilize the Federal Reserve or as enjoyable digital collectibles. The query has now been answered. The Monetary and Economic Department of the Bank for International Settlements (BIS) has lately released a working paper (no. 951) by Raphael Auer1 and David Tercero-Lucas2 titled “Is it a case of mistrust or speculation? The Socioeconomic Drivers of Cryptocurrency Investments in the United States “, which is an enthralling examination of the market forces that influence crypto-asset purchases. Using data from the United States Survey of Consumer Payment Choice, they discover that, despite the noise on Twitter and the shouting at cryptocurrency conferences, there is little evidence that cryptocurrency investors are driven by a hatred of fiat currencies or regulated finance. In fact, when it comes to security concerns about cash and commercial banking services, these investors are no different than the general public.
In other words, people trade crypto-assets because “numbers go up” in a post-modern digitally turbocharged version of the greater fool theory that all you need to profit from an investment is to find someone willing to buy the asset at an even higher price, regardless of whether the asset is worthless or not, as my David Gerard has consistently observed.
ADDITIONAL INFORMATION FOR YOU FUTURE MARKETS
As a result, the crypto-asset market functions similarly to any other market. This is a key and serious conclusion of the BIS work: because investors’ aims are similar to those of other asset types, regulation should be similar as well. Crypto-assets are viewed as a “niche digital speculative object,” rather than a replacement for fiat currencies or regulated finance. Quite. This is why, rather than cryptocurrencies, I’ve always been more interested in the area of digital assets, tokens, and decentralized finance. Tokens can be used to execute trades through smart contracts in decentralised financial markets (“defi”), and this is the way to go.
This is important since markets are riddled with inefficiencies due to the existing state of financial systems and the complex regulatory environment. Critics argue that the response to the financial crisis (Dodd Frank, etc.) simply increased inefficiencies, and that a new, defi strategy is needed. This strategy would offer crypto-assets genuine utility and, in my opinion, provide a glimpse into a future of markets in which machines engage in intricate deals involving instruments that are too complex for human traders to comprehend.
That reference to the Great Financial Crisis brings to mind what happened when we set human traders loose on instruments they didn’t comprehend (mortgage-backed securities): the financial system was blown apart. So, what’s stopping defi bots from trading crypto-assets in the same way? Well, it’s possible that one of the major benefits of using bots to trade is that we can force them to obey rules, whereas we can’t force their human counterparts to behave ethically no matter what the consequences are.
However, it’s worth noting that the decentralised structure of these more efficient markets could be their Achilles’ heel and a considerable impediment to mainstream institutional adoption. In the same way that defi allows market participants to take advantage of new ways to maximize their yields and value propositions, hackers and saboteurs might use the same freedom to launch assaults. Hackers can, for example, borrow tokens from one protocol while swapping them for tokens from another protocol, and then follow this indirect chain of transactions and attacks sequentially. Instruments that are too difficult for the good guys can appeal to the bad guys extremely well.
As a result, I was intrigued to learn in the BIS report that “embedded supervision” is a “promising approach” that supervisory and regulatory authorities may investigate. To put it another way, the supervisory framework for trading digital assets is being embedded into the smart contracts themselves. This is useful confirmation of the applicability of “ambient accountability” on shared ledgers, a notion introduced in a study by Richard Brown (now R3), Salome Parulava (then with Consult Hyperion), and me in the Journal of Payments Strategy and Systems in 2016.

Decentralized finance, according to Bank of America, will be more disruptive than Bitcoin. (Photo courtesy of Getty Images/… [+] Justin Sullivan)
courtesy of Getty Images
Bank of America recently dubbed central bank digital currencies “kryptonite for crypto” (echoing the idea that crypto-assets are not cryptocurrencies), but added that it is interested by defi, which it believes has more disruptive potential than Bitcoin. I am confident that they are correct. The fact that crypto-assets are not currencies does not negate their utility. In reality, quite the opposite is true. They will make a big contribution to improving the lives of all of us, crypto-asset traders or not, if they can lower the costs of financial intermediation (primarily by reducing the costs of regulation, compliance, and auditing)./nRead More