Those of us who have been following the evolution of bitcoin for some time now will have lost count of the number of times we’ve been told “but it’s not money!” Critics trot out the textbook definition of the word – a medium of exchange, a unit of account and a store of value – and insist that bitcoin can never meet all three, while assuming that the established criteria are necessary conditions just because we have been told they are.
One of the many valuable gifts that the emergence of bitcoin bestowed on the world is the imperative to question money’s definition and utility. Most people assume they know what it is, but that is always clouded by their experience. I used to work in traditional finance and so I thought I knew what money was – only, it turns out that I conflated it with numbers. Others conflate it with exchange, some treat it as a collectible, yet all understand that it is useful, which is why people want it.
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
A 2015 explainer from the European Central Bank (ECB) – not exactly known for its open-armed embrace of innovation – opens with this illuminating sentence:
“The nature of money has evolved over time.”
And yet on June 23, ECB board member Fabio Panetta delivered a speech at the BIS Annual Conference in which he insisted that “cryptos have failed to make good on their claim to perform the role of money.”
Here’s another quote:
“Cryptos have not developed into a form of finance that is innovative and robust, but have instead morphed into one that is deleterious.”
Apart from the basic mistake of assuming all cryptos have the same goal, the speech highlights Panetta’s grade-school level of understanding of how crypto assets work (no disrespect meant to grade schoolers). And of traditional markets, come to that: every criticism he lobbied at crypto assets could equally be applied to currency and securities markets – even more so, since they have a much longer track record. But his point is that the crypto industry “has so far produced no societal benefits” and therefore is not deserving of public support.
The confusion itself is fine; most people still don’t understand crypto assets. What I find depressing is the official approval to trot out a speech like this at a high-level event, in which a senior official at a key institution on the macroeconomic stage – one concerned about maintaining its relevance – insists that European needs are global needs and the European take on money is the global take on money. What’s more, this comes from a representative of the same institution that recognizes money evolves.
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Panetta appears to believe that free market crypto assets should be regulated into irrelevance, while a digital ledger central bank currency is developed. This starts to get at the real story here.
It turns out that Panetta is not necessarily against the evolution of the definition of money – the intensifying discussions around CBDCs shows that this evolution is inevitable (more on this below).
What Panetta is against is free market evolution. Anything to do with money, even its definition, should be centrally controlled. His comments imply that this is better for the public – if they speculate on free market innovation, they will get hurt. Centrally controlled official innovation will make sure that doesn’t happen.
From a different angle
The rest of the BIS conference continued in a similar vein. Last weekend, the organization – essentially the central bank of central banks – unveiled its annual report.
The 142-page document dedicates one of the three sections to “the future monetary system.” It fleshes out the idea of a “unified ledger” to connect the various CBDC and tokenized security networks currently under development, and it extols the benefits of asset tokenization, specifically the ability to efficiently reconcile ownership and settlement and improve asset distribution transparency.
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But, cough, as for crypto assets:
“Crypto and decentralised finance (DeFi) have offered a glimpse of tokenisation’s promise, but crypto is a flawed system that cannot take on the mantle of the future of money. Not only is crypto self-referential, with little contact with the real world, it also lacks the anchor of the trust in money provided by the central bank.”
The report echoes Panetta’s conviction that all crypto assets are the “same” and that all experiments to date have been a failure. Official institutions are much better, it insists, at knowing what is good for the people.
The overall message is: we recognize that money is changing, and we are going to be the ones to decide exactly how. The logic seems to be that change in something as essential as money should not be organic – it needs to be controlled.
Now for the important questions
Keep digging and you eventually come across a glimpse of how even official thinking about money is changing.
Earlier this month, two economists from the German central bank published a paper for the European Money and Finance Forum called “Empowering central bank money for a digital future.” This is not a paper from the Bundesbank itself. Rather it is the personal opinions of the authors, one of whom is Martin Diehl, Head of Section Payment Systems Analysis and a Bundesbanker for the past 22 years.
The note discusses the design of central bank digital currencies, and recognizes that a guiding principle should be “form follows function.” Ah ha! This unearths the insight that the function of money is not universal or even constant, and that its design should take its function into account.
But what is its function? Going back to the textbook definition referenced above, for some it’s a payment mechanism, for some a store of value and for some a unit of account. Traditional economists insist that it has to be all three, but this assumption is breaking down in the face of the need to decide what central bank digital currencies should look like.
As the authors say elsewhere in the report:
“What has never changed is that money is what money does.”
While struggling to let go of the traditional definition, the authors accept that the technological advances – driven largely by the emergence of blockchains – allow for some separation of money’s features. What money can do has been impacted by technology, in ways we are all still coming to terms with. It has always been able to trigger programmatic functions (such as in vending machines and arcade games), only now they are sophisticated. It has always had the potential to also be a collectible (signed bills, historic notes), only now with much greater flexibility. Now, money can embed both clearing and settlement. Now, money can be programmed.
This brings us back to the debate around what a CBDC should do. Should it be programmable? The temptation to limit and/or channel payments according to the activity will be hard to resist. And is programmable money fungible? Most assume money should be (it is now). Should it replace current wholesale payment systems, or merely connect to them? Full replacement allows for real-time tracking of financial flows, but is riskier and much more operationally complex.
These questions and others highlight that the very essence of money is being re-considered, even if financial practitioners don’t know that’s what they’re doing. Meanwhile, crypto builders continue to push boundaries, explore use cases and wait for legacy finance to catch up with the idea that old semantics may be convenient. But they no longer set the rules, and they aren’t strong enough to control the direction of change.