EDRODPOV NOTE: This blog post originally appeared on the Medium platform on May 22nd of 2017. On July 25th, the SEC published a report on the DAO ICO indicating that some, but not all, blockchain tokens are securities. Classification depends on how they are used with regard to their interpretation of the Howey Test standard.
The purpose of this post is to explain in simple terms why cryptocurrencies are not a currency, not an asset, not a store of value, and not an investment. With apologies to the guys from the film Swingers, cryptocurrencies are (so) money.
What is Money?
Money was invented to be a physical (and now digital) representation of productive energy. Whether it is the energy from sun, soil, water and toil used to grow an ear of corn, or the labor and resources expended in painting your house, the energy spent practicing and performing music, or getting your CPA so that you can attest to a client’s properly reported financial statements, it’s all derived from energy and it all has a dynamic value when measured in terms of money. Blockchain miners might agree with that run-on sentence. Is there a difference between currency and money? With regard to cryptocurrencies, that may be the crux of the problem.
Whoever invented currency must have wanted to facilitate transactions of goods and services. Until then, commodities like grain were used as “money” between buyers who wanted a willing seller’s goods, when the seller did not desire the buyer’s traded goods or service. Grain was universally valued. Everyone ate grain (before gluten free), and if you ended up with extra beyond what it cost to buy that new mule, the grain could be eaten by you, or by the mule. Grain’s transaction value did not preclude folks from holding onto more grain than needed for that mule so they could feed their kids, or just for a rainy day, or if they thought its market value would later increase so they could buy some shiny new arrowheads. So, the grain was used as a currency, as an asset in and of itself, as a store of value, and as an investment. All four potential uses were inseparable. Grain was money.
Grain gave way to coinage stamped with a ruler’s image, and that gave way to certificates from railroads to silver certificates from governments to electronic statements. But they all have at their basis a recognition of productive energy expended, and it seems that still to this day these four inseparable capabilities properly define money; currency, asset, value store, and investment. The evolution of money appears to be on a trajectory in favor of greater and greater universal acceptance. If I’m right about that, global currencies are the next evolutionary stage.
So, why do people continue to wrestle with the definition of cryptocurrency tokens? Just because you may use it as a currency, does not preclude it from one day being used as an asset, a store of value, or investment (or vice versa). Money is created to serve a useful purpose, on demand, and it is the usage of money at any point in time that defines it. Money is not any one use. It is all four.
Words Matter, Introducing “CryptoMoney”
So in my opinion, cryptocurrency is money. Maybe the terminology should more accurately reflect that: Cryptomoney. When cryptomoney is used to buy a good or service, it becomes cryptocurrency.
What about cryptoassets? The luckiest readers will enjoy bragging about buying Bitcoin for pennies, but held as a cryptoasset it is just electronic ones and zeroes and has little value unless it can be collateralized. At least grain can be made into cereal or bread.
When cryptomoney is used as a store of value, it is a cryptodeposit. High level, there is a better expectation of liquidity for a deposit then for an investment. It is expected to maintain a stable value and be more liquid, so that it may later be used as currency, asset or investment. Maybe some crypto-founders will invent a way for it to generate interest.
Finally, when it is used as an investment for appreciation purposes, it’s a cryptoinvestment to be traded one day as you would make a trade on the foreign exchange market. (cryptocurrencies are not securities in my opinion, as described further below) So, the fact is, as defined today, “cryptocurrencies” are actually cryptomoney.
The only basis for these four uses is a people’s belief that a form of money indeed represents universal value. As suggested, that value emanates from our most universal thing, energy. If it can be used for all four purposes, the only thing to preclude it from being money is lack of a universal belief in its representation of productive energy. In the proof of work world, validating blocks of transactions requires the expenditure of energy, and this resource-intensive energy expenditure is universally recognized as having value.
Why is Cryptocurrency Valuable?
Since cryptocurrency is money, let’s review the value of each of the four versions of money one at a time starting with currency.
Regardless of what’s printed on any nation’s bills, there are no real guarantees for a currency’s value. If a nation defaults, people use its currency to wallpaper kitchens because it’s as worthless as a grain contaminated by some medieval botulism. In fact, wheelbarrows of bread are bought with a single bill now, but after a national default wheelbarrows of currency are used to buy bread. (Venezuela) Just as with fiat currency, railroad certificates in the 1800’s, or silver (mining) certificates in the early 1900’s, underlying Blockchain ecosystems must be perceived as viable productive energy generators for their coinage to be perceived as a universally valuable currency.
Asset values are generally defined by intrinsic value as in agricultural commodities, or by markets’ supply and demand as in oil prices, or by market appreciation as in the $110 Million oil painting that was sold last month. To the extent that markets exist for any particular cryptocurrency, the latter two factors seem to be influencing this immature asset class. Note: the oil painting can be an asset, a store of value or an investment, but it is not a currency. That precludes it from being money.
Store of value is all relative, and performance based. If the possessor feels that their money is better stored in another asset form, they will either barter or change their cryptoasset back into a cryptocurrency in order to then exchange the underlying value for another asset with a lower risk of losing its value. As the cryptocurrency market develops, we should expect more price volatility, but with increasing maturation some relatively stable store of value cryptocurrencies may also emerge.
Lastly, investments’ values are definitively market based specific to the investment’s performance. Given blockchain’s early stage in transforming so many markets, it is impossible for anyone to confidently place a value on cryptoinvesment potential. Many emerging company equities thought to be overvalued at the time, ended up being far undervalued (and vice versa). Why should it be any different with cryptocurrency used as an investment?
Can we get any more simplistic in these definitions? The point is that money’s value derives from productive energy, it enjoys four potential uses, and money’s sub-classification depends upon its use at any time — just like cryptocurrency.
Cryptocurrency Acceptance, Liquidity, and Risks
Although a government may mandate its acceptance within its borders, currencies can also be accepted on a global basis willingly rather than by government mandate. Gold coins (doubloons) were willingly used as one of few “global” currencies in centuries past. Today’s treasure hunters may argue they still are. While digital currencies are validated using cryptography and a globally distributed ledger, gold coins were validated by nautical maps and a good chomp on a coin’s edge. (This was also known as the “golden age’ by dentists.)
Country-specific fiat currencies place little to no responsibility on the bearer. No registration or citizenship is needed to hold or use currency, and the only responsibility is not to deface or copy it on your laser printer. Currency is not possessed as you would possess a registered land title. A fiat currency has a serial number to prevent fraudulent copying, or to allow tracing after a robbery, but the serial numbers do not give it value. If you drop a hundred dollar bill on the street, chances are that the serial number won’t help you locate its current owner. Cryptocurrency can be acquired and held as a bearer pretty similarly to fiat currency, but in virtual form it must also somehow be identifiable.
Another aspect of currencies (one of the four money sub-classifications) is liquidity. A currency’s value is assigned to the bearer who currently possesses it. Blockchain geeks may see bearer-based liquidity as a risk, flaw or a bug, but it is actually just a feature of currency. Cold storage sounds like a good idea in any case.
So, virtual currencies like Bitcoin and Ether are liquid and belong to those who possess them in a digital wallet, cold storage, with a private key or some other protective means. Like any currency, cryptocurrency’s liquidity characteristics attract the criminal element, but more scams, pyramid schemes and thefts have occurred using cash and centralized accounts than cryptocurrencies. I think Tony Soprano or Bernie Madoff would agree with me on that point. The DAO hack was just this money version’s 1950 Great Brinks Robbery (sort of).
Cryptocurrencies Are Money, But Securities Are Not Money, So…
The IRS classified the cryptocurrency as an asset, but interestingly enough, assets are found on a different part of a corporate balance sheet from equities. Is this enough to end the “token as security’ discussion?
If we go back to cryptocurrency as money, one sub-classification or use case is investment. One type of investment are securities. Securities may be used as assets (think of estates), or as a store of value (MA Bell) and/or as an investment (Apple). Securities may be gifted or traded, but are generally not used to buy goods and services. I have never bought a pizza with a stock certificate, but I can with digital currency. One of Bitcoins’ first uses was to buy a pizza — that should be the world’s most expensive pizza. So securities have some of the aspects of money but not all four of the aspects. Securities are not used as a currency, so securities are not money.
When money is used to buy an ownership share in a company, it is no longer a currency. The securities buyer is now part owner of a company. That ownership entails added levels of risk, responsibility and reporting, voting rights, and lower levels of liquidity not present when the energy was just a bundle of cash in a pocket.
Securities represent a hierarchical management of energy expenditure used by legally affiliated teams of individuals for specific missions with a capital appreciation goal based mostly on a single entity’s market share and profits. (Private blockchains are closer to companies.) So, securities are not as controllable, liquid and responsibility free as currency, and that precludes them from being classified as money. (Money can be used for all four sub-classification purposes.) If public blockchain cryptocurrencies are money, and securities are not money, then these digital currencies are not securities.
Proof of work blockchain coins effectively reflect the productive energy expended to validate blocks of transactions and update the distributed ledger. In a public blockchain, these coins fuel an autonomous ecosystem of independent collaborators loosely affiliated by a technology system that no one owns. Once a cryptocoin’s rules are programmed, the digital money is not directly controlled by a hierarchical organization. Its operational value does not depend on any single organization, as is the case with a security. Instead the market defines the coin’s value, derived from the public ecosystem’s collective productive energy, as an instrument capable of being used either as a currency, an asset, a store of value or an investment.
Cryptocurrencies are so money, and you don’t even know it.
I am (obviously) not an economist by profession, nor am I an attorney, a regulator, movie critic or an investment advisor. No one should consider anything written here as investment advice. Cryptocurrencies are still very speculative. This post purely represents my opinions and musings as a Blockchain enthusiast. If I ever have any good ideas they must have been derived from someone smarter than me, like you the reader. I am a proponent of open and civil discussion to cultivate ideas regarding emerging markets.
Ed Rodriguez : Points Of View 