“Money is fiction!” Jacob Goldstein, an American financial journalist, led with this remark in the preface to his 2020 book “Money: The True Story of a Made-Up Thing.” Profound, isn’t it? But is that not the case in fact? Money is money because we say it is money. Money stops being money the moment we decide it isn’t.
That is why stones, cowry shells, and all sorts, could be money once upon a time, and not so anymore. In other words, “money is socially defined” and “when there is a conflict between what a society wants to use as money and what government wants that society to use as money, society always wins” (Leeds, von Allmen & Schiming, 2006, p. 369).
This is why even as governments and central banks continue to put roadblocks on the path of bitcoin, a cryptocurrency, it continues to be used by an increasing number of people around the world as money and as an asset. And as “we define money by observing it in action,” whatever assets perform the functions of money and have the desirable characteristics of money are money” (Leeds, von Allmen & Schiming, 2006, p. 369).
After all, today’s stable currencies had their wild runs too and still do on occasion. Don’t central banks still watch out for potential currency volatility, pre-empting it when they can, or simply letting go when it is overwhelming?
Is bitcoin money? Well, you could say you have 0.5 bitcoin, or 1 bitcoin, or 1,000 bitcoin, couldn’t you? So it is certainly a unit of account, one of the characteristics of money, since just like other currencies, you will similarly first do your accounting in bitcoin before reckoning about its purchasing power; that is, its relative strength to other currencies. You could definitely say “I paid 1.3 bitcoin for the goods, which is about $25k or N12.5m,” after having done so in fact, couldn’t you? There are ample records of bitcoin being used as such, that is, as a medium of exchange, another key feature of money.
For instance, you’ve probably heard people saying, “I bought the house with/for 1.2 bitcoin” or “That would be .00002 bitcoin for the burgers, please.” And as a store of value, which is a major attribute of money, bitcoin can prove to be significantly profitable when the going is good. You’ve probably heard people say such things as “1 bitcoin that I bought for $10 a decade ago is now worth $20k” with glee, or in despair lament how “Only yesterday, my 2.5 bitcoin was worth $125k but today, it is worth a paltry $25k!” So yes, bitcoin is money, akin to gold once.
I think the pertinent question should be whether bitcoin is good money or whether it will become good money. That is, one that has (1) divisibility, (2) durability, (3) portability, (4) relative scarcity, (5) uniformity, and (6) liquidity (Leeds, von Allmen & Schiming, 2006). Many think it is not and would not be one in the future, as the price of bitcoin is volatile and its transactions are relatively sluggish. Bitcoin lost about 45 percent of its value in the space of a week (10-17 June 2022), for instance, but was up 12 percent only a week later (18-24 June 2022).
Depending on a number of factors, bitcoin transactions can take 10 minutes to more than an hour or days to complete, compared to fiat money transactions that take seconds to minutes. A major shortcoming of gold as money was its indivisibility. Bitcoin does not share this weakness with gold, however. Bitcoin is divisible, as it can be divided as far as eight decimal places into smaller units called satoshis. I do not consider bitcoin’s volatility to be a major drawback, being as it is inevitable in the early stages of an asset’s (whether it be a money asset or non-money asset) evolution. After all, today’s stable currencies had their wild runs too and still do on occasion. Don’t central banks still watch out for potential currency volatility, pre-empting it when they can, or simply letting go when it is overwhelming?
In his 2021 book “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance,” Eswar Prasad, a prominent Indian-American economist, argues that bitcoin falls short because of its “unstable value,” which to my mind is not unusual at this early stage, as well as being a “crummy medium of exchange” thus far, since some bitcoin transactions do fail to execute owing to a limiting 2MB block size, in addition to other constraints, to which I rebutt about how innovation is ultimately about fixing such knotty problems.
Prasad (2021) also harps on bitcoin’s “vulnerability to hacking and double-spending”, citing crypto exchange mishaps like Mt.Gox, and so on. I would argue that that is no more a vulnerability for bitcoin than it is for the most cyber-secure systems that get hacked regularly. Hacking is a digital phenomenon. It is not unique to bitcoin. And there is as yet no successful attempt at hacking bitcoin transactions. A “mirage of digital anonymity” that Prasad suggests as another drawback for bitcoin does not seem to me a failing at all: That regulators will be able to unveil those behind suspicious transactions is a positive feature, in fact.
Read also: Bitcoin crashes by 65%, lowest since December 2020
So yes, bitcoin, like gold, is both an asset and money. And one of the reasons why it may perhaps endure as money is that it cannot be controlled by any single individual, not even by Satoshi Nakamoto, the creator who no one has ever met. In fact, were Satoshi Nakamoto to resurrect at this time, since he may already be dead or may simply have been a pseudonym used by a group of idealists to promote their idea anonymously, he (they) couldn’t simply alter bitcoin’s dynamic, nor could any one person for that matter.
There must be a consensus to alter the immutability of bitcoin’s blockchain, as “no single entity is relied upon for maintaining the ledger and no single individual can alter the record on it without the consent of a majority of network members,” writes Saifedean Ammous in his 2018 book “The Bitcoin Standard: The Decentralized Alternative to Central Banking.” The only thing Mr Nakamoto could possibly do now is to use the 1 million bitcoin believed to still be in his possession as he pleases.
My advocacy in the Nigerian case remains that cryptocurrencies be regulated. To my mind, the Central Bank of Nigeria (CBN) robs itself of the power to monitor a burgeoning sector of the monetary system when it directs banks to block crypto transactions. Besides, the ban has reportedly been ineffective, which could arguably be a good justification to reverse it. And why I share the same aversion to some of the funny-sounding cryptocurrencies that are arguably no more than ponzi schemes – being as I am only really just enthused by bitcoin, and maybe just a little bit curious about the potential of Ethereum’s ether – the best way to guard the public from being hapless victims is to force all such transactions to pass through the formal financial system, where the CBN will be able to effectively track them.
Take the case of dollarisation, which is rife in Nigeria at the moment, and has been for a while now in fact. Many private contractors, luxury hotels, high-end retailers, real estate agents, and so on, quote prices in US dollars without fear of prosecution. Even political party delegates will only accept hard currency for their “national service” nowadays, it seems (pun intended). Being as the American dollar is not legal tender in Nigeria, will the CBN prohibit banks from facilitating such dollar transactions too? Surely not.
The CBN should not continue to look on as shadow entities act like cartels over Person-to-Person (P2P) crypto transactions that ironically still rely on the banking system. In May 2022, the Securities and Exchange Commission (SEC) did the appropriate thing by announcing robust “New Rules on Issuance, Offering Platforms and Custody of Digital Assets”. The CBN should do likewise.
