Fed Think Tank: Bitcoin is Not a New Type of Money

A new blog post by the Federal Reserve Bank of New York’s Liberty Street Economics unit argues that bitcoin should not be viewed as a new type of money, rather it is more accurate to think of it as a new type of exchange.

The post by Michael Lee and Antoine Martin of the New York Fed’s research and statistics group, and entitled Bitcoin Is Not a New Type of Money, observes that cryptocurrencies are often described as a new type of money, but argues this is a misconception. “Bitcoin may be money, but it is not a new type of money,” the post states. “To see what is truly new about bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred.

“Doing so reveals that monies with properties similar to Bitcoin have existed for centuries,” the post continues. “However, the ability to make electronic exchanges without a trusted party – a defining characteristic of Bitcoin – is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.”

The distinction between money and an exchange mechanism is not new to the field of payments, the post points out, highlighting a report from the Committee on Payments and Market Infrastructures(CPMI), a body within the Bank for International Settlements (BIS), that says money refers to the asset that is being transferred, for example currency in your wallet, while in contrast, the exchange mechanism is the way in which the asset is transferred, such as physically handing the currency to a merchant in exchange for a coffee.

Specifically, the post asks, “what aspect of bitcoin is truly unique?” and proposes two classifications, one for monies and another for exchange mechanisms. For each classification, it makes use of categories that are deliberately stark. “While finer subcategories might improve the classifications in some instances, it is tangential to our main message,” the authors state.

The research divides monies into three categories: fiat money, asset-backed money, and claim-backed money. The distinction between asset-backed and claim-backed money is meant to replicate the distinction between secured claims and unsecured claims. Exchange mechanisms are also divided into three categories: physical transfer, electronic transfer with a trusted third party, and electronic transfer without a third party. While not identical, the categories are broadly consistent with categories of exchange mechanisms described in the CPMI report, the authors explain.

They add that they find that bitcoin and other cryptocurrencies are not a new type of money, because other examples of fiat monies have existed for a very long time. The same can be said for stablecoins, which are just the latest incarnation of monies tied to the value of an asset, they add.

By contrast, “electronic without third party” mechanisms did not exist before 2009, meaning the real innovation of cryptocurrencies, the report argues, is that they offer a radically new exchange mechanism. “This type of exchange mechanism can support the transfer of different kinds of monies; fiat money in the case of bitcoin, money backed by assets in the case of stablecoins, and even future services or products, as in the case of ICO tokens,” the report states. “And this type of transfer mechanism could also support the transfer of other types of assets, like CryptoKitties.”
Concluding the post the authors pose the question, why should we care about whether bitcoin is money? And then answer it by observing that “history provides lessons about what makes a good money as well as what makes a good transfer mechanism”, adding, “These lessons could help cryptocurrencies evolve in a way that makes them more useful, but to know which lessons are relevant, it is important to be clear about what is new about bitcoin.”

Colin Lambert

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