If you’ve been following the journey of bitcoin, you’ve likely encountered countless arguments dismissing it as “not real money.” Critics often resort to the textbook definition, emphasizing its role as a medium of exchange, a unit of account, and a store of value. They contend that bitcoin fails to fulfill all three functions, assuming that these established criteria are absolute requirements simply because they have been taught as such.
The emergence of bitcoin has bestowed upon us a valuable gift—the opportunity to question the definition and utility of money. While many believe they understand what money is, their understanding is often clouded by personal experiences. As someone who has worked in traditional finance, I once thought I had a firm grasp on the concept of money, only to realize that I had mistaken it for mere numbers. Others associate it with exchanges or consider it collectible. However, everyone recognizes its usefulness, which is why people desire it.
In a 2015 explainer by the European Central Bank (ECB), an institution not known for readily embracing innovation, the opening sentence is particularly illuminating:
“The nature of money has evolved over time.”
Yet, on June 23, during a speech at the BIS Annual Conference, ECB board member Fabio Panetta asserted that “cryptos have failed to live up to their claim of being money.” Here’s another quote from his speech:
“Cryptos have not become an innovative and robust form of finance; instead, they have turned into a detrimental one.”
Aside from the flawed assumption that all cryptocurrencies share the same objective, Panetta’s speech highlights his limited understanding of how crypto assets operate—a level of understanding that even grade schoolers surpass. Moreover, his criticisms of crypto assets could equally apply to traditional currency and securities markets, which possess a much lengthier track record. However, his main point is that the crypto industry has yet to deliver any societal benefits and, therefore, does not warrant public support.
While it is understandable that confusion still surrounds crypto assets, what I find disheartening is the official endorsement of a speech like Panetta’s at a high-level event. As a senior official representing a key institution on the macroeconomic stage—one concerned about maintaining relevance—Panetta asserts that Europe’s perspective on money is synonymous with the global perspective. What’s even more concerning is that this statement comes from the same institution that acknowledges the evolution of money.
Panetta seemingly believes that free-market crypto assets should be regulated to irrelevance, while a centrally controlled digital ledger for a central bank currency is developed. This reveals the true narrative at play here.
It appears that Panetta’s opposition lies not in the evolution of the definition of money—which the intensifying discussions around central bank digital currencies (CBDCs) indicate as inevitable—but rather in the evolution driven by the free market. According to him, anything related to money, including its definition, should be under central control. His comments imply that such control benefits the public by safeguarding them from the risks of free-market innovation. Officially controlled innovation guarantees prevention of such risks.
Another Perspective
The rest of the BIS conference continued along a similar line. Last weekend, the organization, essentially the central bank of central banks, published its annual report—a 142-page document that devotes one section to “the future monetary system.” The report delves into the idea of a “unified ledger” connecting various CBDC and tokenized security networks currently under development. It highlights the advantages of asset tokenization, particularly the efficient reconciliation of ownership and settlement, as well as enhanced transparency in asset distribution.
However, when it comes to crypto assets, the report coughs and states:
“Crypto and decentralized finance (DeFi) have offered a glimpse of tokenization’s potential. However, crypto is a flawed system incapable of assuming the role of the future of money. It is self-referential and disconnected from the real world, lacking the trust anchor provided by central banks.”
The report echoes Panetta’s belief that all crypto assets are essentially the same and that all experiments thus far have been unsuccessful. According to official institutions, they possess superior knowledge about what is best for the public.
The overarching message conveyed is that while acknowledging the changing nature of money, the power to decide precisely how it changes remains in their hands. The underlying logic seems to suggest that change in something as fundamental as money should not occur organically; rather, it must be controlled.
Now, the Pertinent Questions
Delving deeper, we catch a glimpse of how even official thinking regarding money is evolving. Earlier this month, two economists from the German central bank published a paper for the European Money and Finance Forum titled “Empowering central bank money for a digital future.” It is not an official paper from the Bundesbank itself but rather reflects the personal opinions of the authors, one of whom is Martin Diehl, Head of Section Payment Systems Analysis and a veteran Bundesbanker of 22 years.
The paper discusses the design of central bank digital currencies (CBDCs) and acknowledges the guiding principle that “form follows function.” Ah, here lies the crucial insight—the function of money is neither universal nor constant, and its design should account for its function.
But what exactly is its function? Referring back to the textbook definition mentioned earlier, for some, money serves as a payment mechanism, for others, a store of value, and for some, a unit of account. Traditional economists insist that it must fulfill all three functions, but this assumption is crumbling in the face of the need to determine the appearance of central bank digital currencies.
As the authors state in another section of the report:
“What has always remained unchanged is that money is defined by what it does.”
While grappling with the reluctance to abandon the traditional definition, the authors accept that technological advancements, predominantly driven by the emergence of blockchains, permit a certain degree of separation between the features of money. The impact of technology on the capabilities of money is something we are all still coming to terms with. Money has always had the ability to trigger programmatic functions (such as in vending machines and arcade games), but now these functions have become sophisticated. Money has always had the potential to be a collectible (think signed bills and historic notes), but now it possesses greater flexibility. Today, money can incorporate both clearing and settlement mechanisms, and it can be programmed.
