On Bitcoin and the Definition of Money
Some corners of the Bitcoin community challenge the conventional or textbook definition of money. This is not a fringe position, even Bitcoin.org states that Bitcoin is a “new kind of money.” I’m afraid such a challenge is problematic in a way that bitcoiners do not fully understand. I will expand on this below, but the overlooked issue is that when changing the definition of money, its desired properties do not translate to the new definition. Therefore, challenging the conventional definition of money is pointless.
The conventional (or textbook) definition of money
There is no disagreement on what the definition of money is. You’ll find the same one in any textbook of your choosing.1 Below is how you can find it in one of my favorite textbooks on the matter, Larry White’s The Theory of Monetary Institutions (1999). The following passage is in the first paragraph of the first chapter of the book (p. 1, bold are mine):
"Money" […], following standard usage among economists, means a commonly accepted medium of exchange. A "medium of exchange" means a good that people acquire through trade with the intention of trading away later (rather than consuming for its own sake or using up in a production process). "Commonly accepted" means that the money good is routinely offered and taken in trade for other goods, and so appears on one side of nearly every transaction.
A key point here is “commonly accepted” (or generally accepted). Note that the definition of money does not require universal acceptance. For an economic good to be money, it must be generally accepted in the geographic or socio-economic environment -the network- in which the agent routinely interacts. To say that the swiss franc is not money in South Africa, and therefore Bitcoin is money because not everyone uses it as money, is a misunderstanding, and misapplication, of the definition of money. It is also a logical misstep.2
The issue with whether Bitcoin is money is not whether it is accepted as a means of exchange in a small community such as El Zonte or among some bitcoiners. To find curious goods that work as money in small communities or limited groups of individuals is not much of a challenge. The issue at stake is if Bitcoin is money on a larger scale and competes with currencies such as the U.S. dollar or the euro.
On changing the definition of money
It is unclear what the point of changing the definition of money is. If money can mean anything we want, then the word becomes meaningless and said discussion pointless. It is also unclear what the problem is if Bitcoin is not money. If Bitcoin is not money, so what? To say that this or any crypto is not money is neither a criticism nor a value judgment; it is just a description of what Bitcoin is and is not in technical terms.
There is still another issue when changing the definition, which is the problem I think is overlooked on this matter. The point is that changing the definition of money is pointless because such change does not translate into the desired properties of money. The properties associated with the word money are derived from its purpose. Therefore, if we change the definition of money to fit Bitcoin, we cannot assume that the conventional definition’s properties translate to the word’s new meaning. I try to capture this idea in the following way:
Money = conventional definition
Money = unconventional definition
Bitcoiners who want to argue that Bitcoin is money and change the definition accordingly cannot succeed in translating the properties from the conventional definition to the unconventional one. If you say money is the second definition and Bitcoin is money, then you cannot argue that Bitcoin has properties x, y, and z. The properties of money depend, of course, on its definition, not the word itself. Saying that a duck is a dog won’t make the duck able to bark.
Two other confusions
Without entering into much detail, there are two other confusions present in much of this Bitcoin-is-money discussion to avoid:
That money is an asset does not mean all assets are money → That Bitcoin is an asset does not mean Bitcoin is money. Crypto-assets would be a more accurate term than crypto-currency. The latter is not only inaccurate, but it also presupposes that cryptos such as Bitcoin are already money.
Developing a new transaction technology, such as blockchain can be, is not the same as developing money. If Bitcoin is used to move money around, Bitcoin is being used as a transaction technology, not as money. If a merchant says he “accepts bitcoins” as a form of payment, but at the end of the transaction, he gets U.S. dollars through an intermediary, Bitcoin is being used as a payment technology, not money.
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Measuring money (base money, M1, M2, divisia, etc.) has less agreement than defining it. It is important to distinguish the definition of money from the different ways we can measure the amount of money.