2014-10-09

Redefining "currency"

Everyone likes neat definitions of things and being able to categorize what something is. Unfortunately, Bitcoin appears to defy the traditional categorization - sometimes it is viewed as a commodity, sometimes like a digital virtual currency. The problem gets more complicated when you start considering other things that could also be considered currency in some degree, but don't completely fall under the current definition, like M-Pesa or Ithaca HOURs. In this article I would like to propose a new definition of what a "currency" could be to take into account the current technology we have and follow it up with discussion on various edge cases.

The reason for writing this article is the increasing need for new regulation to address what Bitcoin is and what laws it should abide by. This in my opinion creates an opportunity to address some old definitions and create some new structures.

Definitions


Currently, "currency" is defined as:

  • "A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade." (Investopedia)
  • "FinCEN's regulations define currency (also referred to as "real" currency) as "the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance."" (FinCEN)

Generally narrowing it down to whether or not something has been issued by a government. For some Bitcoiners, that would be a fine definition of a "fiat currency", but not "currency" in general.

I would like to propose the following definition of a "currency":

Currency is an object (physical or otherwise) that:
  • Is representing value different from the intrinsic value of the object used to represent it and the principal object used to back it
  • Can be easily transferred between parties for the purchase of goods and services
  • Is not expected to be forfeit when used in most it not all transactions legal under the law
While the wording could use some refining, I think in general the definition addresses some of the core problems I will discuss below.

Some clarifications:

  • The term "object" is used loosely - can range from a physical object, a paper note, or a piece of data used to denote the currency
  • First bullet point deals with the value of two things - whatever is representing the currency (physical object, paper note, piece of data), and what the currency itself is backed by (gold, oil, bread). The first is direct - if we have a gold coin representing the currency, we take the value of that gold coin. The second refers to what is backing the currency at the very core - if we have a digital IOU that denotes a claim to a paper note that is redeemable for a physical object, we take the value for the final object. This can be a bit confusing, but I'll elaborate on it further down
  • The second point doesn't deal with whether it is possible to find two parties that want to transact or how much effort would it take to transfer the currency, only with the fact that it is possible. A tonne of potatoes qualifies, non-transferable reward points do not
  • Last bullet points deals whether there are any restrictions placed on the object by its issuer or curator. If an object cannot be traded between parties at a risk of being forfeit (say, selling WoW gold for real-world money), it doesn't count as a currency. When something does or does not quality can be tricky to determine - one shouldn't be able to escape the definition if they create a currency and say "not tradable for pink elephants", but neither should they qualify if they say "tradable for anything in this store". A rule of thumb should be - if there are more things you can buy with it than not, then it's a currency

Country vs. not a country


In the current definition, a "currency" can only be a currency if it is issued by a country. However, since it's hard to determine if a country is a country, there would also be the same amount of problems determining whether something would be a currency under that definition.

Moreover, with the rise of cryptocurrencies that are not issued by one individual let alone a country, if we want to consider them currencies, that definition won't do.

Value


That part of definition was added to distinguish between a few things that are similar to one another, but shouldn't necessarily be on the same side of the currency / not-a-currency divide, as well as some things that are used like a currency, but shouldn't be defined as currency.

First of all, we have gold and silver versus iron, lead and other metals. Looking at them without the context of how they have been treated thorough history, they are pretty similar. However, gold and silver have value greater than would be expected from their usefulness. A large chunk of gold's demand comes from the investment and jewellery sector. It is therefore worth more than its physical qualities would suggest and should fall under the category of a currency, while something like titanium, used mainly in pigments (although it can also be found in jewellery), should not.

Another edge case that should be considered is the Tide detergent and various computer game items. The former is sometimes used as a currency for purchasing drugs, while the latter is used for trade purposes in various video games. While those items are used like a currency, they shouldn't fall under the category of currencies - their value is about equal to what they are worth. A bottle of Tide that can be bought for $10 doesn't suddenly become a $20 currency. Since they represent only the value they have - they don't fall under the definition.

Currencies backed by commodities


Since it is possible to create any number of currencies backed by commodities, we should consider those as well. We could also have currencies exchangeable for other currencies at a fixed rate, such as Bitstamp's USD IOUs in Ripple, or Seedstock.

Under the proposed definition, if the money that would not fall under the definition of a currency itself and it would not be backed by something that falls under the definition, it would not be considered a currency.

So IOUs for USD would be a currency, since they are backed by a currency. IOUs for cans of coke would not, since cans of coke are not a currency.

Transferable vs non-transferable


There are a number of currency-like things out there that fail this definition. Various online rewards, such as Air Miles, and various in-app currencies, such as Facebook Credits, are tied to one's account and are not transferable between people. If it can't be transferred between willing parties, it cannot fulfil the functions of money and therefore it doesn't fall under the definition of a currency.

This part of the definition was put in place to allow various in-game currencies to be used as tokens for simulated gambling and so forth.

Forfeitability


There are a number of currency-like things out there that would fall under the proposed definition if it wasn't for the last part. Take Plex for example. Plex is an in-game item used in EVE Online. It can be purchased for about $20, can be sent between players in the game and is sometimes used directly as an in-game currency. However, trading Plex for anything outside of EVE Online is prohibited and both parties in the transaction can have their accounts banned for engaging in such a deal.

All in all, if an object is not a subject to forfeiture when used in any legal transaction, it passes this rule.

Further sub-definitions


The definition presented earlier would define what a "currency" is. However, there would also be a need to define various other sub-classes of currencies to further distinguish between various items. Just like we have a tree of life in biology stemming from distinguishing between what is life and what is not, so too would we need various definition that would stem from a single definition of what is a currency. Some sub-categories could include:

  • Fiat currencies - currencies issued by governments and mandated as a legal tender in the given country - so your traditional USD, Euro, etc.
  • Concordia / virtual currencies - currencies with value not enforced by anyone, but agreed upon by the parties to the trade - like Bitcoin or gold
  • Convertible currencies - currencies with a fixed exchange rate to another currency - this would include various local currencies, IOUs for currencies, etc.

1 comment:

  1. I love all details that you give in your articles.

    ReplyDelete