A new blog post has appeared on the St. Louis Fed website, with the not so subtle title: Three Ways Bitcoin Is Like Regular Currency. You can go to the website to read the entire analysis, but I’ll focus on the initial analogy:
Even though bitcoin and other cryptocurrencies may seem exotic, they share some qualities with regular currency. Here are a few ways that bitcoin is like the cash you know, whether in principle or in practice.
1. No Intrinsic Value
Economists Aleksander Berentsen and Fabian Schär explained in a recent St. Louis Fed Review article that bitcoin units have no intrinsic value. In economic terms, something lacking intrinsic value means it has no value of its own. But as the authors noted, “[s]tate monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either.”
Let’s unpack that.
Digital currencies exist as data. The cash in your wallet exists as a blend of 75 percent cotton and 25 percent linen. Neither is inherently valuable.
Compare that with commodity money, like gold or silver. Or representative money, a certificate or token that can be exchanged for an underlying commodity such as gold. Since the U.S. left the gold standard, the paper money in your wallet doesn’t represent gold, yet you are still able to purchase goods and services with it.
Our government has declared the dollar to be legal tender. Federal Reserve notes, then, are fiat currency.
Let’s. Just. Slow. Down. I’m not sure where the author was intending to go, but I think folks in St. Louis may be conflating “tangibility” with “intrinsic” value. (Or something, it’s just not clear). Certainly, things you take out of the earth are tangible assets. You can melt gold, wear cotton, etc. And paper money and bitcoin are not.
But, as I noted on twitter, that’s about as far as any analogy can go. Fiat currencies are backed by the promise of a GOVERNMENT of a STATE ACTOR (or, to make an IL/IR point, an entity identified as a person under international law). Bitcoin isn’t. And this is hugely important. Besides the issue of scale—that the GDP and ability to tax anchors fiat currencies—there are also important legal privileges enjoyed by fiat currencies that private digital currencies, for all their growing popularity, do not have. So any analogies between the two, in my view, are difficult.