Money is understood in terms of its functions and properties. Functionally, money serves as a: (1) medium of exchange, (2) unit of account, and (3) store of value.
- A medium of exchange is able to express the value of all existing commodities in terms of itself.
- A unit of account is when existing commodities can be priced in terms of itself.
- A store of value can be re-used and re-traded without diminishing in value.
When we assess these three core functions of money holistically, several properties emerge (1) scarcity, (2) durability, (3) divisibility, (4) fungibility, (5) transferability, and (6) acceptability. In other words, any substrate that serves as money should be:
MONEY? CASH? CURRENCY? WHAT’S THE DIFFERENCE?
- Limited in supply.
- Easily broken down into units that can express existing commodities.
- Freely interchangeable and replaceable amongst itself where, for example, Bob’s ounce of gold and Sarah’s ounce of gold are equivalent.
- Able to change owners with ease, regardless of the quantity.
- Socially used.
Money is a macro concept that has multiple expressions: “cash” and “currency” are often conflated as equivalent to money even though they are merely expressions of money. In a similar sense, a claymore and a katana are types of swords but we would not use specifically a katana or specifically a claymore as the sole representative of all swords in existence. To be specific:
MONEYARY SYSTEMS: FIAT VS. COMMODIT
- Currency: a type of money that is in circulation – in use – and which is sanctioned by a given government of a given nation. Money is macro; currency is micro. Currency has legalistic connotations that money proper does not have.
- Cash: the physical form of a currency. Examples include coins and banknotes.
A monetary system specifies the source of value that underpins its money. The two most common monetary systems have remained fiat-based and commodity-based.
Fiat means “by decree” – fiat money is established by a given government and has no intrinsic value on its own. In other words, fiat money can be referred to as “because we said so” money where the “we” is a given government. The value that underpins fiat money is the trust that people – within the nation and outside of the nation – have in the issuing government. Should there be trust in a government issuing fiat money, the value of said fiat money is expressed in the relationship between its supply and demand. The demand for a given fiat money is very much a baseline measure of the collective confidence in its issuing government; the supply of a fiat money is a structural issue of how many units of said money its issuing government chose to circulate.
The value of commodity money is underpinned by the commodity that composes it – for example, gold commodity money fluctuates according to the market value of gold. The objects that compose commodity money have a use value and an exchange value, that is, the value intrinsic to the commodity itself and the value in its use as money. Speaking again with gold as an example, its use value comes from the fact that it can be processed into various goods like jewelry, cups, blades, electronic circuits and the like; gold’s exchange value is expressed in its ability to be re-used and re-traded without diminishing in value.
Any currency declared legal by a government – within said government’s territorial jurisdiction – is legal tender. Fiat money, by definition, needs to be declared legal tender by a government to have any value at all; commodity money can be deemed legal tender and this used to be the general norm.
Whenever you hear “cryptocurrency,” think “technology application that can be used as money” and not merely “currency that is cryptographic” – the term “cryptocurrency” is an alias. When “cars” were first introduced people referred to them by the alias “horseless carriages” and it is in this way that we should understand “cryptocurrencies” as an alias for “blockchain tokens.” Blockchain tokens are a technology that can be used as a new monetary system, separate from fiat and commodities. When applied as cryptocurrencies, blockchain tokens are digital money where cryptographic techniques are used to control the money supply and verify transactions, without reliance on a trusted third party (like a central bank) by operating on a blockchain – a digital public ledger in which all the transactions conducted in a specific cryptocurrency are recorded.