A recent post by two New York Federal Reserve economists explores Bitcoin as money. They consider that the cryptocurrency is not a new type of money, but a new mechanism for exchanging it.
According to a post by Michael Lee, an economist in the Research and Statistics Group of the Federal Reserve Bank of New York, and Antonie Martin, Vice President of the Group, Bitcoin does not represent a new idea of money, but a new idea of money exchange.
The document explores the definition of money, indicating that there are three types of money: fiat money, asset-backed money, and claim-backed money. The analysts say that fiat money responds to intrinsically useless objects that have a value based on the belief that people will accept them in exchange for valuable goods and services.
Second, they define asset-backed money as money that derives its value, at least in part, from the assets that back fiat money. This is the case of commodity money, exemplified by gold coins, according to the post.
They explain that claim-backed money derives its value, at least in part, from the promise of some institution to exchange money for something of value. For instance, an unlocked bank deposit has a value based on the promise that the bank makes to exchange the deposit for money, according to the analysts.
Bitcoin as Exchange Mechanism
Economists claim that Bitcoin corresponds to a new type of exchange called “electronic transfer without a third party”, an alternative to “physical transfers” and “electronic transfers with a trusted third party”.
While physical transfers are physical money exchange mechanisms, electronic money transfers with the backing of a third party correspond to the vast majority of electronic payments, by involving entities that validate such exchanges.
According to the analysts, Bitcoin enters the category of decentralized electronic transfers, that is, an entity in charge of unilaterally validating transactions does not participate. This type of exchange was born with Bitcoin in 2009 and also applies to cryptocurrencies in general.
The authors state that it is more accurate to think of Bitcoin as a new type of exchange mechanism that can support the transfer of money. They note that this view is important as history provides lessons on what makes good money, as well as what makes a good transfer mechanism. They say that these lessons could help cryptocurrencies evolve in a way that makes them most useful.
Reactions
Of course, members of the cryptocurrency community have been critical of the economists’ vision. They have mentioned conceptual differences in the argumentation of both analysts in their Twitter accounts.
Content creator “Ivan on Tech” did not hesitate to comment on the post and question the “terrifying incompetence” behind it. “The Moon Carl” reinforced Ivan on Tech’s vision, adding that he considered it to be “one of the dumbest things” he had ever read.
Renowned investor Peter Schiff aligned his thoughts with the New York Federal Reserve post, regarding Bitcoin as fiat money. He dismissed the “digital gold” narrative and stated that, as confidence in traditional fiat money and cryptocurrencies is lost, savers will return to gold.
Many members of the community made Schiff aware of their vision for why Bitcoin was more valuable than gold.
However, recent data highlight that many Bitcoin investors believe that the cryptocurrency represents a long-term reserve of value, following the “digital gold” narrative of the asset.
By Alexander Salazar
