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Despite the best efforts of Mother Nature to keep us huddled indoors this month, we've added another new location. If you're in the Westbrook area, come check us out at Wessie's Den!
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Medium of Control?
From: Magic Internet Money
Fiat Functionality
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” - Satoshi Nakamoto, creator of Bitcoin
Today, fiat functions as money because it satisfies the three primary functions – albeit tenuously.
Medium of exchange: Legal tender laws require that, to varying degrees, fiat be used within a country for commerce. Legally enforcing fiat assures a high degree of acceptability, even if it is somewhat constrained by borders and red tape.
Unit of account: Fiat is moderately useful because it is easily divided, counted, and is commonly accepted, but its unstable and unpredictable monetary policies blunt the precision with which it can accurately measure value over time.
Store of value: With no sound underlying basis, fiat currency has value due to little else besides the general expectation that it should be valuable. This value is at all times presumed and subject to change based on its unknown future policies.
The authorities relied upon to uphold the integrity of fiat currencies and promote economic welfare regularly undermine the confidence markets are asked to place in them. The questionable agendas and outcomes of their policies cast a long shadow of doubt over the fundamental soundness of fiat money.
Debate has raged over whether bitcoin's primary function is a store of value or a medium of exchange. In fact, its ascent to the monetary throne requires that it be both a store of value and a medium of exchange in addition to, eventually, a unit of account. Proponents articulate the case for bitcoin as a store of value with relative ease citing its impressive history of increasing purchasing power, notwithstanding the volatile price fluctuations observed over shorter time periods. Here, the value proposition is straight-forward: the supply of bitcoin is capped, and therefore its purchasing power is not subject to the dilutive effects of money printing known as seigniorage. But what about it's utility as a medium of exchange?
Critics frequently point out that centralized payment processors offer much higher transaction throughput compared to the bitcoin network, and in a shallow sense they are correct. However, such criticisms ignore both the scaling solutions being built atop bitcoin as well as the time required for even the fastest centralized payment processors to achieve final settlement (which is much longer than the time it takes you to pay with your plastic at the register). More importantly, such discussions of bitcoin's utility as a medium of exchange undervalue the design features that make it resistant to censorship at the cost of reduced on-chain transaction throughput. Recent events serve as a reminder that centralization of payment rails can transform a medium of exchange into a medium of control.
In an effort to sustain a protest by Canadian truckers this month, individuals turned to popular crowd funding platforms like Go Fund Me to send money; in an effort to end the same protest, the Canadian government used its regulatory powers to prohibit these platforms from processing the transactions. While these regulatory powers may also be used to interrupt exchanges and other centralized services that facilitate bitcoin transactions, they are unable to prevent individuals from accessing the bitcoin network directly to send or receive payments. As it turns out, maintaining the purchasing power of one's store of value is not the only facet of money that has been entrusted to the authorities. Rather, these authorities must also be trusted to permit someone to spend his money as he sees fit. Whether or not one approves of this degree of personal freedom - which, it must be acknowledged, permits the righteous and the depraved alike - is irrelevant. At this point bitcoin exists, and the toothpaste can't be put back in the tube.
More interesting than how people use bitcoin is the fact that people can use bitcoin as a medium of exchange without permission or reliance on any particular third parties. Transaction throughput is just one of several factors that ought to be considered in any assessment of the functional value of a monetary good as a medium of exchange.
Related Podcast
Citadel Dispatch e52 – venezuela, latin america, and bitcoin with @elsultanbitcoin and @cryptonomista
Another Domino May be Falling
Last month, we highlighted the developing movement in Tonga to make bitcoin legal tender. Recently, the Arizona state legislature introduced a similar measure.
Institutional Investors' Perspective
Fidelity's digital asset division recently published a research piece entitled "Bitcoin First". The entire report is worth reading, but its authors' conclude:
Traditional investors typically apply a technology investing framework to bitcoin, leading to the conclusion bitcoin as a first-mover technology will easily be supplanted by a superior one or have lower returns. However, as we have argued here, bitcoin’s first technological breakthrough was not as a superior payment technology but as a superior form of money. As a monetary good, bitcoin is unique. Therefore, not only do we believe investors should consider bitcoin first in order to understand digital assets, but that bitcoin should be considered first and separate from all other digital assets that have come after it.