It’s the perennial bitcoin internal struggle: am I money? But how, exactly, do you define money? And do we completely miss the point when we try to compare cryptocurrencies, like bitcoin, to traditional currencies? Yes, says one digital asset evangelist who spoke at our GCC Financial Forum in Bahrain.
Define money. Explain it in simple terms that even your granny would understand. It’s not as easy as you think, is it? That is because money is an abstract, ethereal concept which is extremely tricky to pin down. Defining it is like trying to explain the laws of cricket to a drunk Parisian.
The nearest anyone has ever come to nailing down exactly how to define money, uses a three-part checklist. First, money must be a medium of exchange. Second, money must be a store of value. Third, money must be a stable unit of account.
Next question: with this checklist in mind, is bitcoin money? This was the challenge we laid down to Dave Chapman, managing director of digital asset trader, Octagon Strategy, at our GCC Financial Forum in Bahrain earlier this year. It would be an understatement to say that Mr Chapman is a cryptocurrency believer. Evangelist would be more apt. This is the man, after all, who told CNBC’s Squawk Box in December that bitcoin’s price could hit $100,000 by the end of 2018 (at the time of writing bitcoin was trading at $6,800).
Cut out the middle man
We challenged him to defend the notion that bitcoin could be defined as money, using the definition laid out above, adding that – in point of fact - it was nothing more than a speculative flash in the finance pan that would soon burn itself out. It is not a swift or easy medium of exchange for everyday goods and services, we said, and the price is too volatile for it to be a reliable store of value, or stable unit of account. Plus it doesn’t yield anything, like fiat currencies do, so the case for investment is weak.
But trying to define bitcoin in these terms completely misses the point, Mr Chapman said. “The most important component of bitcoin is that it allows peer-to-peer transfer of funds without a middle man. It can’t be stopped, it can’t be reversed by a bank … a government, a regulator … or a dictator.”
Mr Chapman said that bitcoin’s true benefit to society was that it was a means to provide facilities for the unbanked. And that is what makes it a true game-changer and alternative to money, as we know it today. “Two-thirds of the world still don’t have bank accounts,” he said. “But by 2020, 75% of those people will have smart phones.”
Mr Chapman did not deny that the bitcoin price was volatile, or that its infant technology meant that exchange was not yet as ‘free and instant’ as he would like it to be. However, he emphasised that bitcoin was an entirely new concept backed by revolutionary technology. Of course there would be teething pains, he said. He compared it to email and internet in the nineties. “It is a completely new asset class that people are having masses amounts of difficulty in understanding, let alone appreciating.”
The fundamental point to understand about bitcoin – and other cryptocurrencies – Mr Chapman said, was that they were backed by decentralised technology – free from bank or government intervention. “It’s about having something that does not rely on a centralised body and that cannot be manipulated,” he said. “Transparent, decentralised technologies – such as peer-to-peer, block-chains and so forth – are vital for the world’s next decade.”
A criminal’s best friend?
But what of the charge that decentralised technology - like that which backs bitcoin – makes tax evasion, and other types of fraud, much easier? And, worse, can be used by sinister forces to fund terrorism - far from the view of governments or national security services. When it comes to criminality, you need to put things into perspective, Mr Chapman said.
“Europol estimated [in February] that bitcoin was used to launder between $2 billion and $3 billion last year. The total amount of money laundered globally was over $2trillion. Bitcoin is the new kid on the block. He’s getting poked with the stick when [the reality is] everyone around him is doing the wrong thing as well.”
He added that, rather than deprive governments of tax revenue, cryptocurrencies will ultimately make it easier to track and tax people’s income. “Every central bank is currently working on a privately commissioned ‘Fed coin’. It will be much easier to track and tax than cash. I think there will be a number of western societies that actually abolish cash in the next five years.”
So, to conclude, can bitcoin be defined as money? Only in the same way that an apple can be defined as an orange.