A feasible digital currency

Economics Economics Questions
1

This is a theoretical argument for how I think a digital currency COULD come about. This is not an argument that that people would/should want something like this. It is not an argument for whether or not I think it is the most ideal type of currency. I’m simply pointing out, to the digital cowboys out there, how a digital currency could come about. It may also help to clarify why I believe digital currencies like bitcoin are destined to fail.

There is a list of requirements that must be met for a currency to be established. Menger and Mises mostly spelled out these requirements in their theoretical works on the origins of money. I won’t explain to you the details here but instead expect you to do your homework. Mainly the currency must have wide scale market demand prior to its status as a currency.

People must be willing to exchange and hold this digital object for reasons other then it’s usefulness as a medium of exchange. Unless the currency is “currency by decree” it is unlikely that people would empty their bank accounts full of dollars to invest into something like BTC’s. There must be some market drive for this digital object.

Enter Stocks and the stock market. Stocks are really a digital object that people demand. More accurately they are a logical object. It’s just that using digital medium’s to send the information they represent is far more convenient then sending paper notes all over the place. The difference between a stock and a BTC is that a stock represents a good of physical value. The most likely candidates for our digital currency would be a security funds like SLV or GLD. Or perhaps a security fund which holds shares in several security funds. Our best candidate might be an ETF whose stock represented several ETF’s from around the world. Holding shares securites in Gold, Silver, Fossil Fuels, agriculture, foods, ect… The most likely candidate would probably hold securities from around the globe hedging itself from all governments worldwide.

Here is what we would need to have.

  1. People must be willing to invest into the security fund. It must ultimately become widely accessible and widely accepted.
    1. It ultimately must become so widely accepted that exchange ratio’s start to be formed between goods and itself. Not between goods, a domestic currency, and then itself.
  2. A stock in our security fund must be easily transportable and accessible to the 1st , 2nd, and 3rd world countries. Remember we’re talking about currencies absent borders. It makes no sense to speak of dollars that only apply to America and Pesos which only apply in Mexico. A natural currency is not limited by such artificial boundries. So the most succesfull candidate currency will be in demand both in central America as it is in the United States.
  3. The Security Fund would have to show a long and stable track record proving an extreme degree of trust to consumers. As more people demand stocks in this security firm the firm would equally have to further increase the value of it’s portfolio by purchasing more security shares of its own. Much like how SLV and GLD ETF’s operate. Poor management and operation would mean abandonment from investors and/or competitors taking over(Which is just fine and dandy)
  4. Legal tender laws would have to be abandoned or undermined somehow.

I could get into the logistics of a banks role in how such a currency would work but it’s not hard to imagine. Plus I wanted to keep this short and to the point. If you want to ponder logistics let me know.

This is a very crude summary but I am somewhat rushed. Still this seemed interesting enough of an idea that I didn’t want to hold it from you guys.

For you digital currency cowboys out there you would need to build something like this. Just fabricating a digital currency out of thin air and making some kind of scarcity algorithm in and of itself doesn’t make it a good currency. It must offer some type of utility aside from the function as a medium of exchange. BTC’s at least offer no utility outside of it’s function as a medium of exchange.

In short the only way I could envision a “digital currency” is if the currency was a stock, or something like a stock.

Thoughts?

2

Define currency.

3

Dictionary.com has a definition that is in line with the way I use the word, but I am open to other suggestions:

something that is used as a medium of exchange

4

What exactly in my summary are you confused about?

5

Your post used the word currency throughout and using the definition I provided, the logic doesn’t follow through in my opinion. If you share my definition I can point out where I disagree with your original post. If you are using a different definition, then your original post may logically hold for me.

6

There are two reasons why you would want a currency to be backed by a physical asset:

  1. To protect your wealth from inflation.

  2. To protect your wealth from the loss of confidence in the currency.

There are two reasons why you would lose confidence in a currency:

  1. Fear of your money being fraudulently fractionned; inflation.

  2. Fear of your money being seized (governemnts) or stolen.

Bitcoin has a predermined fixed inflation that is known in advance and is completely decentralized meaning no government or group of theifs can steal bitcoins from a bank and cripple the money.

You therefore are wrong, sir, that bitcoins are destined to fail.

7

My thought is that it is glaringly obvious that you have no more than superficial understanding of how Bitcoin works. Who flocks to Bitcoin? The people who understand it. “I won’t explain to you the details here but instead expect you to do your homework.”

8

My response here.

9

Response here.

Look you guys are frustrated because someone disagrees with you. Lets keep the BTC stuff on the BTC thread.

If you guys have a legitimate critique of a commidity backed digital currency I am all ears.

10

Consider the number of things that Stocks are already used for as collateral. For example stocks are frequently used as compensation for labor, in addition to salary. This is further evidence that such a concept is more likely. This practice seems to be on the rise.

11

What you left out in your definition is the “Generally accepted” part. Not only is this included in most definitions of standard english dictionaries, it’s actually included as point 2,3, AND 4 on dictionary.com. Isn’t it very odd that you decided to ignore that?

Here is the whole thing for those reading along. From Dictionary.com

1. something that is used as a medium of exchange; money.

general acceptance; prevalence; vogue.

a time or period during which something is widely acceptedand circulated.

the fact or quality of being widely accepted and circulatedfrom person to person.

circulation, as of coin.

12

Dear filc,

not to spoil your enjoyment from picking on “digital cowboys”, but you seem to assume that bitcoins have no advantage over gold (or other commodity), while having a lot of shortcomings. Try to transfer gold remotely AND anonymously.

13

The prior can easily be done. The latter is an issue of government involvement/intervention. However I could apply the conventions of Bitcoin, in theory, to trade gold anonymously as well. Its just that no one has bothered to make that mechanism. To be quite frank, it’s not exactly a function in high demand…

14

I chose the first definition because that is how I use the word. I was mereley providing a starting point for our discussion on the definition of the term and am open to using your definition instead. To make sure I understand it correctly, is this it:

Something generally accepted as a medium of exchange.

I presume “generally accepted” is dependant on the context of it’s use? So something can be a local currency but not a global currency? Mikey dollars would be a currency while at Disney Land but would not be a currency in the context of Anaheim, CA?

15

Yup. And I suppose your going to try and weasel out of this one by stating that your context was only the BTC community. If thats the case we are talking past one another. I am not arguing whether or not hobbyists in a closed group can agree on a medium of exchange. I am arguing how BTC’s will likely not replace gold/silver or even the Dollar.

So my context is as a societal level. Currently I can’t say that BTC’s are generally accepted in that context and I see no reason why they would be in the future.

Do you have something to add to my Stock based currency OP? If you think BTC’s are an acceptable medium of exchange would you also accept my Stock based currency also?

You said that you disagreed with it in theory. Explain?

16

I would hardly say that remote transfers aren’t in high demand. The entirety of the internet market is done by remote transfers. I purchase everything except food online personally and even then, I utilize “remote transfer” methods when I am buying locally (credit/debit card).

In my opinion, this is a major contributing factor to what allows the centralized banking system to stay on top, nothing anonymous, remote and decentralized has (previous to BitCoin) been created. Because government can intervene with anything that is centralized and/or not anonymous, anytime something comes up they can squash it. This has been seen with the countless government shutdowns of independant currencies over the past ~20 years.

17

@filc

People must be willing to exchange and hold this digital object for reasons other then it’s usefulness as a medium of exchange.

Excuse me, I don’t get why this is needed. It seems to me this is only needed in the beginning, in order to provide a “bootstrap” to the money. But after enough people accept it, then the money starts having value just because other people accept it; why does it need to have value other than exchange value?

18

If there is a single person in the US that does not accept the USD as a medium of exchange then I would assume that the USD would still classify as money within the context of the US. If there are 2 people I assume it still holds. This leads to the question of how do you define where the line is drawn between money and not money within a given context? This comes back to my original question of whether or not you can have two forms of money within a single context or is only the most (singular) liquid/popular medium of exchange money in any given context?

In the Disney Land example every store accepts both USD and Mikey dollars (this is by decree/design). Both are highly liquid and easily transferable between one another. Are both considered money in this context or is there only one money within this context? What happens if there is a single vendor that doesn’t accept Mikey dollars? What about two vendors? Where is the line drawn between money and not money in this context (Disney Land)?

I agree with your first part, BitCoins are not generally accepted within any national context (US, EU, China, etc.). I do not agree with your second part. They have potential to become generally accepted because there are advantages to BitCoins (anonymous, digital and decentralized) over current monies and there is nothing stopping them from gaining wider acceptance over time. This does not guarantee success, it just makes success a possibility.

I do not have a problem with a stock based currency but I see no advantage to it over any other commodity backed currency (digital or physical). In fact, I see it having a disadvantage over a traditional commodity based currency because the value fluctuation of the underlying commodity is too variable. Gold, silver, sugar, wheat, etc. all have relatively stable fluctiations (compared to stocks) and never decrease in value to 0 (as some stocks do).

I do not believe that stocks, as they exist currently, are a medium of exchange because you can’t easily transfer ownership of a stock from one person to another without an intermediate currency. I understand that it is possible to directly transfer a stock without selling by one and then buying it by another but this transaction is not easy and cannot be completed by the average user, especially not without physical delivery of goods.

In your original statement you made this assertion:

People must be willing to exchange and hold this digital object for reasons other then it’s usefulness as a medium of exchange.

I believe this requires some qualifications in order to be true and I would assert it as follows:

Someone must be willing to exchange and hold this digital object for reasons other then it’s usefulness as a medium of exchange.

As can be seen by any current fiat money and as argued by Mises, once a currency is established as a generally accepted medium of exchange it can and will be used for it’s value in trade rather than it’s underlying commodity or historic value.

Coming from a barter economy, if I know the butcher likes apples I may be willing to trade my clothing for apples knowing that I can take them over to the butcher and trade those apples for meat. What I have use for is meat, I may be allergic to apples and have no use for them but because I know someone that wants apples I can use the apples as a medium of exchange. In this scenario I am willing to accept as many apples as I think I can reasonably use to purchase other goods. If both the butcher and the shoe maker accept apples as payment I am willing to accept as many apples for payment of goods as I can spend on shoes and meat. Now that I am accepting apples as payment the carpenter, who also doesn’t like apples, may start accepting apples as payment because he knows he can buy cloths from me with apples, even though he has no desire to buy meat or shoes or consume the apples. The carpenter is now using apples as a medium of exchange even though he doesn’t transact with anyone who actually wants apples.

The purpose of the above example is to illustrate that as long as someone wants a good then that good can become a medium of exchange given time. It can also grow in it’s user base beyond it’s original context just as the apples in the above example grew beyond just trades with apple consumers or trades with apple producers (as seen by the carpenter).

BitCoin has people who value it for reasons beyond a medium of exchange. What their reasons are is of no consequence, all that matters is that such people do exist. This means that there is a demand for BitCoins (currently small, but demand exists) and that demand can grow and expand beyond the hobbyist context just as the demand for apples expanded beyond the apple producer/consumer context purely for reasons of medium of exchange.

19

I don’t see the connection either. To me, it appears a sufficient, but not necessary condition. And anyways, isn’t value subjective? So far, it seems that induction, not deduction, is being used to make the case.

20

a) Does anyone here have anything to add or subtract from my OP regarding a Digital currency backed by securities/commodities?

Lets move the BTC discussion back to the appropriate thread.