Bitcoin Is Not Money

Last November, the number of registered “Bitcoin” traders reached about 1.5 million, and the monthly volume of Bitcoin transactions came to roughly 56 trillion won. Why, then, has a Bitcoin frenzy swept Korea in particular? Prime Minister Nak-yon Lee once issued a warning about Bitcoin, saying, “If we leave the Bitcoin craze as it is, serious distortions or pathological phenomena will occur.”

Let us address a more fundamental question about Bitcoin trading, which has reached the frenzy stage. The media translates the term Bitcoin as “virtual currency.” Presumably this is because the word “coin” is attached to “bit.” However, Bitcoin is not money. Why is that?

In the era of commodity money, commodity money such as gold was used as a medium of exchange. In other words, people did not trade gold as money in order to eat or drink it. They bought and sold gold purely for the purpose of exchange. This excludes, of course, cases in which gold was traded for the purpose of manufacturing things such as gold rings.

Fiat paper money is fundamentally different from commodity money such as gold. First, it circulates through the coercive power of government. Still, as a medium of exchange, it is not greatly different from commodity money. However, if we look at the process by which Sangpyeong Tongbo was issued during the Joseon Dynasty, when private citizens did not use Sangpyeong Tongbo, the royal government allowed taxes to be paid with Sangpyeong Tongbo, and the regions in which it was used gradually began to expand. In other words, the government made Sangpyeong Tongbo a means of payment. In the case of Sangpyeong Tongbo, it was initially used more as a means of payment than as a medium of exchange, and only slowly came to serve as a medium of exchange as it established itself as the key currency. It is said to have established itself as the key currency because, at the time, other forms of money—for example rice, cotton cloth, and silver coins—were used simultaneously. Sangpyeong Tongbo ultimately became a medium of exchange, of course, because of the government’s coercive power through legal tender laws.

Then what function does Bitcoin perform? Bitcoin is not a medium of exchange, because one cannot use Bitcoin to exchange for other goods. Bitcoin is also not a means of payment. If you took it to a tax office, the tax official would say you were crazy. In short, Bitcoin is not what we ordinarily call money. At least up to the present, that is the case. Therefore, translating Bitcoin as virtual currency is incorrect.

Then what on earth is Bitcoin? Bitcoin is a certificate of entitlement to create and trade blocks (ledgers that record transactions). It is a certificate of entitlement, but differs from ordinary certificates of entitlement in that it exists in digital form. To trade blocks is to trade transaction records and digital data storage locations. Therefore, if we disregard the fact that it records transactions, Bitcoin is in effect a certificate of entitlement for trading data storage locations.

So long as Bitcoin is a certificate of entitlement, there is no reason to prohibit its trade. The fact that Bitcoin trading is currently proceeding without any real problem shows this clearly. However, because it creates storage space on another person’s computer, that certificate of entitlement is not based on a “complete” right. In that respect it is illegal and should be prohibited. To repeat, contrary to what is commonly believed, the claim that Bitcoin is a privately issued virtual currency, or that the programmer using the pseudonym Satoshi Nakamoto developed it as “an alternative to the existing monetary system,” is entirely false.

However, even if Bitcoin is not money, the digital world is expanding—the Internet of Things, cloud systems, digital finance, and so forth—and Bitcoin’s possible uses and applications are limitless in that it can avoid problems related to digital data storage, such as hacking. In other words, anyone who needs digital data storage will need Bitcoin or a similar certificate of entitlement. But for ordinary people who do not need such storage, Bitcoin is of no use whatsoever. Of course, no one knows what the future will bring. If Bitcoin is a certificate of entitlement related to storage, then allowing futures trading in it, as in the United States, may be only natural.

Given that Bitcoin is a certificate of entitlement, there is no way in the future to prevent private individuals from using it as money. There is also a high possibility that this will happen. However, Bitcoin is closer to fiat paper money than to commodity money. That is because Bitcoin resembles fiat paper money in that it is merely a certificate of entitlement separated from the underlying right. Fiat paper money, too, is a certificate of entitlement without any right behind it. Commodity money differs from Bitcoin and fiat paper money in that it is a medium of exchange in which the right and the certificate of entitlement exist together. As fiat paper money shows, money in which the right and the certificate of entitlement are separated causes many harmful effects. Therefore, Bill Gates’s claim that Bitcoin is better than fiat paper money misses the essence of the matter.

If Bitcoin were to be used as money in the future, how should it be evaluated? In that Bitcoin is a certificate of entitlement without any underlying right, it is no different from fiat paper money. However, because it does not rely on the coercive power of government, it may be regarded as a form of money one stage more evolved than fiat paper money. Even so, it remains one stage more degenerated than commodity money. Gold, after all, unites the right and the certificate of entitlement. Moreover, Bitcoin also raises the issue of illegality in that it uses data storage space on another person’s computer.

There are two issues regarding the price of Bitcoin. One is, “Why is it so high?” The price of Bitcoin is very high, around 20 million won. One analysis answers that this is because Bitcoin’s total issuance is fixed. If total issuance is fixed, that answer is correct, but whether the total issuance is in fact fixed is not clear. This point requires further research. The other issue is, “Why is it so volatile?” Bitcoin’s price fell from a peak in the 24 million won range on the 8th to the 14 million won range on the 10th, then rose again to the 19 million won range on the 11th. That means a fall of 10 million won and a rise of 5 million won in just two days. The answer here is that most participants enter Bitcoin trading for speculative purposes. This answer is also partially related to the first question.

These two characteristics of Bitcoin’s price are ultimately being created by the mistaken belief that Bitcoin is a virtual currency and by the rumor that it can bring a massive windfall. Therefore, the media should stop describing Bitcoin as a virtual currency. And it must be remembered that the possibility of hitting the jackpot also means the possibility of going bust.

The author’s analysis or explanation of the information technology aspects of Bitcoin may be inaccurate, because the author is no expert in information technology. However, the author can say with confidence that Bitcoin is not money. At least up to the present, that is the case, though no one knows what the future will bring. In order to calm the Bitcoin frenzy, I suggest first correcting the false knowledge surrounding Bitcoin.

Yongduk Jeon

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Professor Emeritus, Daegu University

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Original title: 비트코인은 화폐가 아니다

Author: Yong-deok Jeon

Date: 2017-12-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=17&idx=10781