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Sunday, 27 April 2014

If Bitcoins were money their creation would immediately be banned by monetary authorities

If Bitcoins were money their creation would immediately be banned by  monetary authorities

For a cryptocurrency (for example, bitcoin)  - or any other item - to be money, i.e., a monetary item, it has to be 

1. a widely accepted medium of exchange

2. a perfectly stable real value store of value

and

3. a perfectly stable real value unit of account

besides also being legal tender in the economy where the money is created.

Monetary items constitute the money supply in the economy where the money is created. 

Non-monetary items are all items that are not monetary items. 

Non-monetary items are sub-divided in 

(a) variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, listed and unlisted shares, inventory, raw material stock, bitcoins, etc. 

and 

(b) constant real value non-monetary items, e.g., all items in sharehoders´ equity, trade debtors, trade creditors, all items in the profit and loss account, provisions, salaries, wages, pensions, taxes, rents, interest, etc.

More specifically, a monetary item has to be a perfectly stable store of real value which makes it a perfectly stable real value unit of account. 

Fiat money, e.g., the US Dollar, Euro, Yen, Yuan, Ruble, etc., is generally not a perfectly stable store of real value and thus also not a perfectly stable real value unit of account. The US Dollar and the Euro, for example, have an inflation target of 2 percent per annum. That is regarded (another assumption) as "monetary stability" by the monetary authorities.

Mankind over the ages has overcome the problem of money having to be perfectly stable in real value by simply assuming that it is perfectly stable in real value over time by applying the stable measuring unit assumption under the traditional, generally accepted, globally implemented Historical Cost Accounting model to account all economic activity. 

The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’

Walgenbach, Dittrich and Hanson 1973: 429

Problem solved. Money is generally never perfectly stable, so, we solve the problem by simply assuming it is perfectly stable in real value. Ask any accountant or economist and he or she will confirm this. 

Cryptocurrencies, by being variable real value non-monetary items, can thus never be money or monetary items. 

If a cryptocurrency were perfectly stable in real value over time, it would be a monetary item and could be used as a perfectly stable unit of account. However, their creation would immediately be banned by monetary authorities because only a country's central bank has the authority to issue money in an economy. 

Bitcoins are a medium of exchange because many people and companies accept them as such. They are also a variable store of value similar to fiat money. However, bitcoins are not assumed to be perfectly stable in real value and used as such as a unit of account with a perfectly stable real value whereas all fiat currencies (money within those economies) are. Bitcoins are thus not money. Bitcoins can thus never be money or a monetary item.

If bitcoins were money, their creation would immediately be banned by  monetary authorities. This is true for any cryptocurrency.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.