WASHINGTON, January 28, 2015 – Recently, there’s been a great deal of talk and confusion about the “digital currency” called Bitcoin. But we cannot clear up the confusion surrounding Bitcoin unless we understand currency and money.
First, let’s talk about money. What is money, anyway? And how is money different from currency?
Money is an abstract concept. The place to start when defining money is to understand what money is not.
- Money is not an medium of exchange. A currency is a medium of exchange.
- Money is not a unit of account. A currency is a unit of account. A unit of account can be other things, including frequent flier miles and poker chips. In some places, Tide laundry detergent is actually traded for various and sundry things.
- Lastly, money is not a store of value. Neither is currency. Gold and silver are stores of value.
Legendary commodities broker Anne Barnhardt describes money as “a proxy for time,” and she’s right. Time is money, and vice-versa. Life on earth is finite. You only have so many hours in a day to trade your time for money, be it in cash, gold coins, or Tide.
Some Roman soldiers were paid in salt, which is where the word salary comes from. The courts recognize Ms. Barnhardt’s time-as-money thesis in yet another way, with regard to alimony. If a woman who worked as a home-maker gets divorced, the law generally regards her as entitled to receive a certain amount of money from her former husband. This stipend, as it were, is taken in the form of alimony, which is one way of compensating her for the time she missed outside the workforce. She’ll never get those years back, and is thus compensated for her time.
Currency, by definition, is legal tender issued by a sovereign nation. Also by definition, currency is available in physical form like bills and coins. While the majority of commercial transactions in America are electronic (like credit card and debit card purchases), quite a bit of paper still changes hands.
So what is Bitcoin?
Bitcoin is not money and Bitcoin is not currency. Bitcoin is digital code with a specific address linked to it, and a Bitcoin holder simply has a claim on that address. It you could see an actual Bitcoin, it might look something like this:
Bitcoins are 1’s and 0’s in the cloud, floating out there in cyberspace right along with countless photos, videos, e-mails, and anything and everything else stored in digital lockers throughout the universe. Online poker money, for example, was a precursor to Bitcoin. And just like Bitcoin, it can all disappear if the host gets hacked.
The attraction of Bitcoin is that, if you are lucky, you can convert Bitcoin into U.S. dollars, which are much more useful in our economy. The fact that Bitcoin now has backing from the NYSE Group doesn’t make it legitimate, but it’s helpful just the same.
“To have an organized exchange that has the backing of thoughtful venture capitalists and investors addresses one of the main problems with Bitcoin, its extreme volatility,” says Duke University finance professor Campbell Harvey. But Professor Harvey is wrong about volatility being a problem.
The real problem is that Bitcoin income cannot be taxed. If a landscaper agrees to do $215 worth of work in your yard and you pay him in Bitcoin, do you think he’s going to run right home and cut a check to the IRS? A recent Wall Street Journal article confirmed this real life fact, noting how Bitcoin is “alphanumeric data that can’t be traced to you personally.”
On top of all this, Bitcoin can facilitate illegal activity. One example: Illicit drug purveyor Silk Road was fraught with Bitcoin.
Most disturbing, though, is that Bitcoin undermines the U.S. Constitution. Article 1, Section 8 gives Congress sole authority to “coin money and regulate the value thereof.” You can’t have both Bitcoin and U.S. dollars in America.
What if Proctor & Gamble only sold Tide in Bitcoin?
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