In a cash transaction, one party directly exchanges cash for goods or services from another. This is not the case for online transactions, where third parties are relied upon to ensure secure payment processing. For an online transaction, payment flows from one party through financial institutions, such as banks and processing firms (e.g. Visa, MasterCard, PayPal), to the account of the other, rendering the payment many times removed from being purely peer-to-peer, like the physical exchange of cash, in most instances. Proposing that the many inefficiencies resulting from this online payment model may be avoided by purely peer-to-peer electronic cash, Satoshi Nakamotoi published “Bitcoin: A Peer-to-Peer Electronic Cash System,” more commonly referred to as the “White Paper,” in October of 2008, describing the ideas and technology behind Bitcoin before the currency’s official release in January of 2009.ii
Bitcoin is a digital currency that implements cryptography as a means of verifying and securing online transactions. An electronic coin, as Nakamoto defines it, is “a chain of digital signatures.” As coins are transferred the current owner leaves a signature that includes identifying information validating legitimate acquisition of the coin and a unique public key of the next owner. The receiver is then able to trace the attached signatures to “verify the chain of ownership.” iii To prevent double spending, or the transfer of the same coin twice, transactions are broadcasted and then “timestamped” by external nodes to create a network that legitimizes coin transfers and stores this information in a block. A block consists of the transaction history and a complex mathematical algorithm. Nodes, or individual CPUs, compete to solve these mathematical problems, and in doing so creates a new block, rewarding the node with brand new Bitcoin. This incentivizes both the maintenance of the network and the honesty of the nodes while allowing for decentralized issuance.iv Bitcoin does not rely on a central authority to issue and regulate the currency, implementing, instead, these many autonomous regulatory features in an attempt to replace the need for trust-bearing financial institutions to mediate instances of fraud. As the “White Paper” suggests, Bitcoin is an attempt at establishing an autonomous payment system, making online transactions purely peer-to-peer. Digital currencies, in general, have created an expansive online community strongly advocating for the circulation of these new currencies.
Bitcoin’s inception occurred in the midst of the 2007-2008 global financial crisis, when trust in financial institutions, regulatory agencies, and real estate dwindled significantly. A form of money that is able to circumvent the institutions largely viewed as responsible for such a lengthy period of economic hardship is understandably desirable, potentially explaining the rise in Bitcoin’s popularity. As Nakamoto notes, a cash-only economy would avoid the same problems that Bitcoin aimed at resolving by removing the uncertainties associated with online exchange. While localization movements do exist, they have not received the same level of participatory popularity compared to the movement towards digital currency. Despite this desirability, because Bitcoin is not issued by a state and does not have legal tender status, it also receives widespread skepticism.
The increasing popularity and circulation of digital currencies sparked an intense global debate surrounding the regulatory treatment of Bitcoin and other digital currencies such as Ripple and Litecoin. The discussion ranges from macro areas of campaign finance and national security to more micro issues, such as personal finance and accounting. These debates reveal a fundamental uncertainty regarding the nature of money. Describing what Bitcoin is, a video on Bitcoin.org’s front page claims that Bitcoin is to money what the Internet was to property.v The Internet, through file-sharing, video streaming, etc., shook the understanding of the definition of property, as seen through the intensity of the intellectual property debates that continue as of this writing.vi Paralleling the property debate, Bitcoin forces the fundamental understanding of money to be revisited. Is Bitcoin money? If not, then what is it? What, then, constitutes money? This essay is an attempt to address these questions in the context of Bitcoin and other digital currencies.
At the heart of this discussion is the relevance of the state. Typically, states issue their own money and legally require the circulation of this currency through legal tender laws, legitimizing and obligating its acceptance as a satisfactory means of payment. However, a government does not issue and regulate Bitcoin and its related infrastructure. The question is: does money require the presence of the state? This uncertainty is evidenced by writers such as Abe Cofnas, who poses the question “[is] Bitcoin a currency or commodity?” in Futures Magazine to discuss the essence of Bitcoin outside of a purely regulatory context. vii A common argument one may encounter from authorities is that Bitcoin, not being issued by a state and not being legal tender in any jurisdiction, is therefore not money, and must be some other thing, like a commodity. For example, Deputy Governor Grant Spencer of the Reserve Bank of New Zealand claimed “[…] Bitcoin […] seems to behave more like a commodity than a currency.” viii While Spencer does not explicitly cite Knapp in making such claims, his argument directly parallels that of Georg Friedrich Knapp, author of The State Theory of Money where he founded “chartalism,” or the state money approach, influencing canonical economists such as John Maynard Keynes. ix The lasting influence this work has had created the monetary understanding within which the Bitcoin debate is currently taking place.
I proceed by reconstructing Knapp’s State Theory of Money to elucidate the argument between Bitcoin as money or commodity. Following this, I invoke Alfred Mitchell Innes to reinforce Knapp’s claims. This discussion shows in theory that Bitcoin is not money proper, resembling something more commodity-like instead. In practice, this distinction is affirmed by the Internal Revenue Service’s (IRS) treatment of digital currencies. The digital currency community rejects this State Theory, embracing what I identify as a libertarian understanding of money, resembling Ludwig von Mises’ Theory of Money and Credit. I then introduce Georg Simmel and The Philosophy of Money as a more viable theoretical alternative to those insisting digital currencies are monies. The purpose of this writing is not to ascribe Simmel’s theory to those advocating for the circulation of digital currencies, but to prescribe. In closing, I argue that Bitcoin is not money proper even with an adherence to Simmel’s theory. Instead, under Simmel’s framework Bitcoin is a money-like commodity allowing for more efficient currency exchange in a globalized economic society.
2. Knapp and The State Theory of Money
Georg Friedrich Knapp founded the “chartalist,” or state theory, approach to money. Chartalism refutes the idea that the circulatory value of money was ever derived from the intrinsic worth of the substance comprising the money. Instead, money obtains its value from the state when it issues the money and declares it as the form of money it will accept at its pay offices as satisfactory payment for taxes. Unlike his opponents (the metallists, as Knapp calls them), the material substance behind the money is not relevant in determining the “circulatory value” of the money. Since the purpose of money is to circulate in exchange, only the circulatory value is important. Therefore, the state as the issuer of money, validating its circulation by tax policy, ultimately provides money with value.
In The State Theory of Money, Knapp creates an expansive vocabulary for the numerous forms money may take, rendering it a glossary as much as it is a work of economic thought. For our purposes, we only need to focus on two essential kinds of money for Knapp: valuta and accessory. Valuta is the state-issued, definitive money that is always kept ready by the state to be paid out for government purchases. This money is “definitive” in the sense that it is non-convertible, meaning that valuta money is not redeemable for any other form of money; it is final. In order for an economy to function properly, Knapp argues that valuta money must be circulating within it. On the other hand, accessory money is, as Knapp puts, it “all other forms of money” that are not valuta. x xi Accessory may circulate alongside definitive state money, but is not necessary. Being convertible, accessory money may be exchanged for other forms of money at some determined rate, which the state may or may not have an official role in. In this sense, it is not final because the recipient of accessory money must convert it into the definitive state money in order to satisfy her tax obligations. For example, a restaurant in the southwestern U.S. may accept the peso as a means of payment, but the restaurant owner must convert these pesos into U.S. dollars, according to some rate of exchange, to pay her taxes.
Accessory money, being convertible and non-definitive, behaves as both a commodity and money. When exchanged for goods or services, accessory behaves as money, serving as a medium of exchange. However, being convertible, accessory may be exchanged for definitive state money in order to realize a profit. As Knapp puts it:
[…] all obligations expressed simply in money refer in the last resort to valuta [or the definitive state money], because judicial decision is final and the state as fountain of law only compels obligations to be performed in the money in which itself (by its Treasury) makes payments.
For this reason it is always valuta money which is contrasted with commodities […]
So that it is not money simply which is contrasted with the concept commodity, but only valuta money; for ex definition it is only valuta money which is never purchased. But there is absolutely no difficulty in conceiving that accessory kinds of money are purchased; so that they are commodities[…]xii
This passage indicates two important relationships that valuta money has with commodities.
The first is quite clear: the concept ‘definitive money’ and the concept ‘commodity’ are in opposition with one another. Because valuta money cannot be bought or sold, it cannot be treated as a commodity. Accessory money, capable of being purchased and sold in terms of the domestic state money, may then be treated as both money and a commodity. Only when accessory is used as a means of payment is it being used as money. Investors focusing in foreign exchange markets offer an excellent example of money acting as a commodity. Foreign money circulates as accessory relative to the domestic state money, and investors speculate on foreign exchange rates, investing accordingly in order to realize a profit in terms of the domestic state money.
But there is another facet to the cited passage that is crucial to Knapp’s theory. “[…] All obligations expressed simply in money […]” are to be understood in terms of the valuta money (italics added). At this point, when establishing the commodity status of monies, Knapp does not explicitly distinguish between valuta and accessory. Obligations expressed in money terms, or prices in general, regardless of which money the price is expressed in terms of, are rooted domestically in the state’s definitive money. Having understood this, we can see where some contemporary criticisms of digital currencies are derived from.
Bitcoin is circulating as accessory moneyxiii alongside state currencies, which particular currency depends on the geopolitical location. I will consider the case of Bitcoin (BTC) and U.S. Dollars (USD) with USD being the valuta money. In order to obtain Bitcoin, one must typically head to an exchange such as BTC-e or Bitstamp where state money may be exchanged for Bitcoin. Exchanging or converting United States Dollars into Bitcoin is a transaction where BTC is being purchased with USD. In this transaction, Bitcoin behaves as a commodity. Only when taking BTC to a vendor and purchasing a good/service with it is BTC’s function as money realized. If and when BTC is later sold for USD, it reverts back to its commodity state. USD, being definitive, may not be purchased in the United States, and may therefore never act as a commodity. In Knapp’s formulation, this means that when exchanging Bitcoin for Dollars, Bitcoin is being sold for Dollars as opposed to purchasing Dollars. The State Theory of Money implies that conversions between accessory and valuta money be referred to in such a language. While the developers of Bitcoin have suggested that their aim is to provide an autonomous currency that stands apart from state monies, it is interesting that the adopting community’s literature gestures to the ultimate exchangeability of Bitcoin into U.S. Dollars, with prominent sections of their official wiki headed “Buying Bitcoin” and “Selling Bitcoin.” xiv
3. Innes and The Credit Theory of Money
The idea that prices expressed in accessory are ultimately referring to valuta money suggests that Bitcoin, an accessory money, cannot circulate autonomously alongside valuta. However, Knapp does not discuss this idea beyond the cited passage. More insight into the relationship between accessory money and valuta is offered by Alfred Mitchell Innes, who expounds where the value of money is derived from. If Bitcoin is to circulate as an autonomous currency, then the digital currency community will need to address the issues that Knapp presents. Assuming Knapp is correct in deeming accessory ultimately valuable in terms of valuta, then Bitcoin would not be circulating autonomously as its value is derived from the money of the state. The digital currency community, viewing Bitcoin as money, would need to refute this claim. This may not be an easy accomplishment, as Innes demonstrates that taxation has a prominent impact on everyday exchange.
Innes’ argument proceeds by refuting the traditional economic account of the myth of barter,xv leading to the inception of The Credit Theory of Money. The traditional story told about the evolution of money out of ancient barter economies claims that as exchanging societies grew, the double coincidence of wants problem emerged. Each bartering party must demand the good/service the other has, making trade impracticable. Intermediate commodities, and then money, were introduced as a medium of exchange, solving this inefficiency. Transacting parties could now pay with this medium of exchange, using it to purchase goods/services that they demand at some other point in time. This means of payment eventually evolved into the economies we have today, an idea popularized by Adam Smith. For Innes, the idea of introducing an intermediate commodity into exchange is unnecessarily complicated, so much so that it was not likely to have ever occurred. If these transacting parties had been involved in trade prior to the time when one party did not have an interest in the goods offered by the other, a loan would be more feasible. Introducing an intermediate commodity is a complicated idea; accepting it as payment now in order to purchase something later depends on all other parties in the economic society being willing to accept the medium in the future. A simple loan where party A gives B some good or service with an agreement to be paid at a later time is much more likely to have occurredxvi, as a trust relationship between two individuals is the only prerequisite. For Innes, this means that money must have evolved out of primitive credit systems as a means of quantifying and exchanging debts and credits. Money is then a credit document, and obtains its value as a credit.xvii
The role of the state in establishing the value of money in The Credit Theory is largely similar to that of The State Theory. While Innes goes into much less detail on the state than Knapp, Innes is able to elaborate on the significant influence that the state has on the circulation of money. For Knapp, state money obtains its value by being both issued by the state and being accepted at state pay offices (merely declaring a form of money ‘legal tender’ was not satisfactory). In The Credit Theory, state money is a credit that the government issues, placing society in a debt that can only be repaid through taxation, the legal obligation to pay off this debt. For the best illustration of this, we must turn to Innes himself:
The government by law obliges certain selected persons to become its debtors. It declares that so-and-so, who imports goods from abroad, shall owe the government so much on all that he imports, or that so-and-so, who owns land, shall owe to the government so much per acre. This procedure is called levying a tax, and the persons thus forced into the position of debtors to the government must in theory seek out the holder of the tallies or other instrument acknowledging a debt due by the government, and acquire from them the tallies by selling to them some commodity or in doing them some service, in exchange for which they may be induced to part with their tallies. When these are returned to the government treasury, the taxes are paid. xviii
Taxation, such as property tax, places property owners in the position of a debtor, compelling them to obtain a credit instrument (money) in order to pay the state and absolve the debt. If the property itself does not generate monetary revenue in the terms of state money, individuals must earn, or convert their labor or property, into state money to pay the state in a satisfactory manner.
A synthesis of Knapp and Innes’ theories reveals a deeper understanding of the nature of state issued money, and the presence of the state in every-day economic exchange. States place those living within their governance in a debt by declaring each citizen responsible for a tax liability. By only accepting state-issued currency as a satisfactory medium of payment for these taxes, state money is then a credit document used to absolve the citizenry’s debt. Those obligated to pay taxes must seek this credit document, or state money, in order to absolve their debt, ensuring the circulation of state money in the public and private realms of exchange. Accessory money, not being issued by the state, can only function as a money up until it is time to pay taxes, at which point it must be converted into state issued, valuta money. As it is the money of the state that is accepted at tax offices, this is then the money individuals are ultimately concerned with. Only state money definitively absolves tax obligations, and it is therefore taxes that drive the circulation of money. This is the same conclusion reached by L. Randall Wray, a proponent of Modern Money Theory (MMT) or “neo-chartalism,” in conducting a similar literary analysis and synthesis, deeming money as “that which is needed to pay taxes” (twintopt).xix I will now move to apply the theory to a recent notice issued by the Internal Revenue Service, a payment agency of the state, in order to offer a chartalist account of the circulation of Bitcoin alongside USD.
4. The IRS on Bitcoin
In early 2014, the Internal Revenue Service (IRS) released a notice explaining how they would interpret current tax codes as applying to digital currencies (i.e. Bitcoin).xx The IRS, a federal agency of the United States government tasked with enforcing tax compliance, is an example of a state pay office, as Knapp calls it. Applying the framework of Knapp and Innes to this notice offers an explanation as to why the IRS treats digital currencies in the manner that exemplifies Bitcoin behaving as a commodity in circulation alongside state money.
Bitcoin, having an equivalent value in “real currency” (i.e. USD, or state money) and acting as a substitute for real currency in “some environments,” is thus referred to as “convertible.” In other words, Bitcoin “can be purchased for, or exchanged into, U.S. dollars,” rendering it a convertible currency, sometimes functioning as a medium of exchange during some transactions, rhetorically paralleling Knapp’s distinction between accessory and valuta. It does not have legal tender status, but Bitcoin transactions may still have tax consequences due to their convertibility. Digital currencies are then property in the eyes of the IRS, and are treated as property under current tax law. xxi When Bitcoin is received as payment for a good or service, the “fair market value” on the date of exchange must be recorded and reported to the IRS as income, with fair market value being the exchange rate into USD.
The notice largely corresponds to the theory Knapp has established. Without authority over monetary media itself, the IRS is responsible solely for collecting this tax revenue and handing it over to the Treasury. The U.S. dollar, being the only currency the federal government accepts as payment for tax liabilities, must therefore be the definitive money. Given this, the IRS cannot treat Bitcoin as a money. Rendering Bitcoin a commodity (property) allows for the application of current tax law with relative ease.
By declaring income in Bitcoin as taxable income, the IRS has effectively implicated all prices expressed in Bitcoin as referring to USD in the last resort. All Bitcoin income must be recorded in terms of the U.S. dollar in order to comply with the current tax codes. While the IRS’ interpretation of current tax codes does not mandate constant conversion of Bitcoin into USD in every instance of acquisition, it does necessitate awareness of the exchange rate. The actual conversion is only necessary when it is time to pay the government. However, requiring the recording of Bitcoin revenue in USD terms introduces the money of the state into every Bitcoin exchange. While not actually selling Bitcoin for USD, the conversion occurs conceptually in each transaction. In the language of the IRS, Bitcoin is serving as a “substitute” for USD, a convertible certificate redeemable for USD at a later occasion, with the USD value of the certificate being the ultimate concern of the recipient and government.
This held true prior to the release of the IRS notice. Prices listed in Bitcoin fluctuated with the exchange rate in terms of USD. For example, Overstock.com,xxii which accepts Bitcoin as payment, lists all of their prices in USD. When paying with Bitcoin, the U.S. dollar price is converted into an equivalent Bitcoin price as determined by a Bitcoin exchange. With the prices being listed in USD, and only the Bitcoin price being adjusted for fluctuations in the exchange rate, it is clear that the firm is concerned, in the final sense, with receiving a specified quantity of state money. The desired income for the sale of a particular good must be determined in the terms of a definitive monetary unit, as this is the unit where income is final.xxiii Again, this behavior resembles the valuating process established by The State Theory, where in order for an economy to function properly, there must exist a valuta money that severs the obligations of all involved parties, effectively finalizing the transaction.
Under this chartalist account, Bitcoin is not money. The epistemological assumptions of valuta money rule out accessory as money proper purely by definition.xxiv As I have argued, the IRS treatment of digital currencies and the behavior of firms and agents accepting them is effectively chartalist. As Innes and Knapp demonstrate, the history of money shows the prominence of the state in how we have come to understand money today. The essential role of the state in the nature of money is refuted by advocates of digital currency circulation, evidenced by the recent Silk Road trial.
5. The Silk Road and Ludwig von Mises
Bitcoin garnered significant media and regulatory attention due to the payment technology being implemented on the Silk Road. The Silk Road was a dark web, online marketplace for vendors and buyers of illicit goods ranging from narcotics and forged documents to illegal fireworks. The anonymity software Tor was employed by the moderator(s) and users of the site to make tracking the illegal activities incredibly difficult for law enforcement agencies. However, Dread Pirate Roberts (DPR), the pseudonym under which Ross Ulbricht operated the Silk Road’s endeavors, was arrested in 2013 and convicted in February, 2015 on charges of narcotics and money laundering conspiracy. Ulbricht’s trial brought global attention to Bitcoin, unveiling many of the ideological motivations behind those advocating for digital currencies. While discussing Silk Road and the trial, I will refer to the operator of Silk Road as DPR in the context of correspondence Ulbricht posted online before his arrest, and will refer to Ulbricht by his legal name when citing him in the context of the trial.xxv
Shortly before the arrest of Ulbricht, DPR engaged in an interview with Andy Greenberg of Forbes over the Silk Road’s messaging system. During this interview, DPR claimed that “[…] Silk Road is a way to get around regulation from the state,” and “with Bitcoin giving people control over their money and trade again, [there is] the potential for a monumental shift in the power structure of the world.”xxvi In Ulbricht’s pre-trial hearings, these motivations are front and center as the defense motioned to dismiss charges of money laundering conspiracy. In an attempt to use the IRS’ declaration that Bitcoin is not money against the state, the defense interestingly argued that since Bitcoin is not money, citing the same IRS notice as above, a transaction involving Bitcoin does not constitute a “financial transaction,” and, therefore, “cannot form the basis for a money laundering conspiracy.”xxvii The court disagreed, citing Bitcoin’s ultimate convertibility into state money as a source of value. Recognizing, much like the IRS, that Bitcoin behaves similarly to money when acting as a medium of exchange, the court declared that reducing the status of Bitcoin to a commodity does not strip the digital currency of its money-like qualities. Likening Bitcoin to gold, District Judge Katherine B. Forrest claimed, “[t]here is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, and then converted back to cash, that would constitute a money laundering transaction.” xxviii
DPR’s claim that Bitcoin is a means to avoid state regulation and take back monetary power from the state largely resembles the thought of Ludwig von Mises and The Theory of Money and Credit.xxix xxx Ludwig von Mises directly rejects the idea that money is given its value from the state. Mises also agrees with the chartalist account that legal tender laws do not suffice in creating money, claiming that it is exchanging individuals employing a “common media of exchange” that determines what is money. “Quite possibly, commerce may take into use those things to which the state has ascribed the power of payment; but it need not do so. It may, if it likes, reject them.”xxxi As previously mentioned, chartalism claims that taxation is what drives the circulation of state issued money. Mises refutes this, understanding taxation as a tool states employ to coerce exchanging individuals into adopting their monetary instruments, “persuading commerce to abandon one sort of money and adopt another.”xxxii Tax policy may be influential in a state’s effort to implement a particular monetary media, but it is ultimately those exchanging who must decide to adopt this media as a common media of exchange for this policy to be effective, according to Mises. The power to collectively determine what functions as money in an exchange economy is the Misean idea DPR alludes to in his claim that Bitcoin returns monetary power to individuals.
Despite this libertarian/von Misean monetary ideology motivating DPR’s use of Bitcoin on Silk Road, the chartalist account of Bitcoin as accessory money better explains the monetary phenomenon of this illicit marketplace. While only Bitcoin was exchanged on Silk Road, prices were eventually switched from being purely expressed in Bitcoin over to the user’s domestic state currency.xxxiii Much like the earlier example of Overstock.com, the money of the state fundamentally underlies each Bitcoin transaction to the point where even the black market enterprise Silk Road recognized and legitimized it. The von Misean motivation behind digital currency advocates and users does not adequately explain the commodity-like behavior of Bitcoin, especially in the case of those wishing to use Bitcoin in a more legitimate marketplace such as Overstock.com. For these reasons, I maintain digital currency advocates should turn to Georg Simmel’s understanding of money and communities as an ideological alternative to the libertarian/von Misean monetary theory.
6. Simmel and The Philosophy of Money
Instead of creating a narrow work deriving the value of money, Simmel aimed to understand how money, as an instrument and a construct, affects human relationships both to each other and the world. Making this move is important for the digital currency community as I have shown that a strictly economic understanding of money does not fit Bitcoin. Adopting a broader conception of money, as not only an economic instrument, but a social instrument is more appropriate to the idea that Bitcoin is money while additionally explaining the emergence of communities distinguished by the utilization of digital currencies.
Simmel understands money as the objectifying medium of value. Only once economic transactions occur can an objective value be assigned to an object. xxxiv Money, as a tool for comparing the values of objects in exchange, is the quantification of “abstract economic value,” or an object’s worth in terms of other objects.xxxv Yet, it is difficult to replace value with a symbol; trusting that others will accept it as a form of payment complicates the matter even further. The freedom of an individual to participate in exchange is limited by the liberty of all the other individuals that make up the collective to refuse her money. Since community is largely the result of exchange, the community depends on all of those who comprise it to accept each other’s money. Trust in the state, to coin and mint money, is derived from this community exchange. If the state guarantees that each transacting party will accept the currency payment of the other, individuals can then participate in exchange without worry.xxxvi
Simmel argues that money is continually evolving from material states into more abstract forms towards a state of pure abstraction, which Nigel Dodd refers to as “perfect money.”xxxvii More abstract forms of money are necessary to encapsulate larger populations. Economic societies grow as more individuals accept a particular money. Material forms, such as gold coins or specie more generally, made the transfer of money difficult across vast distances or large quantities. The substance value of the material was eventually replaced with state guarantees in response to these difficulties. However, circulation of state money is confined to the geopolitical borders of that state, since the state cannot guarantee international traders will accept the domestic currency. Simmel argues that this explains the rise of precious metals as a form of currency. If trade across national communities were to exist, currency of higher intrinsic value must necessarily be offered as payment to promote acceptation. Gold and silver were highly valued commodities nearly worldwide, which explained the tendency for large, powerful nations to mint them. However, as global trade increased, trust relationships and interdependencies were established, creating “the basis for the diminishing intrinsic value of money and its replacement by functional value.”xxxviii Paper notes, and then eventually checks, debit/credit cards, and online payment systems allowed for more efficient trade to expand into the global realm.
The Eurozone exemplifies the trend of interdependency, with the agreement of now eighteen European Union states to accept the Euro as legal tender. Instead of each state issuing and circulating their own currency, the Eurozone abstracted the money beyond the individual guarantees of each nation to the European Central Bank, an entity existing above domestic authority. Under Simmel’s terms we can envision this union as a synthesis of previously separate economic societies into a singular society. Individuals in the Eurozone are now members to a much larger economic totality when they possess the Euro, a society that transcends the borders of their domestic nations, with the Euro being the symbol of membership to this exchange society. As German Chancellor Angela Merkel notoriously stated, “the Euro is the guarantor of a unified Europe.”xxxix
For Simmel, money, in addition to being a medium of exchange, is the symbol of membership to economic society. It cannot exclude any particular agent, and is not dependent upon the agent’s productive role. This allows for larger economic spheres to emerge. By removing “everything personal and specific” from trade, money has been able to unite people of such diverse cultural, social, and spatial backgrounds that would otherwise be inaccessible. The form of money must then be more abstract the greater the economic sphere in order to permit acceptability among its members.xl
Money’s ability to transcend distances is one of many reasons global trade has reached such an immense and complex scale, according to Simmel. However, there are still costs and inefficiencies associated with trade in the international market. Money remains the symbol of membership to an abstract economic society. Thus, even with the emergence of monetary unions like the Eurozone many different state monies are still circulating. International trade requires sellers to accept foreign currencies or the buyers to convert their domestic money into one the seller accepts. State money restricts economic societies to geopolitical borders, with individuals constantly entering and exiting as they convert their respective currencies.
If we accept Simmel’s understanding of how money unites exchanging individuals into economic totalities, with membership determined by the money one is exchanging, then Bitcoin holds a unique place in money’s evolution. Money’s value has been abstracted from material substance to state assurance as exchange expanded globally. Continuing along Simmel’s logic, as money approaches a purely abstract form, further abstraction promotes growth of the economic societies by including a more vast population. With economic societies being defined by the currency in circulation and value of the currency coming from states, it would follow that the next step in monetary evolution would be an attempt to transcend states. Nakamoto’s “White Paper” indicates intent to establish an autonomous payment system that eliminates the need for third-party mediation and relying on financial institutions and states to ensure online transactions to purely peer-to-peer online exchange. Using the Internet as a vessel for global communication and trade, Bitcoin as a payment system consists of many internal features that significantly reduce possibilities for fraud, counterfeit, and double spending in the hopes of eliminating the need for institutions of trust.xli Digital currencies, in general, have tried to abstract money beyond a form that requires valuation from an institution or state by incorporating the functions of these institutions that make their money functionally valuable directly into the design of these digital currency payment systems themselves. It is then understandable for the digital currency community to insist that Bitcoin is money because they are a Simmelian society coalescing around these technical features.
Embracing Simmel’s evolutionary understanding of money may be beneficial to advancing digital currencies, as the ideas behind it largely resemble what I have identified as being the motivations behind the creation of digital currencies. States limit the size of economic societies and financial institutions, as third parties, distance transacting individuals from one another. By favoring money that does not rely on these obstructing institutions, the digital currency community reveals a preference for a more coherent and inclusive economic society, mediated instead by the relationship of each transacting member to one another under such a society. In an economic exchange:
[t]he pivotal point in the interaction of the two parties recedes from the direct line of contact between them, and moves to the relationship which each of them, through his interest in money, has with the economic community that accepts the money, and demonstrates this fact by having money minted by its highest representative.xlii
But if the state, as the issuer of money, defines economic society, then a global society cannot fully be realized. Questioning the essential role of the state in the nature of money allows for replacing the state as the “highest representative” with a global economic community. At the very least, the conceptual logic of forming a supranational exchange society is more coherent in Simmel’s formulation.
However, it was not within the scope of Simmel’s project to expose the hindrances along money’s evolutionary path to its ideal form. The philosophical role of the state as a vehicle ensuring acceptation of money is minute relative to The Philosophy of Money as a whole. Knapp, on the other hand, focused specifically on the state’s role and elaborated on the implications of state money. As Knapp and Innes have collectively demonstrated, the state is much more prominent in money than Simmel articulates. States necessarily treat accessory currencies as if they are commodities because the money issued by the state must be definitive, as illustrated previously in this essay. If Bitcoin is truly meant to be a payment instrument that transcends the binds of the state in the name of creating one global economic society, then it appears to have already failed in practice. Taxation reduces Bitcoin to a commodity-like state, ultimately valuable in terms of state money. Even Simmel, himself, viewed the idea of perfect money as fictitious, an asymptotic point money was evolving towards.xliii So where does that leave Bitcoin?
Simmel offers an account of where the evolution of money is heading towards in its perfect, ideal state. While I have argued that Bitcoin fits Simmel’s evolutionary understanding of money, Bitcoin is effectively accessory money, or a commodity that may behave like money in some instances. Given these implications in practice, as illustrated by the IRS’ treatment of Bitcoin and the operations of Bitcoin price listing, I do not expect Bitcoin to reach the status of an autonomous currency, as envisioned by Nakamoto. It is the money of the state that is of ultimate concern to transacting individuals, with Bitcoin serving as a new means of transferring these state currencies. As the IRS notice shows, Bitcoin is not definitive, having its value rooted in the money of the state. Bitcoin is then not autonomous as its circulation depends on the definitive state money. Nevertheless, the features that Bitcoin’s developers implemented as a means of security have greatly reduced the need for financial third parties, whether they be governments or firms, and the costs associated with them. Digital currencies, like Bitcoin, may be a means of compromise between Ludwig von Mises’ voluntary common media of exchange and the limitations of accessory money identified by Knapp and Innes, given this understanding of Simmelian economic societies.
While it does not appear that Bitcoin can succeed as an autonomous currency, Bitcoin is a significant innovation in money transfer technologies. As Ben Bernanke, former chairman of the U.S. Federal Reserve system, said in a letter addressed to Congress, “[Bitcoin] may hold long-term promise, particularly if [digital currencies] promote a faster, more secure and more efficient payment system.”xliv Sending money across the globe can be done in seconds with current digital currency technologies. In the realm of international exchange transacting parties do not need to be concerned with the domestic money of one another with the introduction of digital currencies. Party A, concerned with state money X, can pay Party B, concerned with state money Y, using Bitcoin as an intermediate money, or a certificate redeemable for numerous other state monies. Neither A nor B needs to be interested in the money of the other if Bitcoin is used as the medium of exchange; conversion is the responsibility of each party on their respective end. Bitcoin, then, has the potential to be the symbol of membership to a global exchange community while allowing for independent states to conduct their monetary endeavors in a manner similar to Knapp’s theory and the IRS.
I would like to thank Chad Lavin for his invaluable feedback and guidance throughout this entire project, as well as Michael Moehler, Francois DeBrix, Daniel Breslau, Mark Lucht, Sascha Engel, and Anthony Szczurek. Additionally, I am grateful to the anonymous reviewer for their thorough and insightful critique of an earlier draft of this essay. These ideas, in large, were presented at the 2015 ASPECT Graduate Conference Representations of Resistance and 2015 ACC Meeting of the Minds and will be presented at the Conference of the International Network for Economic Method in November, 2015.
i Nakamoto is likely a pseudonym for one or many different individuals responsible for Bitcoin. As of this writing, the developer(s) of Bitcoin is (are) anonymous.
ii “History,” Bitcoin Wiki, accessed on Dec. 13, 2014, https://en.bitcoin.it/wiki/History_of_Bitcoin#cite_note-1
iv Ibid, page 4. “If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.”
vi Lawrence Lessig , Free Culture: How Big Media Uses Technology and the Law to Lock Down Culture and Control Creativity (New York: Penguin, 2004).
vii Abe Cofnas, “Bitcoin: Currency or Commodity?” Futures Magazine, Jun. 1, 2014, http://www.futuresmag.com/2014/06/01/bitcoin-currency-or-commodity For an additional example of this debate, see Jeffrey I Snyder, “Bitcoin: Currency, Commodity, or None of the Above?” The National Law Review, Oct. 16, 2014, http://www.natlawreview.com/article/bitcoin-currency-commodity-or-none-above
viii Grant Spencer, “Reserve Bank Perspectives on Payments,” (Speech, Payments New Zealand Conference, Auckland, NZ, Nov. 11, 2014), http://www.rbnz.govt.nz/research_and_publications/speeches/2014/5930114.pdf
ix John Maynard Keynes, A Treatise On Money (New York, Harcourt Brace and Co., 1930).
x Georg Friedrich Knapp, The State Theory of Money, trans. H.M. Lucas and J. Bonar, (Clifton: A.M. Kelley, 1905/1976), 150. Originally translated into English in 1924.
xi L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (Northampton: Edward Elgar, 1998), 27.Here, Wray uses a more narrow definition of accessory money when reconstructing Knapp’s theory. I interpret Knapp’s definition of accessory to be every form of money circulating in exchange alongside definitive state money, or all other money that is not valuta (see p. 105, 158-9).
xii Georg Friedrich Knapp, The State Theory of Money, trans. H.M. Lucas and J. Bonar, (Clifton: A.M. Kelley, 1905/1976), 158.
xiii Ibid., 155-157. Knapp would not classify Bitcoin as ‘money.’ In the most general sense, referring to the exchange of money, Knapp is discussing a literal exchange of a physical note, token, etc., with the substance being irrelevant. Money exists as a physical medium. Bitcoin resembles what Knapp calls a “Giro payment,” or payment without money. Giro exchange is merely a matter of bookkeeping, “transferring units of value,” or altering the numbers in transacting parties’ accounts within an institution they share in common such as a bank. For Bitcoin this would be the block chain. Knapp’s analysis remains conceptually applicable as payment technologies evolved beyond what was present in his time.
xiv “Buying Bitcoin,” Bitcoin Wiki, accessed on Nov. 19, 2014, https://en.bitcoin.it/wiki/Buying_Bitcoins_(the_noob_version)The Bitcoin wiki, linked to from bitcoin.org, the unofficial authority on Bitcoin, refers to exchanging Bitcoin as “Buying Bitcoin” and “selling Bitcoin,” conforming to the rhetoric of the state theory.
xv David Graeber, Debt: The First 5,000 Years (Brooklyn: Melville House, 2011). Graeber refers to the theory that money evolved from the inefficiencies of primitive barter economies as “the myth of barter.” As of this writing, this doctrine is still held to be true in economics courses, despite an abundance of anthropological and historical evidence suggesting otherwise.
xvi L. Randall Wray, “Conclusion: The Credit Money and State Money Approaches,” in Credit and State Theories of Money: The Contribution of A. Mitchell Innes, ed. L. Randall Wray (Northampton: Edward Elgar, 2004), 223.Wray notes that Innes’ historical theory is “based on little more than hunches about the history of money,” a history that was largely verified, in the general sense, after Innes’ writing.
xvii Alfred Mitchell Innes, “What is Money?”, Banking Law Journal, (May, 1913): 377-408 andAlfred Mitchell Innes, “The Credit Theory of Money,” Banking Law Journal, (Dec./Jan., 1914): 151-168.
Reprinted in: Credit and State Theories of Money: The Contributions of A. Mitchell Innes, ed. L. Randall Wray (Northampton: Edward Elgar, 2004), 14-49 and 50-78.
xviii Alfred Mitchell Innes, “What is Money?”, in Credit and State Theories of Money: The Contributions of A. Mitchell Innes, ed. L. Randall Wray (Northampton: Edward Elgar, 2004), 37.
xix L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (New York: Palgrave Macmillan, 2012) 47-52. See also Wray (1998, 2004)
xx “Notice 2014-21” (Online, Internal Revenue Service, 2014) http://www.irs.gov/irb/2014-16_IRB/ar12.html In this notice, the IRS refers to Bitcoin as a “virtual currency.” To avoid confusion with the anthropological definition of virtual currency, I will continue to refer to Bitcoin, and similar currencies, as digital currency. The IRS also uses Bitcoin and USD as example money; for consistency, I will continue to do the same.
xxi According to private correspondence (November, 2014) with Scott Johnson, Assistant Professor of Accounting at Virginia Tech, we can consider the IRS deeming Bitcoin as ‘property’ synonymous with ‘commodity’ as both are taxed similarly.
xxii Overstock.com is widely considered to be the first major retail firm to accept Bitcoin for payment, with their first Bitcoin transactions occurring in January of 2014, prior to the March 2014 release of the IRS notice.
xxiii This does not mean that determining the desired income from a sale necessitates expressing prices in terms of the definitive monetary unit. Vendors such as those on the Silk Road (albeit, largely illicit) listed prices in terms of Bitcoin only, for some duration. However, fluctuations in the value of Bitcoin were reflected by an equivalent change in the listed prices, demonstrating again that it was some other money the sellers were ultimately interested in. Before the federal investigation shut down Silk Road, the pricing system was converted to one expressing prices in the purchasing party’s domestic currency.
xxiv For this observation in particular, I am indebted to the anonymous reviewer.
xxv This is done merely because Ulbricht’s defense maintains that he was framed as the identity behind Dread Pirate Roberts. Ulbricht was convicted by a jury for operating the Silk Road enterprise, officially declaring Ulbricht to be DPR. Given this conviction, Ulbricht and Dread Pirate Roberts refer to the same individual. See:Andy Greenberg, “Silk Road Mastermind Ross Ulbricht Convicted of All 7 Charges,” Wired, Feb, 4, 2015, http://www.wired.com/2015/02/silk-road-ross-ulbricht-verdict/ Accessed on: Jun. 29, 2015.
xxvi Andy Greenberg, “An Interview With A Digital Drug Lord: The Silk Road’s Dread Pirate Roberts,” Forbes, Apr. 14, 2013, http://www.forbes.com/sites/andygreenberg/2013/08/14/an-interview-with-a-digital-drug-lord-the-silk-roads-dread-pirate-roberts-qa/ Accessed on: Jun. 29, 2015.
xxvii District Judge Katherine B. Forrest, “United States of America v. Ross William Ulbricht,” (Opinion & Order, United States District Court: Southern District of New York, Jul. 9, 2014) 47-48, http://www.scribd.com/doc/233234104/Forrest-Denial-of-Defense-Motion-in-Silk-Road-Case Accessed on: Jun. 30, 2015.
xxviii Ibid., 50.
xxix A recent popular publication’s article claims that Ulbricht was directly influenced by Ludwig von Mises. However, I am hesitant to cite the article authoritatively as it is a rather sensational biographical piece. I merely intend to draw out the ideological parallels between Ulbricht (DPR) without relying on third-party publications. See: Joshua Bearman, “The Rise & Fall of Silk Road: Part 1,” Wired, Apr., 2015, http://www.wired.com/2015/04/silk-road-1/ Accessed on: Jul. 9, 2015.
xxx Ludwig von Mises, The Theory of Money and Credit, trans. H.E. Batson (Indianapolis: Liberty Fund, 1981). Original work published in German in 1912.
xxxi Ibid., 43.
xxxii Ibid., 49.
xxxiii Andy Greenberg, “An Interview With A Digital Drug Lord: The Silk Road’s Dread Pirate Roberts,” Forbes, Apr. 14, 2013, http://www.forbes.com/sites/andygreenberg/2013/08/14/an-interview-with-a-digital-drug-lord-the-silk-roads-dread-pirate-roberts-qa/ Accessed on: Jun. 29, 2015.
xxxiv Georg Simmel, The Philosophy of Money, trans. David Frisby (London: Routledge, 2004), 82. Original work published in German in 1900.
xxxv Ibid., 127.
xxxvi Ibid., 192-193
xxxvii Nigel Dodd, “Simmel’s Perfect Money: Fiction, Socialism, and Utopia in The Philosophy of Money,” Theory, Culture & Society 29, no. 7-8 (2012): 148, accessed on Dec. 9, 2014, DOI: 10.177/0263276411435570
xxxviii Georg Simmel, The Philosophy of Money, trans. David Frisby (London: Routledge, 2004), 193-195. Intrinsic value, here, refers to the value of the substance the money is comprised. Functional value is synonymous with circulatory value, or the value of money as a medium of exchange.
xl Ibid., 373, 375.
xli Nakamoto does note that these issues may be avoided in pure physical-cash economies, but payments over a channel of communication require trust institutions in the model Nakamoto is trying to replace.
xlii Georg Simmel, The Philosophy of Money, trans. David Frisby (London: Routledge, 2004), 190.
xliii Nigel Dodd, “Simmel’s Perfect Money: Fiction, Socialism, and Utopia in The Philosophy of Money,” Theory, Culture & Society 29, no. 7-8 (2012): 146-176, accessed on Dec. 9, 2014, DOI: 10.177/0263276411435570
xliv Ben S. Bernanke, Letter to Sen. Thomas R. Carper and Sen. Tom Coburn, (Letter, Board of Governors of the Federal Reserve System, 2013), 10-12, accessed on Mar. 1, 2015, https://www.documentcloud.org/documents/835843-virtual-currency-hearings.html Cited in: Steven Perlberg, “Bernanke: Bitcoin May Hold Long-Term Promise,’” Business Insider, Nov. 18, 2013, http://www.businessinsider.com/ben-bernanke-on-bitcoin-2013-11 and Zachary M. Seward, “Ben Bernanke’s Letter to Congress: Bitcoin and Other Virtual Currencies ‘May Hold Long-Term Promise,’” Quartz, No. 18, 2013, http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term-promise/