Modern money for modern markets – Part III
Money as the ultimate value benchmark
As detailed in Part II of this series, money is anything that is commonly considered as valuable and generally accepted as payment. By virtue of these qualities, money must also be a way for its users to compare and measure value. This key monetary function is often overlooked in comparison to the other two, but some argue it’s the most important one.
At the center of this debate is the consideration of whether being a unit of account is a property that emerges from something being accepted as payment or not. In other words, this question can be thought of as whether something becomes money as long as it is countable, or only when it becomes an abstract measure of value for its users.
For example, gold is viewed as valuable practically all around the world and due to its traditional role in our society, acceptance by all major central banks, and durable physical properties, it is fairly easy for most people to accept it in a trade. All these market participants must then consider gold as an ultimate value benchmark, and a gram of gold – or a bar of bullion for the lucky ones – as an abstract unit of account of their wealth.
An opposite example is cigarettes in prisons, a phenomenon widely researched after World War II. These were, and still are, widely valued, even amid non-smokers – although it seems ramen is a better currency these days. Cigarettes and equivalent means of exchange are also used as a means of payment between inmates. But are they a unit of account? Or is their valued only tied to the circumstance in which they are traded?
What does it mean to be a unit of account
Some defend an article like cigarettes, in this example, are not a unit of account because paying with cigarettes is akin to a simple payment in kind, whose value is tied to a more abstract unit of money. Indeed, goods and services are priced in terms of cigarettes, but its exchange rate is quite volatile and unpredictable. As such, they can’t properly measure value – just like a hyperinflationary fiat currency can’t.
Continuing that analysis could lead us into an academic battle, so let’s focus on what’s relevant to understanding modern markets – that becoming an abstract unit of account is what ties together something regarded as a store of value and a means of exchange into money. The next question is then how does something becomes a unit of account?
The more traditional answer claims an authority has to grant such status so that the denomination of the money is convenient to its users and not just arbitrary – or based on the relative price of the good that became currency, like in the case of cigarettes. However, that authority doesn’t need to be governmental, as non-public entities can also make money.
Measuring value with cryptocurrencies
The current cryptoasset landscape can be divided into several categories. Regardless of one’s adopted taxonomy, it’s clear there’s a separation between cryptocurrencies and all the other projects. The multitude of projects that are trying to build a better form of money is not much different than the various coins minted over the previous centuries.
These are fighting for adoption and for mindshare in our economic lives, and some states, sc China, are already entering the arena to compete with non-public cryptocurrencies, e.g. Bitcoin or Monero. Fortunately, other countries, like Japan, are also recognizing decentralized solutions as legal means of payment, although not yet as legal tender.
Meanwhile, there are two scenarios for cryptocurrencies to be good units of account. Once a state accepts one as a mean to settle debts and to pay taxes, or once one reaches enough stability for people to be able to think of other goods and services in terms of its price. As it might take some years for Bitcoin to achieve such status, for now, fiat-denominated stablecoins are a perfect proxy measure of monetary value.
For now, it’s the almighty dollar – or jurisdictional fiat
So, while in the long-term even the European Union has just acknowledged it’s possible that the most popular cryptocurrencies could be considered popular and stable enough to be used as a unit of account, for the foreseeable future all but the most hardcore investors in the space still measure the value of their cryptoassets in the same terms they use to evaluate their other assets – most commonly their jurisdictional fiat currency.
Put differently, very few people are yet measuring their total net worth or the value of their stock portfolios in Bitcoin – they evaluate the value of their crypto portfolio in terms of dollars. Internationally and across asset classes – even those much more widely adopted than crypto – fiat currency remains the principal unit of account between asset classes and countries.
Looking ahead: What’s Left?
So, for those keeping score so far, we’ve introduced two concepts. First – store of value, which historically has been most reliably tied to scarce, dense, fungible and divisible material resources such as precious metals. And second, unit of account – a function of benchmarking the value of any purchase relative to all other goods and services, which throughout modern history has most frequently been the predominant currency of the land.
This leaves us with one more use case left to explore – medium of exchange. For what’s money if you can’t actually use it to transact!