Deciphering Cryptocurrencies

Currency Choice Just Got Interesting

By Margaret Vaughan

On beaches along the coastlines of New England one can find quantities of white and purple shells produced by the quahog or Western North Atlantic hard-shelled clam. These shells were once known as “wampum” and used by North American Indians as money, ceremonial pledges, and ornaments. It was a “fiat” money; currency without intrinsic value that was established as medium of exchange. Fiat money does not have use value and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.

All global currencies today are fiat money. Until the early 1930s, currencies were backed by gold (also known as the gold standard) but this model was retired due to World War I and its subsequent inflations and depressions, not to mention the war debts incurred. In 1971 the U.S. suspended the convertibility of the dollar to gold and essentially ended the gold standard. Other nations followed suit and the world currencies went on a floating exchange rate.

So where does that put cryptocurrencies? Are they also fiat money? By now you’ve heard of electronic peer-to-peer currencies like Bitcoin, Ethereum, Ripple, Litecoin, and so on. There are more than 2,300 types of cryptocurrencies in existence so it’s hard to keep up. Even Facebook is building a cryptocurrency payment platform for its social network which will reportedly let users use digital coins to make purchases on Facebook and third-party sites.

The thing about cryptocurrencies is that they don’t physically exist. You can’t pick up a Bitcoin and hold it in your hand, or pull one out of your wallet. Cryptocurrencies are virtual mediums of exchange meaning that they only exist in cyberspace. Which begs the question of the intrinsic safety of electronic money: can they be wiped out if
a massive solar flare knocks out our electronics or can a computer virus clean out our accounts? But are they fiat money? Fiat currency is “legal tender” backed by a “central government.” It can take the form of physical dollars, or it can be represented electronically, such as with bank credit. The government controls the supply.

Cryptocurrency, on the other hand, is not “legal tender,” nor is it backed by a central government or bank. It is decentralized and global. Its form is more like bank credit without the bank. An algorithm controls the supply.

Otherwise, there is no intrinsic difference. Both fiat currency and cryptocurrency can be called money or currency, both are mediums of exchange that are used to store and transfer value, both can be used to purchase goods and services, both have their value governed by supply, demand, work, scarcity, and other economic factors. Both have their value affected by the quality of the system surrounding it, and both can be traded on exchanges.

Cryptocurrency, gold, a dollar, and wampum are all stores of value and all have exchange value. Some have use value and some, like fiat currency and cryptocurrency, are meant to be a store of value and medium of exchange only. Will we see cryptocurrency used for payment in breakbulk? Probably, but it’s really too soon to tell when.  

Margaret J. Vaughan has more than 30 years’ experience in all facets of supply chain management, serving most recently as logistics manager for Wood PLC where she worked for 12 years.

Image credit: Shutterstock