21 May 2018

VoxEU: Bitcoin, Vollgeld, and popular views of money

On 10 June 2018, Switzerland will be the first country to have a referendum on the introduction of Sovereign Money ('Vollgeld'). This column argues that the Vollgeld project and cryptocurrencies such as Bitcoin build on popular fantasies about money that are disconnected from the actual operation of the current monetary system.

Money being one of the key symbols of the current economic system, and the monetary and the financial system being a key site of the Global Crisis, the idea that there is something wrong with money is one of the most popular explanations for the crisis among non-economists.

The desire to ‘put money right’ by introducing Bitcoin, Sovereign Money (or 'Vollgeld') or regional currency schemes is a result of this perception.

Among other issues, these initiatives revive two major age-old debates at the heart of monetary theory and history:

• Is money (or should it be) a pure asset (i.e. no one’s liability), or a claim on an issuer?
• Should money creation be governed by a responsible central entity, such as a central bank, or by a decentralised mechanism, such as markets or regional community governance (Weber 2018)?

The vision for an alternative currency underlying Bitcoin and similar crypto projects is based on replacing a central issuing entity by an automaton embedded in a technical architecture providing market incentives for economic subjects to animate and use it. Most cryptocurrencies are pure assets governed for the most part by market forces (Huberman et al. 2017, Fatas and Weder di Mauro 2018).

Sovereign Money is based on the view that money should be a pure asset, and that the creation of means of payment, subject to strict quantity control, is a prerogative of the state (Bacchetta 2018).

Both have received the greatest public attention so far among monetary reform projects. Bitcoin and other cryptocurrencies have experienced headline-grabbing price movements in recent months. And a citizens’ movement in Switzerland has managed to enforce a plebiscite on the introduction of Sovereign Money to be held on 10 June 2018.

Money creation can be understood as being based on ‘proof of creditworthiness’. In contrast, issuing a ‘currency’ as a pure asset against either ‘proof of work’ (Bitcoin) or ‘proof of status’ (Vollgeld) severs the link between the creation of means of payments and commitments to contribute to future economic activity.

Whether such an asset would be considered by potential users as a currency, a worthless token best avoided, or a kind of collector’s item inviting speculative activity is an open question.

Over the last ten years, crypto users’ focus of activity (i.e. speculative activity) has already given a clear answer on the status of Bitcoin and similar projects. Whether Swiss citizens are attracted by the invitation to subject their official currency to an experiment remains to be seen.

Full article

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