I counted four cryptocurrency ads during the Super Bowl. The most entertaining of these ads was the one for FTX, warning us “not to be like Larry David.” David portrays a series of fools who dismiss all of the great inventions in history: the wheel, indoor toilets, the light bulb, the Walkman. In his current incarnation, he similarly dismisses FTX. The message was clear: crypto is like the wheel, and you had better get on board now for fear of missing out on a sure thing.
Someone on Twitter quipped “actual money does not need to advertise.”
Indeed, cryptocurrencies are not money, not yet at least, although they could be. Something becomes money when it is generally agreed upon to be fulfilling that function. It is an elementary Econ 101 problem: two people hold different objects in their hands. One has a shiny metal disk, the other a sea shell. We observe the two exchange their objects. Which one was the money, the disk or the shell? Without understanding the context, the answer is indeterminate: either could be functioning as money. That is, there is nothing intrinsic to either the metal or the shell that makes it a store of value and a unit of exchange. Anything can be money if 1) it is generally agreed upon that it is money and 2) it facilitates exchange. Thus, cryptocurrencies could become money, but only if these two criteria are met.
When he joined the Los Angeles Rams earlier this season, Odell Beckham took his salary in Bitcoin. (Detractors were quick to note that, given the recent volatility in Bitcoin’s price, his $750,000 salary is now more like $35,000.) Bitcoin will become money when many, many more people accept it—and trust it—as payment. Because right now cryptocurrencies function largely as investment assets, their value floats wildly. To have the status as money there must be trust established between the users of the currency, and it is not yet clear how widespread trust in cryptocurrencies will be established. Perhaps those Super Bowl ads are one way to induce trust, by peer-pressure?
If cryptocurrencies do succeed in establishing themselves as money, we could find ourselves in a situation where we would have many different types of currencies circulating around us at the same time. This would resemble the period in U.S. history from 1837-1866 that has been called the Free Bank Era. At that time, scores of private entities printed their own currencies; in Australia, such “private currencies” were in use from the foundation of the colony in the 18th century until 1910. The widespread adoption of cryptocurrencies could lead to a new Free Bank Era.
With a cryptocurrency, there is no central bank establishing trust in the currency, or rather the users of the currency provide that collective trust. Cryptocurrencies are built on a blockchain, the digital ledger where trust is established because all transactions are transparent and open to the entire community. Were cryptocurrencies to proliferate, detached from a central bank, money would no longer be tied to a specific country.
Instead, we would witness the emergence of small monetary communities: ecosystems where users exchange cryptos treated as money. These communities would not be limited to existing political boundaries, and could theoretically spread out across the globe. When he was Ohio State Treasurer, Josh Mandel gave Ohio businesses the option to pay their taxes in Bitcoin. (That provision has since been ended). But Mandel remains committed to Bitcoin, recently tweeting as part of his Senate campaign that Ohio must be “pro-God, pro-family, pro-bitcoin.” The currency communities that might emerge could very well be aligned to political beliefs: if cryptocurrencies do proliferate, there is every reason to believe that a “Republican currency” will be one of the first to be established. Mandel’s embrace of cryptocurrency is of a piece with “other populist Republicans who cast doubt on government institutions and want to disrupt the current system.” Lack of trust in government institutions—or institutions of any kind—will drive the creation of other such “ideological currencies.”
To have a functioning economy, these various cryptocurrencies would need to be instantly convertible. Think about how we make payments between the dollar and the euro. This was once a slow-ish process of exchanging physical money, one dollar = 1.35 euros, or some such. That process of exchange is easier now, since I can pay for something on my credit card and the currency exchange is handled automatically. A similar sort of process will be required if cryptocurrencies (plural) proliferate. Think of the cases where I want to make a purchase from a vendor who doesn’t accept my crypto as payment? How will we transact business? Perhaps we’ll carry multiple currencies in our digital wallets, receiving payment for a service in whatever crypto is employed by the other. Consumers would need to learn how to manage a portfolio of currencies.
“The most fundamental reason to be skeptical about the longer-term value of cryptocurrencies as money,” writes the former Bank of England governor Mark Carney, “is that it is not clear how they will ever become effective media of exchange and therefore they are unlikely to become units of account. In short, few retailers accept cryptocurrencies.”
This depends on the definition of “few,” I suppose. One estimate is that there are around 15,000 businesses around the world who accept payment in cryptocurrencies. In the U.S., San Francisco has the largest concentration of such businesses. Could the use of cryptocurrencies proliferate in cities, with each establishing their own unique sovereign currency?
Stablecoins, on the other hand, might more easily become a new form of digital money. We might define a stablecoin as a cryptocurrency backed by another asset, not simply by an algorithm and the mutual trust of the users.
“The highest profile examples of stablecoins, such as Libra,” reports Carney, “are best thought of as payment systems rather than money per se since they derive their moneyness from the underlying sovereign currencies.”
Stablecoins might start to function as money were a sufficient number of users to begin treating them as a store of value. If a stablecoin were linked to a social media platform, imagines Carney, “much of the money in the economy could end up outside the formal banking system. This would fundamentally change the supply of credit to the real economy and the dynamics of monetary and financial stability.”
An even more likely scenario for the future of money is central bank digital currency (CBDC), another form of digital money tied expressly to a central bank. The Chinese have launched the “digital yuan” and many observers are watching to see how this CBDC might function in the actual economy.
A U.S. CBDC—a “digital dollar”—would, in theory, be easier and cheaper to mint than physical money, and would likely be harder to counterfeit. It would also be easier to transmit: think of the stimulus checks that were sent out during the COVID-19 Pandemic. Were those payments sent out as digital currency, the process would have been faster and more efficient. Sherrod Brown has argued that central bank digital currency “could provide access to digital payments to Americans underserved by traditional banks.”
The future of money is almost certain to be digital. What kind of digital money will dominate is still very much in question. But what is clear is that the future of money will be inexorably linked to the future of trust.
David Staley is an associate professor of history, design, and educational studies at The Ohio State University. He is host of the “Voices of Excellence” podcast, CreativeMornings Columbus and is president of Columbus Futurists.