This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.
From an abstract point of view, the three most fundamental elements of the human economic and financial system are:
(1) creation of value
(2) definition of value
(3) transaction of value.
Creation of value
‘Creation of value’ is the central purpose of a productive economy. It should not be controversial to say that value is created in an economy by economic participants, such as businesses, workers, entrepreneurs, inventors, etc. Value creation can be either direct or indirect.
However, not all activities create value (believing otherwise is really a form of abstract existentialism which has no economic and moral meaning). For example, many basic trading activities do create value, but increasingly more don’t, especially trading that is driven by pure speculations about other people’s speculations. Speculation upon reality can create economic value, but speculation upon other people’s speculations never does, because it is in its own realm based on a bubble of circular logic, one of the worst evils of the modern society. A growing portion of the financial system has become a giant bloodsucking parasite of the economic system. With daily foreign exchanges reaching many trillions, and many other extremely clever forms of trading based on speculations on speculations, I don’t know how one can honestly deny this observation.
Definition of value
‘Definition of value’ is an agreement between at least two parties on the equivalence of the values of no more than two different goods or services. Definition of value is thus the basis for all economic exchanges such as trading. Without exchanges, the productive economy would not need such a function of defining value because it is intrinsic to each thing that has been created. Even in a bartering system without money, definition of value occurs whenever the value of one good or service matches another. Value exchange requires finding an equivalence of value, and such a finding would be impossible without its clear definition.
Here, “definition” does not mean some kind of an intellectual exercise on the language or terminology, but a “reality definition” that results from the market’s concrete effects, a legal system, a financial system, a social consensus, and more.
In other words, “definition of value” means the formation of an agreement, either explicit or implicit, on how the value that has been created is to be measured, compared, and exchanged.
“Definition of value” is a function of an economic system which includes not only parties negotiating direct economic deals but also social consensuses, political consensuses, and the law.
In other words, the system defines values through agreements.
The definition of value (or agreement of value) may be a result of voluntary negotiation through the market, an application of authority, or a combination of both. It is on the balancing of these two that political and economic systems differ, ranging from one extreme of laissez-faire to the other extreme of communism. The legitimacy and efficacy of these systems are topics beyond this article, but it should be noted that, even in a so-called market economy of the United States, the definition of value isn’t simply a free market product. The dominance of the U.S. dollar as a fiat distorts the definition of value to no small degree.
Money is a special method for defining value. It standardizes the definition of value across a market covering a large number of goods and services using a common media called money. The numeraire function or unit of account is a key part of money.
There is no intrinsic reason that money has to be defined and created by the government. In theory at least, money can be private and a natural product of the market itself. But the reality today is that almost all governments control money. The government may make it easier to standardize the definition of value, but it also comes with many ills (see below section, ‘Governments want to control money and currency’).
Transaction of value
‘Transaction of value’ is the execution of “definition of value.” In commerce, the value that has been created and defined needs to be transacted. People may agree upon a value, but when the agreement is executed, there must be a specific method or media to carry out a transaction of the value, such as an exchange.
In real life, the above three—creation, definition, and transaction of value—may overlap in time and space and even happen simultaneously, but it is important to differentiate them conceptually.
While money is definition of value, currency is transaction of value. A dollar as money is an abstract legal and financial concept without any specific form, while an actual dollar bill, a dollar coin, or digital bytes representing a dollar’s value transmitted using a digital method, is a currency.
Especially, in a system where a fiat such as the U.S. dollar works as both the money and the currency, the definition of value and the transaction of value are easily confused and essentially merged because they do not happen separately. But they are nevertheless two distinct concepts, and understanding them separately is critical in analyzing the potential new currency or new money such as Bitcoin and cryptocurrencies.
This article approaches these concepts from the first principles.
The concepts apply to both products and financial instruments, such as money and currencies. It is generally easier to understand these concepts in the context of commercial products but harder in the context of money and currencies. It is because the former are concrete, while the latter are more abstract. However, this article intends to show that general concepts covering both products and money/currencies is not only possible, but also important to reduce misunderstanding and confusion.
Money and currency
It just happens that the world has evolved into a system in which money embodies “definition of value” (the second of the above three elements), while currency provides a method to execute a “transaction of value” (the latter).
For example, the U.S. dollar acquired its currently accepted definition of value not through some scholarly arguments but through the very reality of the U.S. economy, its projection of power, legal system, financial system and a global consensus. The U.S. dollar may lose its agreed value when its foundation is weakened or gone. It currently exists not on an academic basis, but on that of defining reality.
Fundamentally, money and currency do not have to diverge, nor do they have to converge. They’re just essential functions that need to be provided, one way or another.
Whether money and currency diverge or converge, a clear understanding of their distinctive functions is important, and lack thereof is a cause of some deep misunderstandings in the crypto world.
There is relatively less disagreement or confusion over the function of currency (i.e., “transaction of value”), as this is primarily a technical issue, and in this regard, the phrase “currency is technology” used by Christian Kameir of Sustany Capital describes it very effectively (see: https://kameir.com/money/).
Almost all the controversy comes from the “definition of value,” especially when it comes to money.
The struggle is not only an intellectual one, but more importantly a struggle of power, value systems, and social structures.
Read more: Money & Currency; and The moral sentiments of Bitcoin.
Governments want to control money and currency
Government’s desire to control money and currency is at its very core. None of the major governments today will allow money to be created outside its control. Because money is at the very core of the definition of value, what the government does is really to control the definition of value.
A socialism government may control the creation, definition, and transaction of value, but even a capitalist government like that of the U.S. still wants, and in fact has, most control over the definition and the transaction of value, although not that of the creation of value.
Even when you move to the transaction of value (currency), most governments still want near-complete control due to security concerns.
This isn’t merely a simple matter of people’s desire to have power, but also because the people in charge of the government always think that they can and should collectively solve some problems for the society, and quickly realize that the best way to be able to do that is to have control over money. This is not a result of altruism but a need for legitimacy or at least an appearance of it. And modern theories of economics such as Modern Monetary Theory (MMT) have further emboldened this pursuit by giving a theoretical basis to such governmental actions.
I make the above statement not because I believe the current central banking system is the right and justified way, but just to state the reality.
I believe in a system wherein market-based private money exists to actively define value through market-driven agreements, while currency as a technology is used to execute the agreements. All this can be conducted under the rule of law without having to give control of the monetary system to a central bank. But we do not live in such a world today.
This is the reality of the modern economy.
Any system that wants to move society away from the current reality must face deep conflicts. This does not mean one should not try anything new, but if one wants to compete, one should understand the reality and measure up to it.
We will use Bitcoin as an example to see if it measures up to such challenge. A brief answer is that Bitcoin Core BTC doesn’t, while BSV may meet the challenge in the transaction of value first, but not the definition of value until much later, if ever.
The problem with Bitcoin’s BTC embodiment
Contrary to its purpose initially intended by its creator, Bitcoin’s BTC embodiment has become solely focused on creating a new “definition of value,” instead of a means for “transaction of value.”
Not only has the BTC community developed an attitude to snub the function of “transaction of value” (e.g., payments) as something trivial, but more importantly has insisted on a completely revolutionary definition of value.
More specifically, the BTC community wants to completely redefine “value” in the context of money, external, and irrespective of the established legal, economic, and financial systems of the world.
Despite the exciting utopian inspirations for personal liberty, I simply do not believe that is going to happen, nor do I believe that it is the right thing to happen.
There are multiple fundamental factors that work against BTC, a perverted embodiment of Bitcoin.
A. The governments will have a big problem with BTC’s definition of value
People celebrated when the Securities and Exchange Commission declared BTC is not a security, and therefore the buying and selling of BTC can be conducted without violating the securities laws. That’s good, but the securities law is only a small part of the laws of modern human society.
There are reasons why governments want to and often need to control money.
As discussed above, every government desires to control both the definition of value and the transaction of value, that is, to control both money and currency. It is the reality.
BTC runs affront with government in both respects above. It is just not a trouble big enough for the government to realize the threat yet.
B. BTC is counterproductive
Without providing a useful means for “transaction of value” (e.g., payments), BTC does not make any positive contribution to the economic system. It has become a quintessential example of speculation upon other people’s speculations.
The question is, does BTC really have the productive inner-workings to replace the fiat money and actually become the master money to drive an economic system?
The answer is no.
It is one thing to enjoy the benefit of speculations without taking any responsibility, and it is quite another when everything is on one’s shoulder.
In addition to the nonproductive nature of BTC, there is also a problem with its culture. The ideology of BTC is anarchistic, while its culture opportunistic, both antithetical to economic productivity and growth. At this point, its $500-billion valuation is entirely based on a “belief” system that is circularly self-making. It also requires country-level (which is at a different order of magnitude than enterprise-level) energy consumption to sustain the system, but almost nothing is aimed to actually improve economic productivity. In contrast, see The real Bitcoin is green.
It is not even a matter of failing to deliver, as BTC does not even plan to deliver. It only banks on the hope of a self-fulfilling dream and the collapse of world’s monetary system.
C. BTC has a Wealth Distribution Problem
A form of money that is adopted as the main definition of value of a country needs to reflect a social and political consensus of nationwide wealth distribution.
The current wealth distribution of a stable country (for example the United States) evolved from a long history, and despite a high level of inequalities, it is sanctified by the law and the government. People may not be completely satisfied with its status, but people’s protests have not reach a point of revolutionary revolt.
Can the same be said of BTC if it becomes a primary money of the world?
It is a matter of scale. Even if BTC is technically scalable (which it isn’t even), it may still be socially, politically and economically unscalable.
In the case of BTC, this question of “social scalability” may not be a problem when the total valuation is just a few hundred billions of dollars, but it would be a problem if it becomes trillions of dollars.
The governments are not going to allow the kind of a new wealth distribution in which a few hundred lucky individuals collectively hold a significant percentage of the global wealth, including a few dozen multi-trillionaires. The objection would arise not merely from an apparent inequality, but much more importantly because a particular argument can be made: that these individuals’ wealth came not from making proportionate participation and commensurate contribution to the world economy through persuasively meritorious economic activities, but simply from the luck of buying some coins when they were dirt cheap.
Of course, one can argue that the existing wealth distribution does not justify itself either. But there are two fundamental differences. First, the existing wealth is a result of a long history of actual economic participation. Fair or not, the world has witnessed and accepted the economic game plan and its outcome, and largely has peace with it. Second, for better or worse, it is the existing paradigm consisting in extensive social, economic and political power structures. Any disruptive replacement of an existing paradigm will need some extraordinary power of itself.
Therefore, the governments would likely do something about bitcoin well before bitcoin has reached a disruptive level, even if bitcoin could reach that kind of level if left alone. They may need a pretext to cover some of the motivation, but whatever the motivation it will be real.
The governments haven’t done it so far because they have not been disturbed enough, and also because they haven’t got their own champion as a surrogate. For that missing “champion,” they will have a central bank digital currency (CBDC). The rise of CBDC would thus further embolden the governments.
Regarding this problem, the fact that there is such a high level of HODLing makes the wealth distribution problem worse. The level of HODLing is especially high among people who acquired BTC at early times when the prices were hundreds or thousands of times lower.
D. BTC has failed to fulfill the most important promise of the original Bitcoin white paper
That Satoshi wanted Bitcoin to be a peer-to-peer cash system is beyond dispute. The white paper’s title is “Bitcoin: A Peer-to-Peer Electronic Cash System,” yet not only has BTC failed to become such a cash system, but in fact the current success of BTC almost completely relies on speculations of BTC’s serving as a “store of value.”
BTC’s inability to function as real cash is also directly related to the “wealth distribution” problem discussed above.
First, an asset that functions as real cash would not have been so heavily concentrated on attracting speculators in the first place, because cash is utility, not a speculative investment. In fact, in the abnormal crypto environment, an asset that honestly works as cash will be despised and even suppressed by the market to drive out speculators. The ones that remain are more likely to be participants of the actual economic activities and their holding of the asset would have both an economic justification and moral justification. See the moral sentiments of bitcoin.
Second, only when bitcoin is used for daily payments will the wealth distribution problem be alleviated, because daily payments would lead to extensive exchange of hands which in turn results in a more or less concentrated wealth distribution.
But “becoming cash” is precisely not why people are buying BTC. Believing in its store-of-value feature is. This fact puts the very force that holds up the BTC price on a dubious and self-contradictory foundation.
E. The current mining infrastructure of BTC lacks national security necessary for a “definition of value” (Money)
During a significant part of the entire BTC history, its mining infrastructure had an alarming concentration in one country (China). It is debatable whether this type of geopolitical centralization is adequate for transaction of value (a function of currency), but it is definitely not for the definition of value (a function of money).
For this reason alone, it is hard to even imagine countries such as the U.S., Japan, and major European countries will allow BTC to become national money as its definition of value. As transaction of value (currency), may be, except that BTC is unable to serve as such. But as the definition of value at a national level, not the slightest possibility.
F. CBDC and BSV will limit the growth of BTC from two opposite sides
The above-identified problems arise from an inherent contradiction within BTC as it stands now. And the introduction of CBDCs does not make these problems for bitcoin smaller, but greater. At the same time, Bitcoin Satoshi Vision (BSV) which embodies Satoshi’s original vision is rising from an opposite side (see below section “Bitcoin Satoshi Vision (BSV) is the right way”).
At the end of the day, governments will control money using whatever method it deems appropriate (through banking system or CBDC), while private sector enterprises will provide the best possible technology for transaction of value (currency).
That is, instead of competing with the governments in the realm of money (agreement of value), a private digital currency’s best opportunity lies in providing the most efficient method for transaction of value. This calls for a highly scalable and efficient blockchain like Bitcoin SV (BSV), leaving little room for BTC which solely aims for its own definition of value.
Bitcoin’s being noninflationary means nothing unless the price of the coin increases perpetually. People who believe that scarcity and non-inflation alone would necessarily cause perpetual price appreciation could face a rude wake-up call.
The only reason why BTC’s price continues to go up is because people believe in a temporarily self-fulfilling promise sustained by an artificially controlled narrative. It is quintessential speculation upon other people’s speculations.
Conclusion: BTC will not become the money to define value in the world economy. It may continue to exist, but will be limited to a fringe of the world’s financial systems.
Bitcoin Satoshi Vision (BSV) is the right way
Satoshi’s original vision is not dead. It lives on with Bitcoin Satoshi Vision (BSV).
BSV restores the original Satoshi vision of peer-to-peer electronic cash system. BSV focuses on creating an electronic cash system that enjoys instant settlement, a unique and critical ledger feature previously only the central bank notes (paper cash) in the present systems possess, while offering low-cost and high-efficiency features that paper cash does not and cannot have.
These features are necessary for micropayment and value streaming over the Internet of Value and decentralized AI-based agent economy.
BSV does not suffer the major problems suffered by BTC, as discussed above.
Fundamentally, for an asset to become money as a definition of value, it must earn its way. The only legitimate way to earn it is through actual participation in the economy. The market, the society as a whole, and even the political system, must be persuaded, and the best persuasion is through creating value by being useful.
Therefore, for an asset to become money, it must first be a very effective currency. Although it might eventually become money as a natural result, it should not set that as a direct and immediate goal. It must first become useful. This is exactly how a commodity becomes money in a market economy, according to Mises’ theory of money & credit.
Accordingly, BSV does not pretend to become “money” to replace the existing monies. It focuses on being the best “currency,” leaving the question of money for the society at large to choose. In other words, BSV does not aspire to provide a new “definition of value” (but leaves that to governments, evolving social consensuses and the market), but instead focuses on providing better transaction of value.
To do this, BSV does not need price pumping. It just needs to be the most effective method to transact value. BSV is exactly that. It currently makes over 50% of the total transactions of all crypto market, while its market cap is only 0.1%. If people temporarily don’t notice it, that’s fine. But they will notice it if BSV starts to make over 99% of the total transactions of all digital currency market in the future.
While doing all this, whether people call it a currency or money is beside the point. It is functionality that matters. BSV can even work behind the scene supporting existing fiat currencies without earning it a name. See Currency is language.
BSV is the true technology of value. Find out which blockchain has unbounded scalability and extremely low cost, and focuses on actual innovation. Also find out which is focusing on controlling a narrative to pump up the coin price, and you will know which blockchain is the true “technology of value.”
BSV does not try to impose a new definition of value. However, it speaks all languages of value to effectively connect them with high-efficiency.
Let the societies decide what money is, but let entrepreneurs and innovators focus on creating the best global technology for the transaction of value.
When Internet was created, it did not impose a new agreement or definition of “information,” but just provided technology for the transaction of information. One should not expect the Internet of Value to behave differently.
This article was lightly edited for clarity purposes.
To learn more about central bank digital currencies and some of the design decisions that need to be considered when creating and launching it, read nChain’s CBDC playbook.
Watch: The BSV Global Blockchain Convention presentation, BSV Blockchain: A World of Good
New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.