Why Bitcoins Are Digital Assets Rather Than Cryptocurrencies
This feature article was written by Ralph Windsor, editor of Digital Asset News and first appeared in Atlas Pulse in April 2016.
In previous editions of Atlas Pulse and elsewhere that Blockchain, Bitcoin and other related innovations are discussed, there has been some debate about whether it is more appropriate to refer to Bitcoin, Ethereum et al as ‘cryptocurrencies’ or ‘digital assets’. In this article, I want to present the case for digital assets. I will acknowledge it is far from clear cut, however and I can appreciate that the term ‘digital asset’ could be viewed as somewhat vague or nebulous which is why people are reluctant to use it.
The first point I want to address is the description of Bitcoin as ‘cryptocurrencies’ . I can agree with the ‘crypto’ element being what gives these digital assets their intrinsic value, but I do not believe they are currencies and I contend it may have more to do with the fact the word ‘coin’ was used by Satoshi Nakamoto in 2008 when the idea of Bitcoin was initially conceived. That it persists is possibly based on an incomplete understanding of the nature of what currencies are and why they exist.
To understand why Bitcoin is not a currency, it is necessary to examine both how assets can get employed as substitutes for currencies and to consider the defining feature of a fiat currency that distinguishes it from other assets.
As readers will be aware, it is possible to use assets like precious metals (e.g. gold, silver etc) to achieve the same objectives as those of currencies. Until fairly recently, it was conventional for currency values to be pegged to gold (‘the gold standard’ etc) to increase trust in them and help maintain their value. Precious metals are not the only asset or commodity which can be used as a currency substitute, however. Over the course of history they have variously included whisky, tobacco, cattle and a variety of other examples (1). To this day, cigarettes and phone cards are used as currency substitutes in prisons (and you find similar examples in other controlled environments). In general, fiat currency substitutes emerge either because people do not trust a currency as a store of value, or the physical manifestations (coins, paper etc) which are used to represent them are not readily available.
The defining feature of a currency is that it is entirely ‘soft’ and depends on the majority of its users maintaining their faith in it. They are nationalised value-exchange tokens, with all of the implied potential for political interference which that description implies. The flexible nature of a currency and ability to manipulate its value is the key differentiator between currencies and assets.
In simple terms: currencies are a matter of opinion, assets are matters of fact. As we have all witnessed in the last decade, central bankers can increase the supply of a given fiat currency, if it suits either their purposes and/or the prevailing political climate at the time. You might reasonably argue that they should be prevented from doing so, but it needs to be theoretically possible with any currency, otherwise it has finite supply and loses the characteristic that makes it a pure fiat currency in the first place. If the supply of Bitcoins was capable of being altered, their ability to appreciate in value would have been severely constrained. With fiat currencies, this has happened on multiple previous occasions and people still trust and use them (to a greater or lesser extent).
Bitcoin and cryptographically-secured digital assets do not have the same characteristics as fiat currencies because it is not possible to directly alter the number in circulation, therefore, they are closer to assets or commodities. Since they are exclusively digital, ‘digital assets’ is a suitable description.
One other characteristic of currencies which I note does not apply to Bitcoin (and their ilk) is the lack of a centrally determined interest rate. I am not aware of any conventional currencies that do not have a base rate which is set by a committee or other equivalent executive body. The rate itself might be pegged to another currency, but that is a policy decision they can change at will. There is a market for lending bitcoin, but there is no set rate for them which can be quoted. It is not inconceivable that something like LIBOR could not emerge for Bitcoin, but that is only effective because the participating banks collectively hold sufficient currency to influence the supply. It is harder to imagine how they might acquire the same role with Bitcoin, further, many people would not want them to and would actively resist that kind of manoeuvring were it to occur.
There are more immediate and non-theoretical problems with referring to these innovations as currencies when some of the other examples of digital tokens are examined. Not all these emerging instruments have cryptography as their source of intrinsic value. One example is MAIDSAFE (3), which is a digital token used to buy and sell capacity on the SAFE network (a distributed file storage protocol). This is sometimes referred to as an ‘asset’ (2) rather than a ‘coin’, indeed, the process of generating MAIDSAFE tokens is called farming (4) rather than mining (both of which descriptions also suggest an asset is being created, not a currency). Examples like MAIDSAFE stretch the definition of cryptocurrency, precisely because it is too restrictive and not semantically versatile enough to represent all the forms of commodity digital assets that are likely to emerge in the future.
The other issue with the term ‘digital assets’ that adds to confusion and reluctance to use it is the way it has been appropriated by various interest groups, but without full consideration of the full range of meanings which it implies (5). In the context of this article, I have talked about digital assets in the financial sense of the word ‘asset’. Digital assets can also be used as a proxy term for photos, videos, documents and other non-financial entities, they are also used in a legislative context to refer to social media accounts or domain names etc, especially about ownership, transfer and access to them if the title holder passes away.
What brings all these definitions together is that digital assets are composed of two key elements: intrinsic value and extrinsic value. Intrinsic value is why you might be willing to pay something to own a given asset. Extrinsic value is the non-integral aspects which contribute to its overall worth. Anyone who has traded derivatives like options will understand that characteristics like volatility and the length of time to expiry can affect the value of those instruments. In the realm of digital assets, extrinsic value is represented by metadata. Just like with conventional assets (in fact probably more so) the extrinsic value can be equally as important as the intrinsic value. For example, in the case of Bitcoin the transaction references on the blockchain is metadata (extrinsic value) but the cryptography which makes this immutable is the intrinsic value which is what sustains user’s trust in it as an asset.
The other point that has been raised about ‘digital asset’ is that the term has also been appropriated by a corporation established to exploit commercial opportunities in blockchain technologies. While I can understand this might make people uneasy about using ‘digital asset’, I note that it has happened numerous times throughout history and usually without consequence for the wider adoption of the innovations concerned. For example, how many firms can you think of that currently make business machines and market them internationally? What about others that produce general electrical products or services? The irony of this is that the two firms I am indirectly referring to now have quite a lot less to do with the name they originally decided to call themselves, indeed, in both cases, they seem to favour the initials these days (i.e. the brand rather than the full form of the actual words used). I can see the motivation for this firm wanting to secure the name to assert their first-mover credentials in a currently fashionable sector, but the value of generic words as brands tends to diminish as adoption of a given innovation increases.
I can appreciate the argument that calling cryptocurrencies ‘digital assets’ is too vague and non-specific, in the same way that if you say to someone you have some financial assets, almost certainly the next question is going to be ‘what kinds of financial assets?’. I don’t know what a suitable more specific alternative is to cryptocurrency. ‘Cryptoassets’ could be a candidate (although I acknowledge that has issues too). I do believe, however, that whatever term ultimately becomes the canonical one, referring to them as digital assets is likely to continue to remain an accurate description for the foreseeable future and that is why it is legitimate to use the term in reference to Bitcoin and other related innovations.
About The Author
Ralph Windsor is editor of Digital Asset Management News (6), consultant and a freelance writer.