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  • Writer's pictureCarolina Pérez

“Bitcoin is just another example of fiat money”

I came across a very interesting article today published by the Federal Reserve Bank of New York Blog. Titled "Bitcoin is not a new type of money," did you make a what face?; I know I did. It exposes that bitcoin is not a new type of money, but what everyone should be amazed at and what is new is the exchange mechanism behind it. When I first began reading this, it immediately feels like its discrediting the creation of crypto because, besides its exchange mechanism based upon blockchain technology, it is much more than that.

“However, the ability to make electronic exchanges without a trusted party—a defining characteristic of Bitcoin—is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.”

Characteristics make something a whole, just like every aspect makes up bitcoin, whether its blockchain, digital, code, or encryption. All these characteristics make up bitcoin, and to make a selection of what they consider new or interesting does not mean its right.

“The distinction between money and an exchange mechanism is not new to the field of payments. For example, according to a report from the Committee on Payments and Market Infrastructures (CPMI), a body within the Bank for International Settlements (BIS), money refers to the asset that is being transferred, for example currency in your wallet. In contrast, the exchange mechanism is the way in which the asset is transferred, such as physically handing the currency to a merchant in exchange for a coffee.”. Bitcoin does both of these things they choose to separate in this blog entry. You can transfer bitcoin, and you can hold it in your virtual wallet, both part of holding and using crypto.

The article states the differences between asset back money, claim backed money, and Fiat money.

“Fiat money corresponds to intrinsically worthless objects that have value based on the belief that they will be accepted in exchange for valued goods and services. A typical example is currency. The paper on which a twenty‑dollar bill is printed is worth almost nothing. But a consumer can purchase coffee by handing over that piece of paper because the barista believes that she can in turn use the latter to purchase something of value. Of course, central-bank issued currencies are different from pure fiat money due to its legal tender status. Examples of fiat money without legal tender status include Rai stones or Ithaca HOURs. And Bitcoin is just another example of fiat money.”

This is not the definition of fiat money that many of us have read? It seems the way they are stating what fiat money is, is completely twisted. If we consider the way this blog is explaining fiat money, then yes, crypto might as well be fiat money, thus another example of the many other fiat currencies out there. It would make sense to consider bitcoin a fiat example if we believe it is a code, and through the years, people have found it valuable and use it as investment opportunities or goods and services. The problem is that this is not the fiat money definition that many of us have read.

For example, according to Investopedia, "Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.”

One more example from, “Fiat money is money that doesn't have any intrinsic value. It is used as money by government decree, or fiat. Fiat means 'let there be' in Latin.” “Take a look at the dollar bills in your wallet. You can see that they are just pieces of paper printed with symbols - they have no intrinsic value of their own. They only become valuable when the government decrees that they have worth. A government must establish and regulate the currency responsibly (such as protecting against counterfeiting and managing the money supply responsibly) in order for fiat money to be successful.”

Bitcoin cannot be compared to fiat; there is no government decree that has stated its worth or its backup. On the contrary, governments all over have spoken against bitcoin. Bitcoin is powerful and used today because of the people, people who haven't been obligated to use it.

The bottom of this entire blog posted by Liberty Street Economics is:

“The real innovation of cryptocurrencies is that they offer a radically new exchange mechanism.”

Do you agree with this statement? Is this the real innovation of cryptocurrencies, I believe they haven't even read the white paper.

By: Carolina Pérez

Twitter: @carolinaninap

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