A look into monetary history shows that people, when given freedom of
choice, opted for precious metals as money. This doesn’t come as a surprise.
Precious metals have the physical properties a medium must have to serve as
legal tender: They are scarce, homogenous, durable, divisible, mintable, and
transportable. They are held in high esteem and represent considerable value
per unit of weight. Gold fulfills these requirements par excellence,
and this is why it has always been peoples’ first choice in terms of money.
Gold has proven its merits as money for millennia; it is the ultimate means
of payment.
More recently, gold has been replaced by the state’s unredeemable fiat
money — for reasons rather more political than economic. The state prefers
money whose value can be altered at will — say, to influence overall demand,
redistribute income, and to benefit some at the expense of the many. Gold
money stands in the way of such machinations. Fiat money doesn’t. On the
contrary, fiat money can simply be printed up; can be created out of thin
air.
Fiat money has serious economic and ethical drawbacks, though. It is
chronically inflationary, widens
the gap between poor and rich, triggers boom-and-bust cycles, and
compounds the economy’s debt burden. Most important, a fiat money regime
allows the state to expand actually without limit, over time potentially
transforming even a minimum state into a maximum state at the expense of
individual liberty and freedom.
In the wake of the most recent financial and economic crisis of 2007–2008,
many people have become concerned that their savings, mostly invested in
fiat-denominated bank accounts and bonds, could be devaluated. This has
prompted a search for “good” money.
Somewhat new to the mix are the digital currencies, most famous of which
is the virtual unit “bitcoin.”
It is a digital currency generated by decentralized,
internet-based computers rather than a central authority.
Transactions through digital currencies such as bitcoin are confirmed, or
validated, by a decentralized consensus system that uses a “blockchain.” The
latter is essentially a public digital ledger, an account statement for
transactions among computers. The blockchain is saved on many computers so that
it is practically impossible to manipulate. In the case of bitcoin
specifically, the blockchain ensures that only the bitcoin’s owner can make a
transaction with his bitcoin, that the same bitcoin cannot be created
manifold.
In this article, I’ll use bitcoin as my main example, although this
technology can be applied to any number of similar digital currencies.
However, this technology has now been used to provide a new means of
transferring assets among people: the “colored bitcoin.” A colored bitcoin —
or something comparable using blockchain technology — represents a certain
asset. For instance, physical gold can be made available for day-to-day
transactions — for purchases and sales in supermarkets and on the internet —
simply by transferring a gold-backed colored bitcoin from the
bitcoin wallet of the buyer to the bitcoin wallet of the seller.
How could one obtain such a gold-backed bitcoin? You would buy, say,
physical gold at a gold shop. The latter then issues a colored bitcoin, which
represents the ownership of physical gold. The colored bitcoin is,
economically speaking, a gold substitute (a money substitute,
fully backed by physical gold). It can be used for making purchases and, upon
the wish of its owner, it can be redeemed into physical gold at the gold shop
at any time.
A colored bitcoin represents a physical thing or asset that exists outside
the bitcoin network. It therefore carries with it a risk that the issuer will
not live up to his promise. However, there are market solutions to this problem.
For instance, the gold can be stored with a particularly trustworthy third
party. Or, people hold colored bitcoins issued by various issuers. If the
latter are seen to be of the same riskiness, they would trade at par to each
other (after making allowance for possible storage and handling costs).
That said, the gold-on-the-blockchain technology appears to hold great
potential when it comes to making possible a world of digital gold money
transactions. So far, governments use regulation and taxation to inhibit and
even prevent unencumbered competition among monies. However, the evolution of
the blockchain largely circumvents many of the obstacles governments put in
the way of a free market in money. Where it will lead is, of course, is
impossible to predict with certainty.
In any case, when we’re comparing to government fiat money, digital
currencies can offer attractive alternatives. The same goes for gold lovers,
who may see blockchain technology as the means of conveying physical gold;
and in the end digitized gold money could become a practical option.
