Money is defined by its purpose. Money acts as a unit of account (it can be counted), a medium of exchange (it is accepted in trade for goods and services), and a store of value (what it will trade for stays stable). Nothing says that money must be backed by a sovereign promise like the paper currencies we think of as “real” money today (US Dollar, British Pound, Japanese Yen and so forth). Gold for example has been accepted as money for much longer than any paper currency. It can be counted (measured in troy ounces), is accepted in trade, and has held its purchasing power over the centuries (albeit with significant cycles). That is what makes the fascination with cryptocurrencies today so interesting. A cryptocurrency is a digital asset designed to work like money and uses cryptography (coding) to control the creation of units and track transactions. As of July 2017 there are over 900 cryptocurrencies with first and largest being Bitcoin and others like Ethereum getting attention now and again. Like gold, there is no government backing with these securities. Mimicking precious metals, the intent is for a cryptocurrency to have a finite supply. However, like paper money, there is no physical limit to the supply. Instead there is only the governance of the system (relying upon the concept that distrustful counterparties will keep others honest) to regulate its integrity.
It is not surprising that a currency designed to be outside the traditional system brings concern to government policy makers. Monetary policy makers influence economic outcomes by pulling levers related to the supply and cost of money. Without those controls, they lose influence. The reaction of governments to cryptocurrencies has varied. Some governments like China prohibit its use. The United States declared it property (not a currency) and therefore it in part legitimized cryptocurrency as a legal asset and also subjected it to capital gains taxation.
The topic continues to capture headlines as reported values have exploded. Bitcoin reached a recent all-time intra-day high just over $4,500 up well over seven times the price just one year ago at $580. The price chart is parabolic. That’s conservative next to Ethereum which is up over twenty seven times its price one year ago despite experiencing an almost 60% drop intra-year from its all-time high. It is hard to describe these eye-popping price changes (up and down) as stable and thus meeting the store of value of test. That is not to say that major market currencies don’t experience substantive change over time – they do. However, the relative change in exchange rates naturally affects the balance of trade between countries/currency blocs which causes the scale to tip back and, over longer periods, balance out. Since cryptocurrencies are by definition outside national borders it is hard to imagine how the economic counterbalance will work. There is also the question of whether these recently developed concepts will capture the minds of people long enough for sufficiently broad acceptance to be a measurable currency in use for global trade (i.e. truly be a medium of exchange). In the end, perhaps money is only defined by what people believe it to be.