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Bitcoins – Currency They Ain’t

And If Or When They Do Acquire Such Status They’ll Be Taken Fiat

by Frank Quin

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When BBC News devotes three minutes to it, you know the subject matter is being taken seriously in mainstream international media, as opposed to just the flaky and the fringe. So it seems to be with Bitcoin, which attracted a 3:14 minute piece at the Beeb two days ago, on 31 March. A day later and it might have been a playful prank but no, similar serious treatment is now being accorded Bitcoin across the mainstream media spectrum, with linkage to the Cypriot banking crisis a common theme.

What is Bitcoin?

What is Bitcoin? And by the way is the ‘b’ upper case – as here rendered – or lower? At the website www.bitcoin.org, the logo is lower case but all the text has a big ‘B’. Kind of like the ‘f’ in Facebook. But that’s to digress. Bitcoin is variously described as ‘crypto-currency’ (label of choice at bitcoin.org), as ‘the online virtual currency’ (at cnbc.com – emphasis added), as a ‘cyber-currency’ (eg, Sky News and many other places) and as a ‘virtual currency scheme with bidirectional flow’ – making it of course a Type 3 scheme – in the ponderous prose of the European Central Bank. The latter source incidentally, an inaugural study from October last year on ‘Virtual Currency Schemes’ in general but with Bitcoin being the star turn, being another indication that Bitcoin – on the Web since 2009 – is moving status-wise from funny- to not-so-funny- money.

Common to all these labels is the assumption that Bitcoin is a ‘currency’. Which, to this particular observer, with an albeit imperfect understanding of just how you make and replicate Bitcoins (trying to follow the WikipediA page made his head hurt), is an extremely moot point.

What is or isn’t currency was established in law – at least in the common law of England and by that means to all intents and purposes in the present-day law of global finance – over two and a half centuries ago, in 1758, in a case called Miller versus Race decided by the eminent British jurist Lord Mansfield. Miller was an innkeeper. He’d provided lodging and sustenance to a traveller and accepted in good faith payment by means of a ‘bank note’ issued by an English bank in favour of a named beneficiary ‘or bearer’. When Miller then presented the note at the issuing bank, seeking payment of its face value in coin of the realm, the teller – named Race – took it from him but refused to pay out. It happened that the note had at some earlier time been stolen in a highway robbery. The bank’s position was that, whether or not Miller’s customer had been the felon, the theftous taking meant that no ownership interest in the note could pass to Miller and that therefore the bank was not obliged to honour it when presented by him.

Lord Mansfield said that this proposition was, not to put too fine a point on it, rubbish. By then – the mid-18th Century – ‘bank notes’ issued by the several privately-owned British banks were universally accepted within the realm as a payment mechanism in course of trade, as if they were the coins issued by the Bank of England on behalf of the Crown. This mercantile custom needed – and justified – the support of the law if banknotes were to function as money. As Lord Mansfield put it, ‘So, in the case of money stolen, the true owner cannot recover it, after it has been paid away fairly and honestly upon a valuable and bona fide consideration’.

This rule – that the ownership of stolen money passes to a bona fide recipient for value – is the acid test of ‘currency’. An object – whether it be coins, paper or strings of data – is not currency unless its ownership in law ‘passes current’, as Lord Mansfield put it, from one holder to the next, excepting only where the object is gifted, meaning no consideration, or the recipient is on notice of the violation of a prior ownership interest. And if that status has been acquired, through course of trade, then the rule becomes one of law and the object must be accepted by all in satisfaction of monetary claims.

Whatever else might be said of Bitcoin at this juncture, manifestly it is not currency in this critical sense of the word. Cypriot bank depositors, and other Eurozone account-holders, may be extracting whatever they can from their accounts – which won’t be much in Cyprus now that the boom has been lowered – and exchanging those Euro for Bitcoins on the ‘Mt. Gox’ exchange but they are not buying currency, real, crypto, cyber, virtual, or otherwise.

What they and the other buyers of Bitcoin are buying is what the bank’s lawyer in Miller versus Race argued for banknotes – that each note was a unique object, identified by a serial number, representing actual or potential value to the owner. The analogy given way back then in the 18th Century was of a lottery ticket but it could just as well have been a Bitcoin.

Of course, it is claimed for Bitcoin that it functions as currency. And no doubt it does amongst the tiny number of participants who are willing to accept it in lieu of ‘real’ money. But can you insist that your landlord accepts rent in Bitcoins, or discharge a debt due to your electricity supplier in Bitcoins? You cannot, because – regardless of what internal Bitcoin protocols might (or might not) say – there is no law to compel such acceptance. It was that way with ‘bank notes’ when they first started to be issued, as a convenient alternative to the coinage they represented. But a point was reached where their universal acceptance in trade compelled their treatment as currency.

Bitcoins may one day attain such standing as a medium of exchange. And in the digital era that day may come much sooner than anyone could presently predict. But when it does, there will be another – and much more predictable – event. Ninety or so years after the law of money in currency was laid down, in the year 1844, the bank note was nationalised – taken fiat - by the British government. If and when its level of mercantile acceptance becomes such that in law the Bitcoin ‘passes current’, it will go the same way. You can put a ring around it. It’s been the fate of every currency ever invented, regardless of whether the underpinning is gold, taxation or – as some are saying of Bitcoin – ‘thin air’. Our penchant for order in our lives admits of no other outcome.

For now though, the most that can be said of Bitcoins is that they are speculative investment items. You take your euro or dollars or pounds and exchange them for Bitcoins, hoping of course that the rate of exchange will then improve in your favour and that later you can change them back at a profit. Right now that’s definitely happening. Only a few weeks back, people were going onto the Web willing to exchange around 32 dollars for one Bitcoin. As this sentence is typed, the ticker at mtgox.com is scrolling at $105.43000 and the day’s volume to this point is said to be 113,610 ‘BTC’ – Bitcoins – and climbing. Plainly there’s investment (or panic?) interest in Bitcoins. But currency they ain’t.

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