Bitcoin is Money, But Not a New Type of Money; It’s An Exchange Mechanism: NY Fed Reserve

“Bitcoin Is Not a New Type of Money,” says the Federal Reserve Bank of New York in its latest paper, where it talks about bitcoin instead of being a new type of exchange mechanism that can support the transfer of monies and other things.

Bitcoin is a new type of money, is actually a “misconception,” argues the authors Michael Lee, an economist in the Bank’s Research and Statistics Group and Antoine Martin, a senior vice president of the Group. They said,

“Bitcoin may be money, but it is not a new type of money.”

There are three types of money; fiat money, asset-backed money, and claim-backed money. Fiat money — the currency is “intrinsically worthless objects that have value based on the belief that they will be accepted in exchange for valued goods and services,” states the paper.

As such, Bitcoin is just another fiat money, unlike central bank-issued currencies (CBDC) that are different from pure fiat money due to its legal tender status, the authors said.

Asset-backed monies like gold coins derive their value from the assets backing the money while claim-backed monies derive their worth from the promise of some institution to exchange the money for something of value.

Just like money, there are three types of exchange mechanisms, including physical transfer, such as currency or notes, and electronic transfer with a trusted third party that represents the vast majority of electron payments today, like the Fedwire Funds Service.

The third type is electronic transfers without a trusted third party where the validation of transactions is decentralized, as is the case for Bitcoin.

Classifying Bitcoin

Source: New York Fed- Classifying Bitcoin

According to the paper, Bitcoin is not backed by anything. It further discusses post-Bitcoin era stablecoins which are tied to assets and tokens from ICOs for which issuers offer rights, though not legally binding, to a product or service in the future.

Overall, bitcoin and other cryptocurrencies are not a new type of money as other categories of fiat money has existed for a very long time. It was the ‘electronics without third party’ that did not exist before 2009, it said.

“The real innovation of cryptocurrencies is that they offer a radically new exchange mechanism,” that can support the transfer of different kinds of monies.

While bitcoin moves fiat money, stablecoins move assets, and future services or products like CryptoKitties are moved by ICO tokens.

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