I was recently asked whether accounting provides a useful way to answer a question that has surrounded Bitcoin since its creation: is it really money?
There is an important distinction to make at the outset. The question is not whether Bitcoin can be accounted for using double entry. Of course it can. Almost any asset can be accounted for in that way. If a company buys Bitcoin, it can debit an asset account for the Bitcoin acquired and credit its bank account for the cash (dollars, sterling, or whatever) used to purchase it. There is nothing particularly unusual about that.
The more interesting question is whether Bitcoin itself embodies the reciprocal asset-liability relationship that characterises all of money, without exception. To put this another way, if someone owns Bitcoin and records it as an asset, whose liability is that Bitcoin? Who owes them something as a consequence of their ownership? Answering that question is where things become interesting.
Double-entry bookkeeping is based upon a remarkably simple idea. Transactions have two sides, and accounting recognises them both. If one person owes, another has a claim. If one person pays, another receives. If one person has income, another has a cost. The debits and credits are not arbitrary devices invented to make accounts balance. They reflect the relationships that economic transactions create. They record reality.
Money provides perhaps the clearest example of this. Suppose a commercial bank lends someone £100,000. The bank records the loan as an asset because the borrower owes £100,000 to it. At the same time that the bank records the loan, it also credits the borrower's current account with £100,000, which they can now spend. That is what the loan was meant to achieve; its purpose was to give the borrower purchasing power they otherwise did not have. That deposit is a liability of the bank because the bank owes that money to its customer. The loan and the deposit arise simultaneously as part of the same transaction. They balance. And that is how all money is created.
When looked at from the borrower's perspective, the transaction and the relationship are equally obvious. The borrower has acquired a £100,000 bank deposit, which is their asset, whilst simultaneously acquiring a £100,000 obligation to the bank, which is their liability. There are accounting relationships on both sides because there are economic relationships on both sides.
The important point is that the £100,000 of newly created bank money is not simply an object that has appeared from nowhere. It represents a claim. The customer's deposit is the customer's asset precisely because it is the bank's liability. Those two things cannot be separated.
The same basic point applies to central bank money. Central bank reserves are assets of commercial banks and liabilities of the central bank. Again, the monetary asset is simultaneously somebody else's liability.
This is why I have long argued that money is debt. Modern money records relationships between people, banks, companies and the state. Money is not simply a valuable object that happens to circulate between people. It is an accounting relationship denominated in a currency, and double-entry helps us understand what that relationship is.
Bitcoin, though, is fundamentally different.
Bitcoin has a ledger, in the form of its blockchain, but the fact that something has a ledger does not mean that it has a double-entry accounting system. The Bitcoin blockchain records transactions and establishes who has the right to control particular amounts of Bitcoin. Its architecture is designed, amongst other things, to prevent the same Bitcoin being spent twice. What it does not do is establish the debtor-creditor relationship that exists when conventional money is created.
Suppose new Bitcoin is created as a mining reward. The miner acquires Bitcoin because the Bitcoin protocol says that they should. But who simultaneously acquires a liability to the miner?
The answer is that no one appears to do so.
No bank owes the miner the value of the Bitcoin. No government promises to accept responsibility for it. No issuer stands behind it. No organisation has recorded the newly created Bitcoin as its liability. The miner has acquired an asset, assuming Bitcoin is appropriately described as such, without another economic entity acquiring the corresponding liability.
That does not mean the miner's accounting records are wrong. If the miner is a business, it will record the Bitcoin it receives in its accounts, and there will be an appropriate corresponding entry, which is presumably as income. Similarly, if another company subsequently buys that Bitcoin, it will record both the acquisition of the Bitcoin and whatever it gives up in exchange.
But those are double-entry accounting entries about transactions involving Bitcoin. They do not demonstrate that Bitcoin itself embodies a reciprocal accounting relationship. A company can use double-entry accounting to account for a building, a painting, a bar of gold, or a field. None of those things is somebody else's liability simply because the owner records it as an asset.
That is why I think the crucial question is not, strictly speaking, “Where is the credit when Bitcoin is created?” An accountant can create an appropriate credit when recording the receipt of Bitcoin. The more fundamental question is: if Bitcoin represents a monetary asset, what is the corresponding monetary liability, and who owes it?
There appears to be no answer to that question.
That fact puts Bitcoin into a very different category from modern money. Gold is not somebody else's liability. Nor is a painting, a building or a field. These things can all be assets because ownership does not necessarily require another person to owe the owner anything. Bitcoin appears to share that characteristic. In accounting terms, it looks much more like an asset of this sort than like money created through a credit relationship.
This distinction matters because money is necessarily relational. A pound in my bank account represents a claim that I have on my bank. My asset is its liability. If I own Bitcoin, nobody owes me anything simply because I own it. What I possess is the ability, subject to the rules of the Bitcoin system, to transfer that Bitcoin to somebody else. Its value therefore depends upon finding somebody else willing to accept it at an agreed price.
Bitcoin's supporters might say that this is precisely the point. Bitcoin was designed to remove the need for banks, governments and other institutions standing behind money. They say that the absence of an issuer is not an accidental omission from the Bitcoin architecture. For many of its advocates, it is one of Bitcoin's principal attractions.
But that design choice has consequences. Remove the issuer and there is no issuer's liability. Remove the liability and there is no corresponding claim against an issuer. Remove that reciprocal relationship and what remains is something quite different from the credit money that actually powers a modern economy.
Bitcoin can certainly be traded. Its price can rise and fall. People can speculate in it, save it and sometimes exchange it for goods and services. But none of those things settles the question of whether it is money. Gold can be traded and speculated upon. So can paintings, houses and countless other assets. Exchangeability alone does not define money.
Accounting therefore provides a useful test. If Bitcoin is claimed to be money, ask what monetary relationship it records. Ask whose liability a Bitcoin represents. Ask who has the corresponding obligation to its owner.
There is no obvious answer to any of those questions.
That does not mean Bitcoin does not exist, nor does it mean that it cannot have a price. It means something rather more specific, which is that Bitcoin does not appear to have the reciprocal asset-liability structure that characterises modern credit money.
Bitcoin might be a digital asset. But if money is fundamentally a credit relationship, as the accounting evidence strongly suggests it is, then Bitcoin fails that test. And that is why I do not think Bitcoin is money. So, what value does it have, and why?
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[…] read these observations in the context of my other article on cryptocurrency this […]
The supply cap is critical, it prevents endogenous creation of new coins and forces Gold Standard type behaviour. This is intended.
But (one of) the key features of money is that it is created and destroyed on demand in order to keep price levels stable. (Eg. The BoE will print as many £10 notes as banks ask for… and burn as many as are no longer required).
The key feature of bitcoin – limited supply means it can never be money.
Agreed
Bitcoin is most definitely not money. There is no promise to pay, it is an asset like a painting or a gold bar. Gold is the closest thing to it that’s probably why they call the guys trying to find the magic number with so many leading zeros to win the next coin miners. Furthermore, you can’t pay your taxes with it so it’s not money. Blockchain is a brilliant idea and beyond the control of anyone especially if you use a Tor browser. I guess the authorities could forbid adverts of bitcoin exchanges and third party wallet holders to make it very difficult for the average user but I’m afraid it’s too useful for those engaging in illicit activities for it to go away.
Thanks for the explanation. Pls forgive my ignorance on accounts. I still struggle on the classification of things being assets/liabilities/credits etc … Sometimes these seem counter-intuitive ……
Can you extend your explanation. Imagine I am a gold miner with a bit of land. And imagine that literally dig up lumps of gold.
I’m guessing there is no asset- liability relationship …. But the gold miner has an asset which is deemed valuable and can be exchanged for other goods. It’s not money, it isn’t backed by a government – but it has a value? What am I missing?
You are not missing anything about gold. It is an asset with value because people are willing to exchange goods and services for it, but it is not someone else’s liability because it is not money.
Money is different. Modern money is an asset to whoever holds it and a liability to whoever issued it. A bank deposit is your asset and the bank’s liability. Gold does not have that relationship. That is precisely why something can have value without being money, and why value alone does not define what money is.
You’ve gone right into the DNA of bitcoin and crypto as far as I am concerned. Crypto is its own little monopoly in my view, to be shared amongst a few to enhance their monopoly power.
The fact that it has not been closed down by the worlds central banks is extremely stupid and worrying. It is a challenge to sovereign money everywhere. By being tolerated, a form of hyper individual sovereignty has been created. Its effects could also be a bit like private credit creation – it could contribute to more chaos in the financial system and even more worryingly, claims that could be made against real sovereign money by its creators and users (bailouts). In addition, this private money sovereignty is not under any democratic control whatsoever.
As in AI, we are sleep walking towards disaster if we let crypto grow. I would not dream of using the dollar in my own country – the pound is my legal tender. So why is crypto tolerated then? Well, just look at the pleonexic people who promote it. They’re mostly authoritarian anyway.
One thing BREXIT and the EU taught me was that borders and laws were not really the most tangible forms of sovereignty. One’s sovereign currency however, was another matter entirely. It is raw power. And that is the only reason why a bunch rich usurpers promote crypto.
Much to agree with
Money depends on people being willing to use it. The currency of many nations have little value outside the issuing state and they have to use other currencies for external trade. However, they continue to be used domestically. Crypto currencies surely depend much more on a willingness to use them. They have no gold -a real substance- or national bank to protect them. Am I right to think a collapse in confidence could see them wiped out or is there some way of protecting the currencies?
If that happened I suspect we would all suffer-which may give politicians a reason to try to protect it.
I am reminded of the Sorcerer’s apprentice.
These “currencies” are the ultimate confidence trick: they could be wiped out. Many have been. Many more will be. Fools and their money are easily parted.
I’d agree that money is an accounting system. But, double entry accounting is only the way that banks today create money. It’s not the only way to do accounting for money.
(a) gold worked as money for 2.5 millenia, and works well without double entry accounting, which only really appeared in the 1300s. Gold might be called token accounting (and ignore the current common usage of tokenisation as wrongthink).
(b) Bitcoin itself is triple entry accounting, but agreed, that in itself doesn’t make it money.
(c) stablecoins are money, but they track fiat using double entry and account for themselves on triple entry ledgers.
(d) Trying to equate “money” as double entry accounting is the sort of thing that banks would do to stop any other money emerging – e.g., CBDCs, gold, Bitcoin, stablecoins.
You are wrong.
Gold was never money: it was a token representing transferable debt.
Stablecoins are not money: they are extractive financial instruments.
We do not ned alternative money: they would destroy society.
Is that what you want?
I fully understand why you say that gold is not (was not) money in the modern sense Richard.
But surely we must acknowledge that gold was used as money for a long long time, as were other commodities.
I think this fact is one of the reasons why many people today fail to understand the reality of modern money. They treat it as scarce and valuable in its own right, just like gold in fact.
It’s always struck me as odd though, the gold has little real intrinsic value. Sure it makes nice jewelry but is very few practical uses. It was valued because it was scarce. But that was its undoing I suppose: limited supply of money is deflationary.
I guess the proponents of bitcoin are just wealthy people desperate to find new assets to buy as a way to secure their surplus wealth…
I would go further. Gold was not itself ever money in the sense that I describe it. It was a tangible, physical representation of the debt relationship that constituted the money.
Confusing the gold with the money is therefore rather like confusing the map with the territory. Gold was the map; the debt was the territory.
That distinction matters because otherwise we inherit precisely the mistaken idea you identify: that money must be intrinsically scarce because the thing once used to represent it was scarce.
What value? Well mainly speculative but at present has a total market cap of $1.5T (57% of crypto’s MC) compared to gold’s $30T.
You believe in gold?
There are fairies at the bottom of my garden….
Lol thanks for the offer! Not particularly a believer but practically would I have more £ available now if I’d bought some 5 years ago? Yes
I cannot work out what your comment means: sorry.
I have always been puzzled by crypto currency. Why does it have any value at all? I might just as well scribble “£5” on a piece of paper and call it money. It’s always had the smell of snake oil about it.
I would suggest that your note is worth more.