What exactly is Bitcoin? A new trading mechanism

Bitcoin may be a currency, but it is not a new type of money. To understand what’s really new about Bitcoin, it’s necessary to distinguish between a “currency” and a “transaction mechanism”.

What exactly is Bitcoin? A new trading mechanism

What exactly is Bitcoin? How should we understand and regulate Bitcoin and similar coins? Can they perform the functions of a currency? At the Boao Forum in early April, Li Bo, deputy governor of the People’s Bank of China, said that bitcoin and stablecoins are crypto assets. Crypto assets are investment options, which are by no means currencies per se, but alternative investments. The main role crypto assets may play in the future is as an investment tool or an alternative investment. Zhou Xiaochuan, former governor of the People’s Bank of China, also said that it is important to distinguish between digital currencies and digital assets, and that it is not time to draw conclusions about digital assets like Bitcoin, but “to remind and be careful” and that “in China, financial innovations have to be clear about their benefits to the real economy “. A previous article by the New York Fed discussed the nature of Bitcoin in detail, arguing that there is nothing special about Bitcoin if it is used as a medium of exchange, and that the main novelty of Bitcoin is the creation of a new mechanism for transactions that is not dependent on third parties. The article is quite helpful in our understanding of Bitcoin, and we have put together the article for reference.
Bitcoin, and cryptocurrencies more generally, are often described as a new type of currency. In this article, we argue that this is a misconception. Bitcoin may be a currency, but it is not a new type of cryptocurrency. To understand what is truly new about Bitcoin, it is necessary to distinguish between a “currency” and a “transaction mechanism”. Doing so suggests that currencies with Bitcoin-like properties have existed for centuries. However, the ability to exchange electronically without a trusted party is a defining characteristic of Bitcoin that is entirely new. Bitcoin is not a new currency; it is a new transaction mechanism that can support multiple forms of currency as well as other types of assets.

Currencies and Transaction Mechanisms
The distinction between currencies and transaction mechanisms is not new in the payments world. For example, according to a report by the Committee on Payments and Market Infrastructures (CPMI), a body within the Bank for International Settlements (BIS), a currency is an asset that is being transferred, such as the currency in your wallet. In contrast, a transaction mechanism is a way to transfer assets, such as handing over physical currency to a merchant in exchange for a cup of coffee.
It is not uncommon for Bitcoin, and cryptocurrencies more generally, to be referred to as a new type of currency. For example, the Bank for International Settlements released a chapter of its 2018 Annual Economic Report titled “Assessing whether cryptocurrencies can play any role as currencies.” Similarly, an International Monetary Fund report on fintech categorizes cryptocurrencies as a currency.
With this in mind, it is necessary to ask whether the truly unique aspect of Bitcoin is the type of currency it represents, or the transaction mechanism it uses? To address this question, we propose two simple classifications, one for currencies and the other for exchange mechanisms.

Three types of currencies
We classify currencies into three types: legal tender, asset-backed currencies and claim-backed currencies. The distinction between asset-backed and claim-backed currencies is intended to distinguish between secured and unsecured claims.
Legal tender corresponds to essentially worthless items that have value based on the belief that they will be accepted for goods and services that have value. A classic example is currency. A bill with a $20 bill printed on it is almost worthless. But the consumer can buy coffee by handing over that piece of paper because the barista believes he can in turn use the paper to buy something of value. Of course, because of its legal tender status, the currency issued by the central bank is different from pure legal tender. Legal tender currencies that do not have legal tender status include the Yap Island Rai stones and Ithaca HOURs. Bitcoin is just another example of legal tender.
Editor’s note: Yap Island is a small island in the Pacific Ocean with a population of only about 5,000 to 6,000 people. The island’s indigenous people use a giant stone coin as their circulating currency. Since metal is not produced in the area, stone became an important resource and a pattern of trade was developed in which stone was used as a medium of exchange. The local people called this stone coin Fei.
Editor’s note: The Ithaca Hourly Voucher is a local currency issued and used in Ithaca, New York, and is a time-based monetary system. It is designed to encourage economic development in Ithaca and surrounding communities and to prevent these funds from leaving the local economy. The value of an hour is fixed at $10.00 and any hour worked is equivalent. Ithaca hourly vouchers have a circulation of over $100,000.
The value of asset-backed currencies comes, at least to some extent, from the assets that back them. A prime example is commodity money. A gold coin has intrinsic value because it can melt down a coin and find someone who wants to use it for other purposes.
Finally, the value of claim-backed currency comes, at least in part, from the promise of some institution to convert the currency into something of value. For example, the value of a bank deposit is based on the bank’s promise to convert the deposit into currency. Non-financial companies can also issue claim-backed currencies. For example, a barista may exchange a cup of coffee for a (fully perforated) membership card. In this case, the membership card is a special type of currency that can be exchanged for items of value. In principle, if others believe that the barista will deliver on her promise in the near future, the perforated card can be used like money to purchase other goods, as long as enough people want the coffee.

Three types of trading mechanisms
Transaction mechanisms can also be divided into three categories: physical transfers, electronic transfers with a trusted third party, and electronic transfers without a third party. Although different, our categories are broadly consistent with the categories of transaction mechanisms described in the CPMI report above.
Physical transfers are transfers of money by physical means (e.g., paper money or coins). This includes the exchange of physical money for goods and services. In the case of physical money, if a consumer wants to buy a cup of coffee with a $20 bill, he needs to hand it over in person. Likewise, he can make a payment by sending a check in the mail, for example, which will be physically delivered to the recipient to pay the landlord’s rent. Technically, a check is a proof of payment, not money. That is, endorsed checks can circulate like money.
Electronic transfers using trusted third parties represent the vast majority of electronic payments today. These transfers involve a number of trusted entities that are responsible for ensuring that the transfer is valid. The Federal Wire Transfer Fund Service® is an example of an electronic transfer system in which the Federal Reserve System acts as a trusted third party on behalf of banks and other financial institutions to transfer deposits held at the central bank to each other.
The final category is electronic transfers without a trusted third party. This is a decentralized exchange mechanism, just like Bitcoin and many cryptocurrencies.

Categorizing Bitcoin
To illustrate the differences between currencies in these two dimensions, we created a 3 × 3 matrix that combines the types of currencies with the types of exchange mechanisms, and for each combination, we provide an example.

What exactly is Bitcoin? A new trading mechanism

Physical transfers of currency include:
Paper money – legal tender;
Gold coins – the value of which depends on the gold behind the coin;
Checks – notes that a bank promises to convert into currency.
In the U.S., many bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), so they benefit from greater protection than the promise of individual banks.
Currencies that are transferred electronically through trusted third parties include central bank reserves, which can be transferred in the U.S. by federal wire transfer; money market mutual fund shares, a very liquid investment backed by assets (usually Treasury bills); and (uninsured) commercial bank deposits.
Finally, electronic transfers without a third party include bitcoins without any backing; “stablecoins,” cryptocurrencies whose value is (in principle) tied to an asset; and tokens from initial token offerings (ICOs) for which the issuer offers the right to future products or services (although not necessarily legally binding). In all of these cases, the transfer of funds can take place without a trusted third party. It is worth noting that all of these examples are the latest phenomena to emerge in the post-Bitcoin era.
As is apparent from the table above, Bitcoin and other cryptocurrencies are not a new type of currency. Other examples of fiat currencies have been around for a long time. The same is true of stablecoins, which are simply the latest incarnation of a currency tied to the value of an asset. By contrast, the third row of the table didn’t exist until 2009. The real innovation in cryptocurrencies is that they provide a completely new mechanism for transactions. This transaction mechanism can support different types of money transfers; bitcoins are fiat currencies, stablecoins are asset-backed currencies, or even future services or products, such as ICO tokens. This type of transfer mechanism can also support the transfer of other types of assets, such as CryptoKitties.

In this article, we argue that Bitcoin is not a new type of currency. Rather, it is more accurate to say that Bitcoin is a new type of transaction mechanism that can support the transfer of currency and other things. Why should we care about this? History provides us with lessons on how to run good currencies and how to form good money transfer mechanisms. These lessons can help cryptocurrencies evolve in a more useful way.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-exactly-is-bitcoin-a-new-trading-mechanism/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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