Currency Notes of Bitcoin: Today and Tomorrow


The Nature of Currency Notes

In the course of money functioning, regardless of the commodity acting as a common equivalent, its notes sporadically emerge in the form of monetary liabilities and bonds. A monetary liability is a security establishing its issuer’s liability to exchange the note for a predetermined amount of money (those are commercial drafts and classic banknotes, which are a drafts for a banker). A bond is a security establishing its issuer’s liability to exchange it for a commodity worth a predetermined amount of money (those are gift certificates and bonus money assigned to loyalty program members). Thus, monetary liabilities and bonds are nominated in money, but the former are redeemed with money, and the latter with commodities.

The main purpose for currency notes is the necessity of credit in capitalist economy. For instance, by signing a commercial draft, a customer obtains a commodity today for a promise to provide money in the future. A gift certificate’s seller gets their money today in exchange for the promise to provide the commodity later. However, currency notes do not stay in the creditor’s hands as mere credit tools, they start traveling from one hands to another, i.e. in fact they circulate along with money, thus starting functioning as money themselves. Whatever money product is the basis for a system, distribution of notes thereof is an objective regularity of economic behavior.

Any commodity may in fact become money. Certainly, if the commodity, say, a prepaid single-purpose card like a petrol station card or mobile communication card, is used for the intended purpose, its manufacturing should not trouble monetary authorities. However, if market agents, regardless of the manufacturer’s and the authorities’ intent, start using it as money, the authorities will have to pay their attention to it.

“Mobile Money” as Currency Notes

Mobile company bonds may be used as money. Circulation of mobile operator bonds may take two forms, as circulation of top-up cards and as movement of assets through accounts of the subscribers.

There also is a specific intermediate state, when the same security may act as a bond for one owner and as a monetary liability for another. Money at the mobile account are bonds for the subscriber (as they are the operator’s liability to provide the commodity, i.e. communication service, for a particular sum of money). A seller who accepts those assets from the subscriber’s account as payment for the commodities provided, and who can convert it into money with the mobile operator, those assets are monetary liabilities. This could compare to a gold bar standard, when national currency was credit money only for those who could redeem it with a sum sufficient to obtain a standard gold bar. For the rest, the currency was fiat, i.e. they could not redeem it with gold with the issuer.

As for ‘mobile money’ like M-PESA, which exists as records in accounts of Safaricom’s subscribers, it is monetary liabilities, not Safaricom’s bonds. In that case, a subscriber’s account splits: along with bonds in the account, there are also monetary liabilities which the operator undertakes to redeem with money, not mobile services.

Currency Notes of Bitcoin: Today

If bitcoin is money, its notes shall develop in the form of liabilities and bonds. Their movement does not correspond with movement of bitcoins along the accounts in a distributed ledger, and therefore they reduce the workload of the network.

Currently, there are several bitcoin-based monetary liabilities. The most important of them is bitcoins at accounts of centralized exchanges. An account at an exchange is not bitcoin as it is, but the exchange’s liability to provide bitcoins for the extent of the account minus fee. As of today, platforms like Cryptonit and Bitfinex offer cards which allow one to pay for commodities directly with the exchange account. Also popular are exchange drafts. Such draft may be exchanged for private e-money at exchange offices, and used as a replenishment tool at a different exchange. For instance, BTC-e’s drafts are applicable for replenishment at Bitok.

Bitcoin-nominated private e-money is less popular (those are monetary liabilities of gates in the Ripple system, or WebMoney’s title note WMX). Those are not bitcoins, but a liability of the issuer to provide a particular amount of bitcoins.

Assets at centralized wallets like Coinbase also may classify as bitcoin notes. The centralized wallet user’s screen displays the account with a sum of bitcoins. However, in fact all bitcoins belonging to the customers of the wallet may be located at the accounts of a bitcoin storage provider. It means that movement of bitcoins along the accounts of the wallet’s customers does not accompany movement of bitcoins in the distributed ledger. In that relation, customer accounts with bitcoins are similar to bank accounts, which represent monetary obligations of a bank (not money itself), which also may be frozen.

Another form, not quite popular as yet, is account keys representing another kind of notes as compared to monetary liabilities mentioned above. If an exchange account or e-money account is similar to a bank account, the keys are more like a plastic card, which is an access tool for the account. The difference is that a bank account is a monetary liability, while a bitcoin account is not anyone’s liability, but it is money.

There are two important differences between those keys and prepaid mobile cards. First of all, in the bitcoin system, a key is an access tool for a particular account, while a prepaid card is a tool for topping up any account. The gap may be filled with bitcoin-nominated prepaid cards applicable for any bitcoin account. Such card is a monetary liability of issuer thereof. Second of all, a prepaid card is a mobile operator’s bond, while a bitcoin account key is neither a bond, nor a monetary liability.

Bitcoin notes in the form of bonds and monetary liabilities are related to trust, as the issuer undertakes to redeem with either bitcoins, or traditional currencies, or commodities. The keys to bitcoin accounts do not require any trust as the account balance and the key’s trustworthiness may be checked easily. The problem is that the key, subsequent to its provision, remains known to the previous owner, so there should be a tool, which automatically changes the private key following any change of owner. In Denarium, so-called physical bitcoins in the form of coins, they use a 2-out-of-2 mulitisignature technology: a coin is activated only with two signatures, one of which is issuer’s, and the other one is the customer’s, which frees him or her from necessity of trust for the issuer.

Platforms like BitShares and Ethereum, which allow for creation of securities way more complex than simple bitcoin-nominated bonds and monetary liabilities, discover new technological boundaries for creation and circulation of bitcoin notes.

Another technology which expands issuance and circulation of bitcoin-based liabilities is the sidechain technology: as long as bitcoins rest on a designated account, their notes move along the sidechain, and may be redeemed with bitcoins for a predetermined sum. The first commercial sidechain Liquid allows exchanges to trade with bitcoin notes instead of performing any transaction via bitcoin’s blockchain. Nowadays, some exchanges accept each other’s drafts, thus establishing mutual trust. However, circulation of bitcoin notes within a sidechain does not require any trust. A sidechain may be arranged in a way that prohibits bitcoin notes to appear without relevant backing, with impossibility of blocking of their redeeming with bitcoins (i.e. removing bitcoins from a sidechain to the blockchain).

Currency Notes of Bitcoin: Tomorrow

Though technologies for issuance and circulation of bitcoin notes exist today, they are only at early stages of development. However, circulation of bitcoin notes remains quite limited. Trading of commodities for bitcoins at exchange accounts, for bitcoin-nominated e-money, keys to bitcoin accounts, prepaid cards for bitcoin account replenishment, and for monetary liabilities representing account assets in bitcoin sidechain, is not widespread. As for bitcoin-nominated bonds, they are almost non-existent: services like CardCash sell gift cards for bitcoins, but those are nominated in national currencies. There are no bitcoin-nominated bitcoin cards on the market.

The reason for the existence of the gap between the theory and practice is in the fact that bitcoin itself is at the early stages of introduction to circulation (i.e. as exchange means for goods and services). If bitcoin has failed to obtain mass adoption as yet, there is no surprise in low usage of bitcoin notes.

Anyway, there is another side to the coin, which allows one to speculate that development of bitcoin issuance and circulation would result in greater acceptance of the first decentralized cryptocurrency. Bitcoin is compared to gold quite often. Distribution of gold notes in the form of banknotes, bonds, and account records was mainly related to greater convenience of using thereof. Using paper notes for gold was faster, cheaper, and safer than moving actual gold. Distribution of gold notes’ circulation has indirectly expanded the gold circulation realm, as those notes were gold-nominated. Initially they were circulating along with gold, but then they gradually superseded it from circulation, but still remained its mere notes.

Bitcoin notes might use the same scenario. Settlements with bitcoin notes may become faster, cheaper, and safer than those with actual bitcoins. Initially bitcoin notes would circulate along with bitcoins, but eventually, due to their greater convenience, they may supersede bitcoin in circulation. It has not been a year since the emergence of bitcoin notes, so, if we maintain the analogy with gold and notes thereof, it is too early to expect the scenario to come true because significant gold notes appeared a bit later than in five years as of gold’s transformation into money, and got widespread a bit later than in a year following their emergence.

Dmitriy Bondar exclusively for ForkLog

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