Summary: A recent post on Liberty Street Economics — a site featuring insights and analysis from New York Fed economists — highlighted that the unique aspect of Bitcoin is not the token, but instead the ability for users to transfer funds without a trusted intermediary. The post calls out the commonly held belief that Bitcoin is a “new type of ...

A recent post on Liberty Street Economics — a site featuring insights and analysis from New York Fed economists — highlighted that the unique aspect of Bitcoin is not the token, but instead the ability for users to transfer funds without a trusted intermediary.

The post calls out the commonly held belief that Bitcoin is a “new type of money,” writing that instead Bitcoin is a new type of exchange mechanism which can support an array of monies, assets, or services.

To prove its point, the post breaks money into three categories: fiat money, asset-backed money, and claim-backed money. An example of a fiat currency is the U.S. Dollar. The physical dollar itself is worthless, but it has value because the Internal Revenue Service collects dollars from citizens on behalf of the government for providing infrastructure and services. Gold coins are an example of an asset-backed currency because the coin itself can be repurposed and has value in and of itself. And claim-backed monies are valuable because they can be exchanged for a service or asset.

Exchanges are also segmented into three categories: physical transfer, electronic transfer with trusted third-party, and electronic transfer with no third party.

Bitcoin was categorized by the authors as fiat currency, arguing that Bitcoin tokens themselves are worthless but have value because it is believed they will be accepted for goods and services. Authors also categorized central bank notes and Rai stone as fiat currencies, but Bitcoin was different from either because exchanges happen electronically without a third party. Stablecoins are examples of asset-backed monies, and so even those are not a “new type of money.”

Bitcoin working as a currency that’s safe to transfer without a third party is the heart of Bitcoin’s revolutionary spirit. Bitcoin users can side-step long established financial institutions, including banks, and use the currency to find financial autonomy. Some have even argued that cryptocurrencies like Bitcoin are the keys for economic advancement for minority communities who have historically been at a disadvantage because of practices like redlining.

The authors emphasized that it’s important for everyone to be clear on what’s new about Bitcoin and that is that it offers users the ability to transfer funds without a trusted third party and to do so anonymously.

By Emily Mason