ABSTRACT
Although we use money every day, few really understand it. Most define it by its most obvious manifestation – government-issued paper certificates or coins that specify units of currency, such as dollars or euros. The advent of digital currencies is therefore confounding almost everyone.
From an epistemological and regulatory standpoint, this Article argues that money should also be viewed functionally – as a ‘right’ that serves one or more of the generally accepted functions of money. The Article focuses on two of money’s most generally accepted functions: to serve as a medium of exchange to facilitate the sale of goods and services, and to serve as a store of value. To perform these functions, money must be transferable, ideally with low transaction costs, and also must represent something valuable.
This perspective can enable readers to understand, more intuitively, the changing nature of money and can help to de-mystify digital (that is, electronically evidenced) currencies. For example, the current differences between tangible and digital currencies relate to transferability; electronic transfer can be quicker and less costly than physical transfer. Furthermore, the current differences among different forms of digital currencies relate to value, which is influenced by who – government or private – issues the money and, in the case of private issuers, whether or not the money is backed by assets having intrinsic value.
Viewing money functionally also can inform monetary regulation. In addition to the traditional goals of limiting third-party harm, monetary regulation should help to protect money’s functions by correcting market failures that impair the low-cost transferability or the stable value of the rights that are becoming widely used as money – widespread usage suggesting that the innovation is surviving in the marketplace of ideas and is perceived as beneficial. This ‘functional’ approach would expand the proper scope of financial regulation beyond its traditional negative role, protecting against harm, to also include the positive role of helping to promote beneficial business innovations.
Schwarcz, Steven L, Money: A Functional Analysis (April 26, 2024).
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