[Editor's note] Faced with the new challenges of digital currency, economists are divided into two categories, one is scornful, and it is not worth mentioning that digital currency is a speculative bubble; the other is cautiously accepted and begins cutting-edge exploration. As the digital currency grows, more and more economists join the second camp. To this end, a series of articles on “Digital Currency in the Eyes of Economists” was launched, which is the most comprehensive review of digital currency literature. In the six aspects of classification, market, exchange, price, risk, and supervision, the global economists' research on the frontier theory of digital currency is summarized, which provides a useful reference for interested researchers. This article is the first article in this series.
Before economists study digital currency represented by bitcoin, there is an important question that must be clarified, which is the type of assets that digital currency belongs to: currency, commodities, securities or a brand new one? The classification problem is an important issue of pedigree. The academic community, industry and regulatory agencies have been discussing this issue intensely, but there is no unified answer.
1. Digital currency is currency
Understanding the basic characteristics of money can help us clarify the currency attributes of digital currencies.
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Money is an intermediary of transactions. Its purpose is to minimize information asymmetry and transaction costs, and to achieve transaction convenience and efficiency. The currency issued by a state agency is called fiat currency, and the issuer has the right and obligation to ensure that the currency has a certain value.
The French currency used to be based on gold and silver. We call it the gold standard, the holder of the legal currency, and the right to exchange a certain amount of gold and silver, or other goods of economic value. A commodity that is the basis of value itself functions as a value-preserving value, and the price of the commodity changes as its supply and demand change. Ancient pirates plundered merchant ships to snatch gold or silver because gold and silver were the basis of legal currency and could be used all over the world.
A monetary system based on the value of gold, silver or other commodities has a drawback in that the supply of money is limited by the total supply of goods. Therefore, most currencies finally decided to abandon the gold standard and replaced it with the tax standard, that is, the value of the legal currency is endorsed by the credit of a country. In the evolution history of commodity trading, the exchange property of money gradually manifests itself, and the currency endorsed by the state is widely accepted because of its convenient and unified exchange properties. The emergence and development of digital currency is also part of the evolution of commodity trading.
From the evolutionary history of money and the trading properties of currency, the digital currency represented by Bitcoin has great similarities with currency. But should digital currency be classified as currency? What happens if the digital currency is currency?
According to Kaplanov (2012), money can be used as a medium for trading, value storage, and value measurement . The standard for measuring value is an important attribute of money. However, it is well known that it is almost impossible to use Bitcoin to measure the value of other commodities, because the price of Bitcoin itself is highly volatile. Therefore, the digital currency world has generated stable coins that are specifically responsible for the value measurement function, that is, these new types of digital currencies, such as USDT, TUSD and USDC, use a certain mechanism to lock the value of the French currency, such as locking 1:1 to the US dollar. . In addition to the value measurement attributes, let's look at the remaining two attributes: the transaction medium and the value store.
When discussing whether Bitcoin is a currency, many people ask, can Bitcoin be used to buy and sell goods and services? How many businesses and institutions accept Bitcoin? In fact, with the development of digital currency, hundreds of institutions accept bitcoin, Ethereum, EOS, Litecoin and other mainstream currencies. More famous institutions are Overstock.com, Expedia, eGifter, Microsoft, CheapAir, etc. Although more and more institutions are beginning to accept digital currency payments, they are also subject to various restrictions. For example, at Microsoft, you can only buy games and software with Bitcoin, you can't buy goods, you can't return them, and so on.
As for the value storage attribute, it is related to the present and future value. In finance, Hull-White's future interest rate is used to explain the relationship between current value and future value. We do not delve into the model here, but it is important to emphasize that in this model, interest can be generated as an important feature of the currency of valuable storage attributes. However, Bitcoin cannot generate interest. In the traditional monetary system, the central bank provides official interest rates, and financial market transactions provide forward interest rates. From these data, we can calculate the interest rate model to accurately calculate the value of presence and future. However, the future value of Bitcoin cannot be estimated by Bitcoin's unique “interest rate” model, so it seems that its value can only be found elsewhere.
Many people challenge the idea that "digital currency belongs to money."
The digital currency is considered to be a currency because the digital currency is issued in a similar way to the currency: the issuer can control the total amount of issuance and can guarantee the security and stability of the issuance mechanism. However, this similarity is limited. In the currency issued by the state, the amount of currency is subject to change with the country's GDP and the demand for consumption investment. The circulation of money is always at an optimal level to maintain a comparative advantage over other countries, and ultimately reflected in the foreign exchange rate. However, the supply of bitcoin is fixed.
The advantage of Bitcoin over traditional currencies is that transactions are settled quickly, at low cost, and anonymously. In fact, bitcoin trading and settlement speed is not absolute, because the limitation of bitcoin throughput is sometimes slower than modern electronic payment settlement or credit card payment settlement. Many digital currency supporters relish that "the bitcoin transaction fee is low", which is not necessarily the case. Bitcoin transactions also require a bitcoin miner transaction fee for mining, which is similar to a transaction fee charged by a financial institution. As bitcoin appreciates, more and more miners join the mining industry, and the competition is more intense. Although the single transaction cost is reduced, the social cost increases because the miners spend more CPU to get the same transaction fee. Since it is not technically difficult to create a new digital currency, there will be more alternative coins (Altcoin) appearing to compete with Bitcoin, which is rare in traditional currencies.
Anonymity is where Bitcoin is better than traditional currencies. Early Bitcoin fans were mostly supporters of privacy protection and cryptography, against government figures, criminals and speculators. Early merchants accepting digital currency are online gambling, illegal drug trade auctions, or adult porn sites, and these are the most important businesses for privacy and anonymity. In addition to these special people and businesses, ordinary people and normal businesses do not need to hide their identity and credit card information. On the contrary, in some special transactions, it is necessary to leave an identity, such as a tax credit for donations, no identity information, and tax credits cannot be realized.
As for the advantages of digital currency in cross-border payment, it is actually logically flawed. Of course, in a special closed market that is not connected to the outside world, Bitcoin can be used as a convenient cross-border payment tool. However, in the end, Bitcoin still needs to be converted into French currency (such as US dollars or Renminbi) to be widely used. This has resulted in an exchange rate between Bitcoin and French currency, the bitcoin price we often see. The exchange rate of this exchange, that is, the price, needs to meet the "Law of One Price" in the theory of foreign exchange, that is, the principle of uniform price, that is, a commodity can only have one price, regardless of the dollar or bitcoin. However, today, when digital currency does not enter the lives of ordinary people, if you use the exchange rate of digital currency to measure many commodities, you will find that in most cases, the principle of uniform price will be violated. Therefore, cross-border payment of digital currency can only be achieved in a limited and special closed market.
No matter how good the digital currency is described, if it wants to become a currency, then its purchasing power must be based on the price of goods in real economic life, and it must conform to the basic economic principle of unified price .
2. Digital currency is a commodity, more similar to gold
Considering that bitcoin and other digital currencies need to run program mining, and similar to digging gold mines, it is natural that everyone is called the miner of the digital currency, and the name of the person who digs the gold mine is the same. A professional title. A lot of explanations of the video produced by Bitcoin directly used mining miners to visually explain the work of Bitcoin miners . All of this implies that digital currency is a virtual commodity and bitcoin is a digital gold. Academically, there has been a lot of discussion about this. Everyone still has disagreements and cannot reach a consensus. We will then combine the research of several scholars in this area to explain whether digital currency should be classified as a commodity by comparing bitcoin with gold .
It is counter-intuitive to classify an intangible digital currency as a tangible commodity, but if we simply look at the market price fluctuations of bitcoin, we might accept it.
In Dyhrberg's (2016) study, GARCH and Exponential GARCH models were used to test bitcoin, foreign exchange rates, gold futures and spot prices, as well as interest rate data, in an attempt to find links between statistical data and time series data. Conclusion: Bitcoin can be seen as a special commodity between gold and the dollar. Baur et al (2018), using the same method to re-examine more updated data, came to different conclusions: Bitcoin's returns, volatility and correlation are completely different from any other assets including gold and dollars. The methods used by the two researchers are the same. The only difference is that the amount of time and data is different. The result is the opposite. It can be seen that there is a lot of controversy about classifying bitcoin as digital gold. Another study by Klein et al (2018) focused on comparing the volatility, correlation, returns and hedging capabilities of Bitcoin and gold. The results of the study also prove that classifying bitcoin as a commodity or calling bitcoin digital gold is not academically sound. Of course, aside from academic research, from a market perspective, it can explain why the difference in conclusions is so large, because before 2017, Bitcoin was relatively stable compared to other assets. However, in 2017, bitcoin broke out and prices soared to nearly 15 Double, the return is very different from other assets. Therefore, using statistics and measurement to identify bitcoin classifications is definitely a huge challenge.
All of the above studies are based on the comparison of the financial attributes of Bitcoin and gold. Obviously, the conclusions are different and controversial. However, if the digital currency and gold are compared in terms of physical properties, the conclusion is very obvious: digital currency cannot be like gold. It can be used for industrial use and can be used as an ornament. Even though the Chicago Mercantile Exchange (CME) has opened Bitcoin futures trading in December 2017, Bitcoin transactions on the exchange are classified as financial products rather than commodities.
In summary, we propose to reconsider the use of market performance as a criterion for testing whether digital currency is a commodity . Because the market performance is the same, it can't prove that they are of the same kind, and if the data time is too short, the market performance is also greatly affected by the special time nodes. For example, the bitcoin skyrocketing in 2017 can change the market performance. Classification conclusions. The academic community also needs to find a more stable, more accurate way to judge whether digital currency is a commodity .
3. Investment or speculative assets and securities Investment (Speculative) Asset and Security
The price of Bitcoin, in just 10 years, from a worthless value to the current $7,300 (May 2019), its return on investment is staggering. Especially in 2017, the price of Bitcoin has gone out of an incredible market, rising from $1,000 in early 2017 to a high of $16,000 at the end of 2018, with an annual return of 15 times. The media’s transitional exposure and rendering of the story of being rich because of Bitcoin has attracted countless speculators. The only reason they buy Bitcoin or any other digital currency is to sell at a high point and earn The difference becomes rich. Of course, the fluctuation of Bitcoin is also huge. From the beginning of 2018 to the end of 2018, its price has fallen by 4/5, with a minimum of $3,000. This high volatility is also one of the characteristics that speculators like. Especially in many exchanges that have already launched bitcoin futures and derivatives, short selling can also be one of the means of profit.
Bitcoin is not an investment or speculative asset. This topic has attracted the interest of many scholars. Dirk (2017) & Chris (2017), in contrast to the correlation between Bitcoin and returns and other types of assets (foreign exchange, stocks, bonds, precious metals and energy), have consistently consistently low correlations between Bitcoin and other assets. In conclusion, Bitcoin is a good risk-spreading investment, whether it is during periods of market stability or during periods of market turmoil.
Because Bitcoin is a feature of the super-open book, Bitcoin's transaction records are public, and Dirk (2017) goes further to study Bitcoin's transaction records, stating that "about one-third of Bitcoin is in the hands of investors. Especially for those who don’t use Bitcoin, only Bitcoin is used as a payment tool for people who occupy a very small portion of the number of people and Bitcoin usage.” Dirk believes Bitcoin is closer to investment or speculative asset. Of course, the classification criteria used by Dirk when classifying users did not provide a convincing enough explanation. In addition, the data used by Dirk is very outdated data from 2010 to 2013, so the conclusion is inevitably somewhat far-fetched. .
Chris (2017), after researching the user type of Coinbase (the largest digital currency exchange in the US and the world's largest dollar and digital currency trading platform) for 2012-2016, proposed more than half of the users, buying bitcoin holding time exceeded One year, that is, the investment user (that is, the user who bought and held Bitcoin for more than one year). And less than half of the users sell their bitcoins within a year, so they belong to the transactional medium. However, Chris's definition of trading users is too arbitrary. If it is high-frequency trading, short-term speculative trading, users will not hold bitcoin for a long time. According to Chris's definition, they are incorrectly classified as transactions. Users, however, they do not use bitcoin as an intermediary for transactions, but as a medium for speculation or investment.
Florian (2014) analyzed the relationship between Bitcoin exchange trading volume, bitcoin network trading volume and the number of new Bitcoin users. His reasoning is that new users will open accounts on the exchange and buy bitcoin in the currency. Increased the trading volume of the Bitcoin exchange. If the user is investing or speculating, they will trade on the exchange. These transactions do not increase the amount of Bitcoin network transactions; if the user is mainly for exchange, the digital currency will be taken out, and then the goods and services will be bought through the Bitcoin trading network. The amount will increase. His logic and algorithms are more convincing than those used in previous academia. But the conclusion is still ambiguous and may be related to the data he used at the time. After all, in 2014, the amount of Bitcoin transactions at that time, both on the exchange and the Bitcoin network, was much worse than it is now.
Perhaps because the assets of digital currency are stronger than the currency, the IMF of the World Monetary Fund in the 2018Q2 Global Financial Stability Report says that the cryptocurrency digital currency is the encrypted asset "CryptoAsset", perhaps this is a very Obvious hints.
Since many people in academia believe that Bitcoin is an investment asset or even a speculative product, another question that comes with it is: Is bitcoin and other alternative currencies such as Altcoin a special asset – securities?
This issue is critical to the industry as regulators need to know whether to regulate digital currencies with securities laws and regulations, and exchanges and companies that issue currencies are eager to know the answer before deciding whether to comply with securities laws. If so, then exchanges and digital currency issuers will be forced to change the current state of the company's operations. Because in the current business model, digital currency is not regulated by national securities laws. This issue has become a topic that has been debated for a long time in the industry.
Recently, especially since 2018, the attitude of the US SEC has become increasingly clear. SEC Chairman Jayton said on February 6, 2018: "All digital currency initial offerings look like securities." SEC is trying to incorporate digital currency into existing The securities regulations, while the US Congress did not make a clear statement at the two hearings in February and July 2018, it is obvious that Congress hopes that the SEC can become the main institution for regulating digital currency, which also indicates indirectly Congress recognizes that the SEC regulates digital currency as a security.
Is the digital currency a security? SEC executive William Hinman expressed his opinion at a meeting in June 2018: "As long as these digital currencies represent the holder's specific rights to the company and can bring financial returns, such digital currency is a security, whether it is ICO or a certificate. Token is still any other name." That is to say, the name is only superficial, and the SEC is concerned with what the digital currency actually represents and its actual operating mechanism. William also said that this rule of thumb also has a special case, that is, digital currency does not belong to securities: for example, digital currency investment is not a centralized institution, or the issuance of these digital currencies is only to pay for goods or services within the system. The possibility of the digital currency becoming a security can be ruled out.
In the United States, judging whether it is a securities or not, through the securities law, the judge will refer to the "Howey Test" rule (SEC v. WJ Howey Co., 328 US 293 (1946).). The Howey test is mainly to see if there is a return on the expected benefits of investing in a normal company. According to such standards, the vast majority of ICOs are all securities, except Bitcoin and Ethereum.
Of course, we must emphasize that it is necessary to judge whether it is a security, not to look at the digital currency itself, that is, ICO or other TOKEN itself is not the key to judging whether or not the securities are concerned. The key point is to see how the digital currency is sold, and whether the buyer expects to operate through a company. To determine whether the digital currency is a security . For example, Bitcoin has been identified as a commodity by the CFTC, and the SEC also believes that it is not a security. Because Bitcoin does not operate as a centralized company, the owner cannot profit by raising the value of Bitcoin by expecting the profit of any organization. However, if Bitcoin is packaged as an ETF and sold to the public, it is a security. Whether the Bitcoin ETF can be approved indicates whether the digital currency represented by Bitcoin can be accepted by the general investors through the mainstream exchanges and enters the public investment field. Its historical significance is no less than the CFTC approval of Bitcoin futures. . Unfortunately, the SEC has repeatedly rejected multiple Bitcoin ETF applications in three consecutive years.
Of course, the idea of whether a digital currency is a security is not static. Ethereum initially adopted the method of public distribution, which was considered by the SEC to be a security. However, with the expansion of Ethereum's use and decentralized operation, SEC Chairman Jay Clayton confirmed in March 2019 that Ethereum is not a security. .
Whether digital currency is a security, but there is not much debate in the academic world, because the definition of laws and regulations is relatively clear. It can be said that most digital currencies (except Bitcoin and Ethereum) are securities.
4. Synthetic new assets: equity, gold and currency fusion
There are different opinions on the issue of the classification of digital currencies. In 1997, Robert J proposed the concept of Super Class, which is based on the characteristics of traditional asset classes. Based on this classification, it was classified as Captial Assets (including equity, bonds, real estate) and consumer goods. / Variable assets (including commodities and certain precious metals), as well as value storage (such as certain precious metals, currencies, and art). According to the classification of this super category, digital currency has attributes of three categories at the same time, and dividing the digital currency into any one category is incomplete and one-sided.
The classification of digital currency can be verified in a simple and effective way: by looking at the attributes of its users and the purpose of holding them . Given the decentralization and anonymity of Bitcoin, and the fact that the current exchange data is opaque and not public, it is challenging to identify specific user attributes and holding purposes. However, we can still see the change in identity from the history of Bitcoin.
Bitcoin was first traded from the birth of 2009 to May 22, 2010 and the real world: a programmer, Laszlo Hanyecz, spent 10,000 bitcoins and bought two pizzas. Prior to this, Bitcoin was only circulated in a small circle. Bitcoin mining miners were the majority of Bitcoin users at the time. They held Bitcoin as a by-product of their hobbies. The coin is more like a toy .
After 2010, Bitcoin began to trade with the real world. As the transaction took place and the exchange appeared, its price gradually increased. In 2011, it broke through 1 US dollar and 10 US dollars. At this time, Bitcoin attracted some geeks who were paying attention to digital currency early. They own Bitcoin, and more because they are interested in collecting. No one can expect Bitcoin to have today's achievements. During this time, Bitcoin also attracted the attention of many criminals. They found that Bitcoin can be the best payment tool for money laundering, illegal trading and tax evasion. The famous idea website silkroad users are typical representatives in these criminals. In the eyes, Bitcoin is the universal currency in the illegal world .
In just two years, Bitcoin has risen from $10 to $100, and after four years, Bitcoin has risen from $100 to $1,000, and in one year it has gone from $1,000 to $10,000, even to a maximum of $18,000. Left and right, then fell back to $3,000 within one year. Such huge price fluctuations have attracted many venturers who are adventurous. Bitcoin is a speculative product that quickly makes a fortune in their eyes.
The public really understands and participates in the investment of Bitcoin. It will not start until 2017. Bitcoin has a dazzling trend in 2017. The media’s substantial and continuous reports have made the investment public care for Bitcoin for the first time. It is considered an investment asset . For a time, many users flocked to the exchange to open an account, the purpose is to buy digital currency and hold, waiting for future appreciation. Institutional customers also joined the team. Of course, institutional customers buying Bitcoin have another purpose. They can use Bitcoin as an investment payment method to invest in blockchain projects, all of which require investment in digital currency. At this point, Bitcoin takes on the value scale and payment functions.
From the development history of Bitcoin, the attributes and purposes of users holding Bitcoin are constantly changing, and the identity of Bitcoin has also changed: from the toys of geeks, to the currency of criminals, to the speculation of speculators, to The assets of investors.
In short, the classification and attributes of digital currency represented by Bitcoin have been controversial. The digital currency itself has also been changing rapidly and dynamically. In the face of such a new species, we should only be able to maintain an open, unreliable attitude.
After the classification is finished, please pay attention to the next market article: there will be no leek in the currency circle .
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