Smartphones, bitcoin and the unit of account

I listened to BoE Deputy Governor Ben Broadbent’s speech on digital currencies today.  It’s a tour de force.

One line of thought that one might be tempted into is the following.  Because Bitcoin is not widely used as a unit of account, it won’t grow as a medium of exchange.  And, completing the self-reinforcing feedback loop that favours the status quo, if it does not grow as a medium of exchange, there is no chance it will become a unit of account.

However, the ubiquity of smartphones, and information about exchange rates between digital currency, goods and other currencies, might obviate the need for a conventional, common unit of account.

Smartphones plus free, high frequency, exchange rate data, enable me and those I trade with to check what I could get for my Bitcoin [or similar].

There have been many instances in the past when there were multiple units in which prices were posted.  In gold, silver, and private banknotes.  Coping with that then was no doubt a headache.  But in the near future, perhaps less so.  The smartphone does the mental arithmetic, and avoids the need to remember anything.

Following this logic, smartphone technology plus information may make the fact that Bitcoin is not a unit of account less of an issue in its growth as a medium of exchange.

We have observed that central banks have lost control over what is used as money in some economies.  But typically only when the currency was spectacularly abused for seigniorage purposes, as in Zimbabwe.  However smartphone and related technology might make the threshold for misbehaviour at which these dynamics begin lower.

All this puts to one side the current problems actual digital curency communities like Bitcoin are experiencing, of course.  Which seem to be many and serious right now.

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4 Responses to Smartphones, bitcoin and the unit of account

  1. toby_n says:

    I’m not sure I follow Tony.

    I can see (putting aside the technicalities associated with Bitcoin) that Bitcoin could grow as a medium of exchange as you suggest. But if the growth of Bitcoin is for transactional purposes only, how does this undermine the central bank’s status quo? (e.g., I have £5 ‘in’ my commercial bank account, want to buy something for £5, and choose to settle a digital transaction with Bitcoin. As I hit ‘buy’ my smartphone buys £5 worth of Bitcoin, ‘sends’ them to the vendor, who then sells them for £5 ‘in’ her commercial bank account

  2. toby_n says:

    Oops – hit send by mistake.

    Anyway, in this instantaneous settlement situation via Bitcoin world (that does not currently yet exist) I don’t understand how it is that the central bank loses control. Unless balances are accumulated in Bitcoin rather than commercial banks. (And for this we get into unit of account as well as store of value territory.)

    There are, incidentally, much larger medium-of-exchange currencies that lack unit of account status that are typically overlooked by folks interested in money. One large grouping can be found in the form of senior executive deferred compensation (typically the traded or accountant-estimated phantom stock of the employee’s enterprise, but in the case of some financial institutions subordinated bonds). Unlike Bitcoin, these make a virtue of the store-of-value problems associated with a (long) delay in the completion of the medium-of-exchange transaction. But this is your (excellent) blog, not mine so I’ll shut up there.

    • Tony Yates says:

      Interesting! Does anyone except an IOU on someone else’s deferred comp?
      On your fundamental question. If things progress no further than you suggest, there’s no loss of control, provided that the unit of account does not shift. Woodford opines at great length on this, in his book ‘interest and prices’, how the non existence of money in his model leaves control with the cb provided the unit of account does not change. However, it’s perfectly conceivable that, just as we stopped looking to convert into gold ultimately, we might stop looking to convert out of Bitcoin. Isn’t it?

  3. toby_n says:

    When I started in the City in 1997 I was told how until just a few years before folks would, with relative regularity on the trading side, establish a secondary market for, and then sell, their variable comp before it was given (as a way to hedge tail risk I guess). But I think this was typically the cash element rather than deferred element.

    But your point about anyone accepting someone else’s deferred compensation is well made: while deferred payments may consist of instruments that are transacted in larger volume and higher value on a daily basis (company stock or bonds) than Bitcoin sees on an annual basis, and while these may represent a (major) component of an individual’s total compensation (eg, the fruits for which labour is exchanged in lieu of money), the bilateral rather than prospectively multilateral nature of the exchange is definitely a *thing*. When deferred comp vests, this bilateral medium of exchange stuff transforms into multilateral medium of exchange (commodity) stuff. And perhaps your point could be extended in the world of smartphones: any/ all electronic commodity-like stuff (of which there are tens of trillions) has the potential to complicate.

    And your point about prospectively seeking to either carry higher Bitcoin balances is of course true – and is I think what some folks use to estimate ‘fair value’ for Bitcoin.

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