One of the troubles with understanding the cryptocurrency boom is that the existing definitions aren’t consistent. We call all of these things “currencies”, but that implies that they are all money which is incorrect. For instance, Filecoin is basically a decentralized version of Dropbox. It isn’t a currency at all. It has an exchange value, but it isn’t a “currency” in the traditional sense of the word. This space is so new that the terminology still isn’t very clear. I’ll try to make this short and sweet so let’s see if we can add some clarity here.
I really like where Adam Ludwin, founder of Chain, started with this:
“Here’s my definition: cryptocurrencies are a new asset class that enable decentralized applications.”
That’s a really good start. But I think we need to go further. So, to reiterate the basics – crypto assets are just decentralized networks. Bitcoin is a decentralized payment processing network. Filecoin is a decentralized file sharing network. They’re issued by no particular entity and they are self regulating and self managing. No one can tell you that you can’t own or buy/sell things with Bitcoin because the decentralized network can’t be controlled by an outside entity.
Now, this is where the accounting gets tricky. We know that crypto assets are non-financial assets. They have to be because a financial asset is an instrument whose value is derived from a contractual obligation with an issuer. That is, the financial asset has a corresponding liability. Stocks, bonds and cash all have issuing parties who are liable in some sense for that financial asset. A non-financial asset has no corresponding liability. Your house is an asset with value, but not necessarily a corresponding liability. A patent is an asset with value, but not necessarily a corresponding liability. Physical gold is an asset with value, but not necessarily a corresponding liability.These are examples of non-financial assets.
Okay, so what is a crypto asset? These are assets with no real issuer. There is no liability to correspond with the asset. So they are non-financial assets. But the kicker with crypto assets is that the owners of the “coins” are all making a bet on the underlying value of the decentralized application. That is, they have collective equity in the value of the coin because the coin really represents the value that can be derived from the underlying asset. So, when you buy some Bitcoin you are making a bet on the future value of the underlying payment network that Bitcoin gives you access to. You are an owner with equity in a decentralized non-financial asset. But since there is no corresponding liability the instrument is a non-financial asset. So here’s where I would add my own definition:
“Cryptocurrencies are Non-Financial Collective Equity”
Bitcoin is the easiest one to understand within the context of this definition. Bitcoin can be thought of as virtual gold. Its value is based in the value of its payment network and as this value changes its coin will reflect the rising/falling equity that one has utilizing the payment network. But because there is no central issuer or liability bearer the instrument itself is a non-financial asset that stands as pure net worth for the aggregate economy.
The concept of a “coin” is confusing though as it brings us back to the currency confusion. I’d argue that the “coins” are more like perpetual decentralized collective patents. That’s a mouthful, but they’re basically like patents that are publicly issued and then traded in a way that anyone can obtain the rights to their value and whatever they give you access to. And the asset has no corresponding liability. A patent, like a cryptocurrency is a weird blend of an asset with real properties (something tangible with a physical value) and financial properties (it’s conjured out of thin air and has no physical value). But in the end they’re non-financial collective equity because they’re non-financial assets that give the owners access to the collective equity of the asset.
Anyhow, I don’t know where I am going with this. I’m not sure if anyone really knows where any of this is going. But I’ve tried to maintain an open-mind about the crypto craze and I continue to think that this is an interesting and potentially revolutionary type of instrument. If you have some thoughts on this please feel free to share them in the forum.
NB – I was tempted to define them as “non-financial common equity”, but I think that overlaps too much with the existing concept of common equity. Using the term “collective” creates a clear distinction between common equity and whatever the hell these new things are.