Digital currencies and the concept of money as a social agreement

Abstract

The first appearance of digital ‘currency’ tokens following the implementation of Bitcoin was a catalyst for discussion about the nature of money and the future development of both fiat monies and central bank money. Indeed, the discussion today remains dominated by arguments concerning the definition of money and the role of central banks. However, ‘money’ must be understood as a social agreement between economic agents who confer legitimacy and value upon it by agreeing to accept it, both now and in the future. This paper presents a framework to understand money as a social agreement in the age of digitisation using four different mechanisms: game theory with tokens, market-driven development of account-based money, liabilities (of banks to their clients and central banks to commercial banks), and a trust-based mechanism for digital coins provided by a central institution. Any development of money in the digital age must consider its users’ perception of stability, security, convenience, freedom of choice and trust in its ‘reusability’. Complementing the current discussion within central banks, this paper considers how social dynamics in the 21st century might challenge the traditional definition and acceptance of money.