By David Fox, Professor of Common Law, University of Edinburgh
In 2018 the Governor of the Bank of England, Mark Carney, pronounced that cryptocurrencies were “failing” as money. Their extreme volatility against state-issued fiat currencies, like sterling or the US dollar, proved they were inefficient stores of monetary value. Storing value through time is one of the main functions of money.
Mr Carney’s comments raise important questions for lawyers. Does the law have a distinctive conception of monetary value, and is there any difference in how it might apply to a privately-created cryptocurrency compared with a state-issued fiat currency?
One reason for thinking that it might is the statutory rules of legal tender. The Coinage Act 1971 provides, for example, that 20p or 50p coins are legal tender for payment of any amount not exceeding £10. Legal tender rules define the kind of money that a debtor may offer if he or she is to make a valid tender towards discharging a debt. They also define the value of that money for the purposes of the tender. The legal value of the coins is fixed at 20p or 50p. The law excludes all other competing values from the transaction. A creditor is not free to value a 50p coin at 20p, and then demand more coins to make up the difference.
Another reason for thinking that the law might have its own conception of monetary value is “chartalist” theory. It was most famously expounded by Georg Knapp in his State Theory of Money (1905, 1924). Of all monetary theories, Knapp’s has exerted the greatest influence on private law. Knapp argued that money was essentially a token. The state, through its laws, defined the things that served as money and the value at which they passed in payments. The law could even confer monetary value on token objects that were intrinsically worthless or practically useless.
Properly understood, neither chartalism nor legal tender amount to a distinctive legal conception of monetary value. They are not a reason why private law should treat the value of cryptocurrencies differently from stated-issued fiat currencies or from the forms of bank money based on them.
The law shares the same theory of monetary value developed by the classical economists from Adam Smith onwards. The exchange value of a thing is a relational concept. Value expresses the relationship between the quantity of one thing, which might be money, and the quantity of another thing, which might be the commodities bought with the things we use as money. Money is more or less valuable depending on the quantity of other things it can command in exchange for itself. Its value varies depending on the subjective assessments of the market agents who use it.
The law would only fix the value of money if it fixed the price of every commodity that money could buy. Outside periods of war or extreme economic instability, experience shows that it does not.
Legal tender rules are concerned with the discharge of debts, not the value of money generally. All they do is fix the exchange relationship between money and debts or between money and a price denominated in monetary units. They do not determine the value of a debt or the price of a commodity.
For lawyers surveying the private development of cryptocurrencies, whether the law has a distinctive conception of monetary value is the wrong question to ask. The real question should be how legal structures might support the exchange value of cryptocurrencies so that they can better serve as stable stores of value against commodities or against fiat currencies in the real world.
Based on a presentation delivered at the Trusts and Wealth Management Conference, Singapore, August 2019.
For further material from Professor Fox on cryptocurrencies and the law, see: