Hmmm, what is the bottom line when it comes to the concept of money?
I do not give a whole lot of thought to the logistics of money. I know I have to have it to function in society and that not having enough of it to meet my financial liabilities puts me in a dicey situation. That is pretty much the extent of my understanding. Money is money. I like to think it is that simple. But that is decidely not true. There are different kinds of currency.
Fiat Money is a form of currency that is declared legal tender. It includes money in circulation such as paper money or coins. Fiat money is backed by a country’s government. Okay, that seems straightforward enough.
But there is also Representative Money. This is government produced money backed by physical commodities such as precious metals. Credit cards are the obvious example – forms of payment used in place of traditional money with the intent to pay at a later date. Okay, that is a little less straightforward but I get it more or less.
And now, of course, there is Cryptocurrency. This is virtual money, stored in a digital wallet, that does not require a financial institution to verify transactions. No government involvement and no government regulations that apply. The first cryptocurrency, and most commonly traded one, is Bitcoin although various other cryptocurrencies now exist.
So money is money except that it comes in different forms – some I can put in my pocket, some I can spend without actually having it and some I can have in my digital pocket. But I have to purchase the digital kind using Fiat or Representative money. So I am using money to buy money? I am starting to get a headache puzzling through this concept.
But wait. This might help. I found an article that says Bitcoin is like a casino chip – an exchange medium from one entity to another. That sort of makes sense. But I can only use it in the Bitcoin casino? Or can I use it in other places? If not, then it sort of is money but sort of is not. Ugh, my headache is getting worse.
Here is an important fact. Banks insure money kept in bank accounts against loss. The Bank of Canada, our nation’s central bank, regulates the industry. Cryptocurrency has no recourse in the event of a loss. So Fiat money is more secure.
But wait! I found another article that says banks are only required to keep a certain percentage of deposits on reserve and can invest the rest. If all depositors tried to withdraw their funds at the same time, the bank would fail. I do not like the sound of that.
Oh no, I just found another article that says reserve requirements in Canada were removed as of March 2020 for all depository institutions effectively reducing the reserve requirement to zero. Yikes, is that true? I wish I had not learned that.
So what is the bottom line when it comes to money? I guess the best I can conclude is that money is a metaphor for a commodity which we all need that comes in different forms, may increase or decrease in value depending on the circumstances and may or may not be secure.
My headache is now full-blown. Can I buy Tylenol with cryptocurrency?
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Tags: Bank of Canada · cryptocurrency · fiat money · metaphor · Michael Robert Dyet · representative moneyNo Comments