Listen to the Audio Mises Wire version of this article.
As the decentralized revolution gains momentum and cryptocurrency adoption reaches new heights, concerns pertaining to the quality of money are too often ignored. According to a Crypto.com report, the number of bitcoin owners surpassed 71 million in January 2021, but how many of them are aware that bitcoin is not anonymous but rather pseudonymous, or recognize the pitfalls of embracing a currency lacking fungibility? While bitcoin’s provable scarcity signifies a return to the tenets of sound money, its creator’s peer-to-peer vision ultimately falls short without fungibility, because counterparty risk is created. Bitcoin’s fungibility issues come from the history that is attached to the coins. The insertion of trust into transactions by scrutinizing coin history has the potential to splinter the bitcoin network, in the process increasing fees as a result of regulatory compliance costs. More alarmingly, a transparent blockchain inevitably transforms into a surveillance chain on which reputation travels. In order to prevent censorship and protect our natural rights to privacy, a fungible currency is not a luxury, but a requirement.
Money facilitates business on the market by serving as a medium of exchange, store of value, and a unit of account. The Federal Reserve Bank of St. Louis lists six characteristics of money: durability, portability, divisibility, limited supply, uniformity, and acceptability. The latter two of these attributes are directly impacted by a currency’s fungibility.
Fungible assets at their core are interchangeable. On the nonfungible end of the spectrum are fundamentally unique assets such as real estate and artwork. Conversely, precious metals represent physical fungible assets. Gold, for example, can be melted down and swapped without complication. As noted by Menger (1892), the adoption of gold and silver as forms of money throughout history can be partially attributed to the homogeneity of these materials. In order to satisfy Berg’s (2020) fungibility criteria, “each unit of a currency, or any commodity used in a money function, should be indistinguishable from others of the same denomination,” and “an individual unit of said currency should not be reidentifiable through time and change.”
The most widely adopted digital decentralized assets designed to serve as money are bitcoin (BTC), litecoin (LTC), and bitcoin cash (BCH). All of these cryptocurrencies, however, are nonfungible in nature. Each satoshi, the smallest BTC unit, possesses an accessible history on the network’s transparent ledger. Consequently, 1 BTC ≠ 1 BTC.
Imagine selling an automobile you posted on Craigslist to a stranger who, unbeknownst to you, earned their fortune peddling contraband on the dark web. Subsequently, you attempt to deposit the proceeds of the sale, but to your surprise, your financial institution has flagged the transaction and will not accept your “tainted” bitcoin.
According to Mises (1953), “the subjective use-value of money, which coincides with its subjective exchange value, is nothing but the anticipated use-value of the things that are to be bought with it.” Economic calculations become increasingly difficult when ambiguity pervades the medium of exchange. Fungible monies maintain their purchasing power regardless of past use, thus eliminating uncertainty…