0.01  The reason that fitting virtual currency into modern monetary law is so difficult is that the high water mark of monetary legal theory more or less coincided with the high water mark of the gold standard. Thus, the old masters were broadly in no doubt as to what money was. Any of them, if asked, could have picked up a gold coin of some denomination or other and demonstrated that this, ultimately, was what they meant when they spoke of money. It bore the stamp of a sovereign issuing authority, was of a weight and fineness broadly consistent with its monetary value; it was clearly a store of value and a medium of exchange, and its denomination constituted the unit of account in the economy concerned. They realised that it was not the only form of currency, but they would have been in no doubt that it was the basis of the idea of money.

0.02  This coincidence led to the belief that there was a clear distinction between ‘money’ and ‘not-money’, and the only challenge with respect to any particular form of circulating medium was to decide which side of the line it fell. This was not always entirely straightforward—there was some debate in the early twentieth century as to whether cheques might properly be regarded as a species of money—but the existence of the bright line was not in doubt.

0.03  The idea of the bright line was compounded by the economic theory of the “quantity theory of money”¹ (QMT). This is based on the simple but deeply misleading idea that there is a specific quantity of money in circulation in the economy.

0.04  The origins of the QMT lie in what Schumpeter called the “Ricardian vice” of the economics profession² – that is, the tendency to view the world through a prism of oversimplified approximations. In this case, the approximation was the idea that because in any given period there are a measurable number of transactions, each at a measurable price,³ it must be possible to calculate the total amount of money in use at any given time. This approach appears rational in the abstract, but is based on a fundamental misunderstanding of the nature of both money and commerce. In reality, a sale transaction is an exchange of goods for a credit claim. Money is one (p. 2) of the mechanisms by which the resulting credit claim may be discharged, but it is trivially true that not all credit claims are discharged by money payment – indeed the vast majority of them are satisfied by the creation of other credit claims on other economic actors. However, for our purposes the problem with the QMT approach was that it induced those thinking about the economy to assume without examination the existence of a lump of stuff called ‘money’ whose quantity could be established by sufficient statistical analysis. Once this idea had become established, it created scope for all sorts of concerns about where this stuff came from, who could create it, and on what terms it should be created, and the lineaments of these concerns are visible today in some of the thinking on the dangers posed by virtual currency to central bank’s control of the economy.

0.05  The reason that this idea is a problem is that it leads to an approach to money based on the idea of identifying ‘what it is’—does any particular thing form part of the “lump of stuff”. In reality, however, money is characterized by what it does, not what it is—that which is universally accepted in payment is money, regardless of the views of the relevant authorities.

0.06  The ‘lump of stuff’ idea, even if it performs some useful function in the field of economics, is useless when it comes to examining the real world. The more any definition of money is examined, the less clear the precise location of the border between money and not-money seems to be. In particular, the conventional idea that money can be defined as a unit of account, a mechanism of exchange, and a store of value is an excellent description of a gold coin, but disintegrates on first contact with monetary reality. There are historical precedents for monetary items which are units of account but neither stores of value nor media of exchange (e.g. the ghost units which are frequently encountered in monetary history, which have a theoretical but not a real existence⁴), items which are media of exchange but not stores of value (currency in hyperinflating economies), and stores of value but neither units of account not media of exchange (such as the stone money of Yap⁵). Equally there are examples of things which can be both money and not—money at the same time (e.g. cigarettes in prison camps,⁶ slave girls in second-century Ireland⁷). Society can make anything money, and money is fundamentally different from other forms of property in that its essence is its social function. The usefulness of any thing treated as ‘money’ derives precisely and exactly from the extent to which the recipient expects other members of society to accept it in payment. Whereas most social behaviour can be regarded as arrangements between people in respect of things, money is an arrangement between people as to their future behaviour. More importantly, these arrangements are ‘social’ in the sense that they are absolutely not private contracts. If A accepts X in payment from B, in the expectation that he will be able to give it to C in payment in due course, he almost certainly has not made an explicit (p. 3) agreement with C in advance to accept X in payment—not least because at the time when he accepts X in payment, he probably has no clearly formed intentions to give it to C as opposed to D, E, F, or whomsoever else he wishes. The basis of the ‘moneyness’ of X is that all of the members of the group have a firm expectation that all of the other members will accept it as money. Thus, in any society, the question of whether a particular thing is ‘money’ or not can only be answered by examining social behaviour and social norms.

0.07  It cannot be too strongly emphasised that this question of ‘moneyness’ is entirely separate from the issue of legal tender. The laws of legal tender take effect when a person owes a debt, and determine what instruments the creditor is obliged to accept in payment of that debt. These laws have no relevance in the situation where a seller, debating whether or not to sell goods in exchange for a particular instrument, is considering how useful that instrument will be in buying things from others. If the seller does not wish to accept the instrument in payment he can secure that outcome simply by refusing to enter into the transaction in the first place or by demanding some other thing as payment, and the laws of legal tender are powerless to affect his decision. It is not the law, or the legal status of the thing proffered in payment, which determines his decision. It is sometimes said that money is a legal institution.⁸ It is not. It is a social institution. Law is a phenomenon of society, not a determinant of it.

0.08  If we reject law as a source of social practice, why therefore, if money is a social phenomenon, is the law of money of any interest at all? A simplified answer to this question is that when sociology and economics had their celebrated parting of the ways in the Methodenstreit controversy at the end of the nineteenth century,⁹ one of the issues which subsequently divided the controversialists was Menger’s theory of money (an economic phenomenon) as a socially constructed device. Both sides of the debate would have asserted that money was a legal phenomenon, but both would have argued (for different reasons) that the law surrounding the topic was nothing more than a manifestation of the ineluctable logic of their positions. This is why, if we want to examine social attitudes to particular things at particular times, the law is a good place to look. Court decisions are generally little more than expressions of consensus social attitudes to particular issues, and because of their nature are likely to be more precisely recorded than other manifestations of social attitudes. In many respects, laws and court decisions may be regarded as similar to the palaeontological record—patchy and incomplete, but providing high levels of information of specific cases. Thus, by examining the legal treatment of particular things at particular times we can understand where the balance of forces between social and economic pressures lie, and by doing so see more clearly the social reality.

0.09  The argument of this book can be put very simply. There is no rule of law whose effect is that virtual currency is money. Equally, there is no rule of law whose effect (p. 4) is that virtual currency is not money. There is a legal doctrine of money, whose effect is that if a thing is characterised as money, certain consequences follow as to the conduct of claims in respect of it. However, that doctrine determines only the consequences of being money, not the question of what is money. Thus, the question which we have to address is how we answer the question of whether the law should apply these doctrines to virtual currency or not, and the way that we address this question must involve abandoning a priori legal analysis. There is a striking comparison here with the development of negotiable instruments law under Lord Mansfield in the eighteenth century. There was no body of established English law which could have been used to create the doctrine of negotiability. However, Mansfield was quite clear that in deciding questions arising between merchants, ‘a great deal must be referred to the usage of merchants’.¹⁰ Thus, when questions arose as to whether particular and how particular instruments might be transferred in the market, the courts in effect looked to market usage to answer these questions—thus, in Goodwin v Robarts, when the question arose as to whether a scrip certificate was negotiable, the court held that ‘the usage of the money market has solved the question whether the certificate should be considered security’.¹¹

0.10  The development of new monetary instruments in the United Kingdom, and their treatment within the legal system, should be managed no less sensitively in the twenty-first century than it was in the eighteenth century. Thus, it is necessary—uncomfortable though it may be—to abandon an approach based on existing rules and to look to social practice in developing private law. This means that the court must ask ‘how do people generally treat these instruments?’. Where there is a discontinuity between legal structure and commercial usage (as there is today as regards commercial bank money) the law must adapt its analysis to accommodate practice. It seems clear that the question of what the law should regard as money can only be answered by looking at what society itself regards as money.

0.11  In order to answer the question of how society determines money-ness, it is necessary to look in a number of different directions. First, we need to accept that money is a social institution with an exceptionally long history, and that how we think about money today is heavily influenced by how we thought of money in the past. We therefore need to consider how money developed. Next, we need to consider where money comes from—to what extent is the answer to the question ‘what is money?’ answerable by reference to who makes it—in particular, whether there is a rule to the effect that only units created by a sovereign issuer can be money. Next, we need to consider how the modern economy works, and in particular how payments are actually made. This means we need to look at the banking system of today, and ask how payment made using private bank money compares with payment made using other types of currency—in particular virtual currency. Next, we need to venture into the realms of hypothesis. We need to look at what the actual legal consequences are of treating virtual currency units as money or not. This involves (p. 5) hypothesising a series of potential disputes concerning virtual currency, and asking how they would be decided differently on the alternative hypotheses that it is or that it is not money. Finally, we need to think about how the ordinary rules of the road of the financial system—in particular the doctrines of financial regulation—should apply to virtual currencies.

0.12  The scheme of this book is therefore roughly as follows. In Chapter 1, I seek to establish some of the basic attributes of money and consider how money comes to have those attributes. In Chapter 2, I examine the extent to which money acquires its value because of its association with the state as its creator. In Chapter 3, I consider the job which money does in society and, in particular, the relationship between money and credit. In Chapter 4, I consider in more detail the question of how it is that money comes to be considered to be valuable. In Chapter 5, I look at the history and development of private payment instruments through history and consider whether and how much they provide precedents for virtual currency. In Chapter 6, I consider how payment is actually accomplished in the modern economy and, in particular, how deposits with commercial banks form the basis of the modern payment system. In Chapter 7, I look at the attributes which the law accords to money per se and identify the unique characteristics which money has but other types of property do not. In Chapter 8, I consider virtual currency as it currently exists and provide a taxonomy of both private and public virtual currencies. In Chapter 9, I review the various legal issues which transactions in virtual currency units give rise to. Finally, in Chapter 10, I consider how virtual currency interacts with the existing financial regulatory system.(p. 6)