The Ontology of Currency and the Fallacy of Decentralization: A Socratic Dialogue

Introduction

What follows is a distilled record of a conversation with a former mentee from my time at the Seoul office of a Singaporean asset management firm. He has since moved into real estate asset management at a reputable domestic brokerage. Our discussion made clear that he still tends to place too much emphasis on technological utility while too little on the foundations of monetary theory and the social contract. The discussion centered on whether cryptocurrency could realistically serve as a substitute for fiat currencies such as the US dollar or the Japanese yen.

I. Faster Infrastructure Is Not the Same as Currency

Mentee: Don’t you think cryptocurrencies like Bitcoin could eventually replace traditional fiat currencies? Amazon has already started accepting Ethereum in its payment system; if firms like that keep expanding its use, couldn’t crypto eventually displace the US dollar?

Me: Cryptocurrency may be treated as a distinct financial asset because of its relatively low correlation with traditional asset classes. But that does not mean it can replace a reserve currency. Why, exactly, would anyone need to use Bitcoin instead of the dollar?

Mentee: It’s more convenient; faster settlement, better security. Like you said before, blockchain systems can make wire transfers much faster.

Me: You’re confusing the infrastructure with the instrument. Wire transfers involve intermediaries like banks. In that context, blockchain can make it easier and faster to move existing currencies like the dollar. But the usefulness of that payment infrastructure depends on the prior existence of the currency being transferred. If there is no dollar to send, a faster dollar payment system means nothing.

Mentee: But sending Bitcoin directly is much simpler.

Me: What are you talking about? We already live in a world where you don’t need to move cash directly. When you swipe a card, you’re already making a digital payment. Visa works in real time. So does PayPal. For Bitcoin to function as a primary currency, it would first have to attain something like the global standing the dollar already enjoys. But for Bitcoin to reach that level, its price would have to rise on the back of the utility of the underlying blockchain technology. You’ve got the order backwards. People don’t go to the bathroom in order to feel full; they go because they’re already full. The usefulness of the technology―the second floor―cannot come before the monetary system it rests on―the first floor.

II. Money, Value, and Trust

Me: And even setting causality aside, there’s the question of stability. We’ve already seen flash crashes where certain coins lost more than 99.9 percent of their value, and even if the coin itself isn’t hacked, an exchange can be. There was even that case in Canada where the head of the exchange died and nobody could access the passwords, which meant hundreds of millions were effectively gone.

Mentee: Still, the limited supply and decentralized nature of cryptocurrencies give power back to the participants. They also preserve anonymity. Isn’t economic decentralization the whole point?

Me: Money isn’t a physical object; it’s a concept. At the most basic level, it has three core functions: a store of value, a medium of exchange, and a unit of account. All three depend on trust in the medium itself. A defaulted bond is still part of the money supply in a broad sense, but nobody uses it in exchange once the solvency of the issuer is gone.

Take online game currency. It can have real exchange value within that closed ecosystem because players know what it is worth and there is real demand for it there. But a luxury car dealer won’t take it, because outside that ecosystem there is no shared demand, no common pricing framework, and no trust. In that sense, Bitcoin is no different. The coin itself does not have “value” in the strict sense; what the market is pricing is the perceived value of the blockchain technology behind it. Money itself does not have intrinsic value; it is the medium of exchange with the function of storing value. One eats the honey, not the jar. You’d better not confound the value in the blockchain technology with the price attached to its byproduct.

Mentee: I see.

Me: And relative purchasing power―as expressed through exchange rates―ultimately rests on the economic strength and credibility of the sovereign behind the currency. Why is the US dollar so much stronger than the Zimbabwean dollar? Because trust in the United States is stronger than trust in Zimbabwe. Demand differs because the underlying economies differ, and supply differs because states manage their currencies through fiscal and monetary policy. That gap in credibility shows up as a risk premium. Brazil cannot borrow on the same terms as the United States for the same reason, and a CCC-graded bond cannot yield the same as an AAA-graded bonds; higher risk means a higher premium.

III. Redenomination, Enforcement, and the State

Me: In the end, the price of a currency is still a matter of supply and demand, shaped by the strength of the issuing economy and by the fiscal and monetary policy of the issuing state. A decentralized currency has no issuing authority, thereby creating three fundamental problems:

• ⑴ It cannot use fiscal or monetary policy.
• ⑵ It has no clear legal mechanism for dealing with fraud or monetary disputes.
• ⑶ It has no guarantor of purchasing power.

Mentee: But if Bitcoin replaces the dollar, can inflation not just be handled by subdividing the unit more finely?

Me: That’s exactly the problem with your assumption. You keep starting from a conclusion that cannot be reached in the first place. If there is no central authority managing the money supply, how do you control inflation, especially when price swings are driven entirely by demand while the supply is fixed in ways that Bitcoin supporters themselves celebrate, like halving? And once the unit gets too unwieldy, you run into redenomination. Redenomination requires a sovereign authority that can legally declare the ratio between the old unit and the new one, coercing everyone to follow it.

Mentee: Couldn’t the leading exchanges just agree to a new unit of account?

Me: And what would enforce that agreement? Law is, at bottom, a body of social contracts backed by coercive force. It works only because individuals have accepted restrictions on their own freedom in exchange for broader social utility. But exchanges are just platforms; they don’t have sovereign authority. If the number-two exchange disagrees with the number-one exchange’s redenomination claim, saying, “No, 100 Bitcoins is still 100 Bitcoins,” what happens then?

Mentee: But if redenomination is more convenient, why would they refuse?

Me: That’s not the point. The issue is not whether exchanges have a reason to comply with that decision, but whether anyone has the power to coerce them. If nobody does, then there is no binding redenomination. And if some exchange somehow does come to wield that kind of binding power over the unit of account, then, congratulations! You’ve simply reinvented another central bank under a different name! That is not ‘decentralization,’ one of the concepts crypto supporters praise.

IV. The Limits of Tech Determinism

Me: This is just one example, but the broader point is simple. If Bitcoin or Ethereum really takes over the role of existing currencies, they can’t escape the basic logic of monetary economics. They would just be more efficient currencies, not some radically new mechanism that abolishes the old monetary order altogether. If they function as money―as their advocates keep claiming―then questions of store of value, relative purchasing power, inflation, exchange, and confidence all come back immediately. Those are not optional; they are the core of monetary theory.

That means the argument is internally contradictory. The same people who insist that cryptocurrency is fundamentally different from traditional money still fall back on the logic of traditional monetary theory when they try to explain why it would be useful. They are using the old framework to argue that the new thing makes the old framework obsolete. That is not a revolution in monetary theory; it is a contradiction.

Mentee: So you think they say these things because they don’t really know what they’re talking about?

Me: In many cases, yes. Programmers are not economists. I’ve said this before: I do think blockchain technology has value. I just don’t have enough computer science knowledge to accurately appraise its economic value or how to price the coins built on top of it. That’s why I’ve always treated it as speculation and stayed away. But the question of whether it can function as money―let alone replace a reserve currency―is a monetary question, and on that question economics has plenty to say.

To be blunt, a lot of these people appear to be fachidiots, specialists who mistake expertise in one area for universal competence. Bankers think capital rules the world; politicians think political power trumps everything; engineers think technology alone changes history. None of those views is entirely wrong, but none of them is sufficient on its own. Political economy cannot be separated from history and philosophy, and science and technology do not exist outside them either. To me, the claim that a cryptographic protocol can simply sweep aside centuries of monetary theory sounds far too glib.

V. Geopolitical Reality and Hegemony

Me: And then there’s the most practical problem of all: power. Why would the United States voluntarily give up the dollar’s reserve-currency hegemony? If Bitcoin ever really looked like it might challenge the dollar, why would Washington tolerate that instead of crushing it?

Mentee: But if Bitcoin helps make dollar settlement more efficient, then from the US point of view it also improves dollar liquidity and transaction efficiency. Why ban it?

Me: That only makes sense if Bitcoin is complementing the dollar. But you keep talking about a world in which Bitcoin has replaced the dollar. Do you really think the United States would just sit back and watch that happen? Look at the Plaza Accord. The United States just crushed the economic momentum of what was then the world’s second-largest economy by sharply shifting the yen’s valuation and pushing Japan into decades of stagnation.

In the past decade or two, China has spent astronomical amount of money to internationalize the renminbi, and even after it was officially recognized as one of the SDRs, it still cannot compete with the dollar, the yen, or even the euro in actual global standing. Russia sits on oil and natural gas, yet the ruble can still be wrecked almost overnight if the United States and Western Europe tighten sanctions. If states with that kind of real-world power cannot dislodge the dollar, how exactly is an anonymous digital token supposed to do it?

If a cryptocurrency ever posed a genuine threat to the existing monetary order, global powers―the superpowers in the real world―would hit back with full force. I’m only half joking when I say that if Bitcoin really threatened the dollar, the US’ CIA and China’s MSS would probably run a joint operation and dump the troublemaker somewhere in the Pacific Ocean. The claim that Bitcoin will replace the dollar is either a fantasy pushed by people who do not understand the basics of money, or a price-pumping scheme pushed by people already holding Bitcoin. For Bitcoin’s price to rise in any fundamental way, the major powers―the United States, China, Japan, Russia―would have to approve and institutionalize crypto settlement. But the moment that happens, the whole dream of decentralization is dead.

In short, let’s make it simple: if your employer offered to pay you either in 100-dollar bills or in Bitcoin worth the same amount at the current spot rate, which one would you choose? I’m definitely going for the dollars.

Mentee: What a clear explanation.