Aristotle and Cryptocurrency

Cryptocurrency has hit the mainstream in our financial systems, for better or worse. Cryptocurrency markets are now valued in the trillions of US dollars, creating major fluctuations through the rest of the world economy. Are these assets a digitized form of currency? Or are they speculative commodities bringing chaos to existing economies? Or something else entirely? The truth is largely based on our perceptions, specifically our perceptions of cryptocurrency’s potential value as money.

Cryptocurrency and Fiat Currency
Cryptocurrencies are digital assets intended to be used as a medium for exchange, secured by an encrypted, decentralized technology called blockchain. Blockchain is a data structure that keeps a shared, privatized ledger for the entire pool of currency. Each asset has a unique identifier and a record of which users have held the currency. User data is often hidden using encrypted keys to protect privacy.

Each cryptocurrency uses a different means to control the creation of additional currency. Coins are “mined” by servers by completing a set number of meaningless transactions. Each newly created coin is added to the blockchain in a set way to prevent counterfeiting, and the shared ledger reflects this addition. Value in each currency, then, is created through a combination of artificial scarcity and market exchange rates.

By contrast, fiat currency is a physical asset intended to be used as a medium for exchange, issued and backed by governments, and managed through a variety of legal, financial, and accounting procedures. Bills, notes, and coins are issued with unique identifiers and anti-counterfeiting measures, and accounting is managed by each person or organization. Banks and other institutions can be used to store, manage, and transfer monetary assets using bank cards and online services.

Most currencies in circulation are now fiat currencies. Governments, or regulatory agencies, manage the amount of currency in circulation. Old currency is replaced over time. Additional currency can be printed and injected into the economy. So, value in physical currencies is also created through a combination of artificial scarcity and currency exchange rates.

So, what’s the difference? Obviously, the technical implementation of each system is very different, each with its pros and cons. Blockchain provides a robust accounting protocol but pays for it in intensive energy usage to mine new coins and maintain the ledger. Fiat currencies struggle with maintaining accurate accounting, and are subject to regulatory changes from governmental, financial, and corporate entities, but also backs the currency with its authority, providing insurance for bank deposits in some cases.

Each difference affects the way each person values each currency, and when those valuations are aggregated together in economic exchange, they affect the market value of each currency, which affects the buying power of each currency, and in turn should affect the value of every other currency in an integrated economy. So, to understand whether cryptocurrency, or any currency for that matter, has value, we must first consider the origins of money and its role within society.

Origins of Money
Wealth has always been a part of human civilization, a reflection of the social hierarchies within and between each community. Early tyrants and emperors controlled an entire region’s wealth, then set about managing it through ordering society, sometimes facilitating exchange with the use of money. A region’s currency was tied to its perceived power and wealth, much like fiat currency, and that perceived value was represented in each coin.

However, while ancient traders could make use of fluctuations in currency valuation by moving wealth and goods from port to port, the vast majority of individuals within each community were unable to leverage wealth in this same way. The value of money, in this case, was something imposed onto everyone else, not something determined primarily by market usage or social agreement.

It was only within some of the first democratic experiments in Ancient Greece that we begin to see a socialized concept of money, one as a medium of exchange between individuals, or at least the growing number of individuals beginning to have a say in government and commerce. Rather than having value imposed by the tyrant, the growing Athenian middle class (and others) had to agree to the use and purpose of money in managing society. In Nicomachean Ethics, Aristotle offers one potential origin for money.

“For it is not two doctors that associate for exchange, but a doctor and a farmer, or in general people who are different and unequal; but these must be equated. This is why all things that are exchanged must be somehow commensurable. It is for this end that money has been introduced, and it becomes in a sense an intermediate; for it measures all things, and therefore the excess and the defect — how many shoes are equal to a house or to a given amount of food. The number of shoes exchanged for a house must therefore correspond to the ratio of builder to shoemaker. For if this be not so, there will be no exchange and no intercourse. And this proportion will not be effected unless the goods are somehow equal.” (Aristotle, Nicomachean Ethics, 1788; Bekker 1133a16–1133a24)

Aristotle proposes that money came into being to equalize value between two individuals, so the value of labor and resources is equalized for the commodities and services we need. Commodities, like shoes or houses or food, are by nature not inherently equal in value, so we use money to measure the value. It’s not enough, however, for money to be able to value some things, which we could do by, say, equating a thousand pairs of shoes with a single house. What sets money apart is that is can be used to value all things.

“Now the same thing happens to money itself as to goods — it is not always worth the same; yet it tends to be steadier. This is why all goods must have a price set on them; for then there will always be exchange, and if so, association. Money, then, acting as a measure, makes goods commensurate and equates them; for neither would there have been association if there were not exchange, nor exchange if there were not equality, nor equality if there were not commensurability. Now in truth it is impossible that things differing so much should become commensurate, but with reference to demand they may become so sufficiently. There must, then, be a unit, and that fixed by agreement (for which reason it is called money); for it is this that makes all things commensurate, since all things are measured by money.” (Aristotle, Nicomachean Ethics, 1789; Bekker 1133b12–1133b22)

Essentially, Aristotle is saying that everything really can be valued in terms of money, or at least all things involved in commerce and trade. Money becomes the measure of value for all goods and services, so that trade can be exchanged between free individuals. One that is fixed by agreement, which is to say a social construct. Aristotle spends a considerable portion of Nicomachean Ethics exploring the ethical repercussions of this agreement, specifically fairness in economic exchanges and the proper use of wealth in society.

Aristotle also believes the value of money to be steadier than the value of commodities. Since money can measure all things, each commodity’s value scales in relation to both economic factors (supply, demand, markets) and non-economic factors (war, revolution, regulation). We’ve seen this fluctuation of commodities on the small scale, when the value of toilet paper and bottled water rose in the United States during the beginning of the COVID-19 Pandemic, and on the large scale, when the price of oil reached its lowest ever due to increased supply and distribution. Generally, the value of money fluctuates only when compared against the buying power of other currencies, an argument often made about the viability of leading cryptocurrencies. Cryptocurrency’s volatility, however, suggests it is more of a commodity than money.

Of course, this wasn’t the only origin of money proposed by Aristotle. In Politics, Aristotle offers another origin story for money, this time related to national exchange and trade, which also offers another key characteristic of money.

“When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use. For the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time, they put a stamp upon it, to save the troubles of weighing and to mark the value.” (Aristotle, Politics, 1995; Bekker 1257a31–1257a41)

This passage once again emphasizes the equalization of value money provides in exchange, but also emphasizes the benefit of its portability to streamline and optimize trade. It’s extremely difficult to transport vast amounts of resources, but much easier to transport rare elements or national coinage. Paper money is easier to carry around, bank cards easier still, and cryptocurrency arguably extends this convenience even further. Banks and lenders took this one step further to issue currency to individuals on credit, often charging interest on the loans, a practice Aristotle condemned when done in usurious amounts.

So, according to Aristotle, money is (a) a social construct, that allows us to (b) value all things; (c) equalize exchange among individuals and between groups; and (d) provide a convenient method for storing and transporting wealth. Aristotle further argues that the value of money tends to be steadier than the value of commodities. This conception of money, by and large, has carried forward into our modern, advanced, capitalist markets.

Social Constructs and Critical Mass
Fiat currency meets all four requirements for Aristotle’s conception of money. Fiat currency is a social construct, which values goods and services, is used for commerce and trade, and provides a convenient method for transporting wealth. But can the same be said for cryptocurrency? The answer is no, or perhaps more correctly, not yet.

All social constructs require a certain critical mass of acceptance in order to become part of our larger, more integrated social systems. Cryptocurrency is still gathering enough acceptance to fully integrate into our existing economies. It doesn’t negate the existence of cryptocurrency, but it has yet to achieve a broader acceptance among the population. Moves by corporations to accept cryptocurrency directly as payment and the growing number of financial corporations dedicated to cryptocurrency investment are all building towards reaching that critical mass.

Many individuals, investors, organizations, and governments are hesitant to invest into cryptocurrencies. These concerns include, but are not limited to, the power consumption requirements for currency mining and ledger maintenance, the lack of user transparency and potential for money laundering, the lack of government regulation and difficulties regulating a fixed system like blockchain, the lack of government or financial backing to protect against losses, and the wildly swinging fluctuations in valuation within cryptocurrency markets.

Without this critical mass, cryptocurrency may be a social construct, but it is not currently being used to value all things, our second requirement for money. The best cryptocurrency can do right now is value all things for those individuals willing to trade the cryptocurrency. There’s no question that we can value all things in cryptocurrency, but the vast majority of goods and services within society are valued in terms of fiat currency, and the vast majority of currency accepted for those goods and services is still fiat currency.

Since cryptocurrency is not yet being used to value all things, one can also argue that fiat currency, not cryptocurrency, is currently responsible for equalizing exchange between individuals and groups, our third requirement for money. In this sense, cryptocurrency is more akin to a commodity than a currency, because in order to perform the equalization, we must first value each cryptocurrency in terms of the more universally accepted fiat currency. Once so valued, an equivalent amount of cryptocurrency is exchanged in lieu of fiat currency. We can technically do this with any commodity, or using Aristotle’s example, we can trade shoes for houses, but only after we express that valuation in terms of the accepted fiat currency.

One of the major appeals for cryptocurrency, and one that might eventually push it into critical mass, is its convenience for storing, securing, and transporting wealth. Since this final characteristic of money is largely an engineering challenge, blockchain as an engineering solution works very well, even if the solution leaves out the half of the world’s population without access to the Internet. Its convenience places it on par with all the methods we’ve used to digitize fiat currency, especially for Internet transactions.

The Fate of Cryptocurrency
Governments are probably the biggest hurdle for reaching critical mass, influenced by the wealthy and constituents in varying proportion, and will ultimately determine the fate of cryptocurrency. It’s a difficult decision to make, since governments have routinely been left with the responsibility of repairing the economic damage caused by our existing financial systems. Economies are social systems to manage, not just engineering problems to solve. Sometimes economic solutions call for infusions of currency into circulation or for regulation and transparency, which are difficult prospects under many cryptocurrency implementations. Governments run the risk of being at the mercy of a system it cannot manage.

Aristotle offers one more passage, with an alternate theory about coined money, which might explain government’s hesitancy.

“Others maintain that coined money is a mere sham, a thing not natural, but conventional only, because, if the users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food.” (Aristotle, Politics, 1995; Bekker 1257b10–1257b14)

This passage cuts both ways in terms of the fate of cryptocurrency. Cryptocurrency investors would have you believe that fiat currency will soon become worthless, and that cryptocurrency will become the dominant social construct for money. Cryptocurrency skeptics would have you believe that cryptocurrency is an overvalued, speculative commodity ultimately heading towards worthlessness once demand has reduced sufficiently. Both scenarios present real financial risks and rewards not just to the wealthy who can profit from providing access to speculative markets and from the speculative markets themselves, but to individuals who see cryptocurrency as a means of being lifted out of poverty in one scenario or being rescued from poverty in the other.

However, what’s clear is that fiat currency and cryptocurrency are now competing within an integrated market. Aristotle is not wrong to suggest that fiat currencies can become worthless overnight; we have seen fiat currencies do just that throughout history in response to various stimuli — war, economic depressions, and pandemics to name a few. The Terra/Luna meltdown is a very real recent example of such worthlessness happening for cryptocurrency. In accepting cryptocurrency as a valid currency for economic transactions within nations, governments run the risk of destroying their own currency, and their economies, in the process.

The fate of cryptocurrency lies in reaching critical mass as a social construct, which is largely based on our perception of its value within our existing economic systems. Fiat currency is a social construct that currently values all things, equalizes exchange between individuals and groups, and offers a convenient means for storing, transporting, and securing wealth, because of its universal acceptance. Cryptocurrency is a social construct that can value all things, like commodities, with a convenient means for storing, transporting, and securing wealth, but has not yet reached critical mass to value all things, which in turn means it is not used directly to equalize exchange between individuals and groups.

If cryptocurrency can reach critical mass, through a combination of universal valuation by businesses and universal acceptance by consumers and governments, then cryptocurrency could evolve into a fuller definition of money. The impacts of such an economic transition are unknown, and cryptocurrency has many social, environmental, and financial reasons for individuals and organizations to be skeptical or cautious. Until these concerns are addressed and resolved, cryptocurrency remains a commodity, and not a currency, at least by Aristotle’s definition.

Works Cited
Aristotle. The Complete Works of Aristotle: The Revised Oxford Translation. Edited by Jonathan Barnes, Princeton University Press, 1995.

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