It is common to hear critics of Bitcoin and other decentralised digital assets state that they are not backed by anything other than the faith of the people who own them or want them and, as such, are not money. In contrast fiat money is backed by government. The word fiat, broadly speaking, means ‘by decree’ and derives from the Latin word for “Let it be done” (as in ‘fiat lux’, or ‘let there be light’, from Genesis 1:3). As implied, this decree comes from the government and, as any holder of Imperial Russian rouble debt will tell you, what it is really backed by is ‘faith in’ government.

Arguments against Bitcoin as money will also often cite the ‘functions of money’ that define it, which are:

1. Unit of account
2. Medium of exchange
3. Store of value

Many forget that the original author of this, William Stanley Jevons, split the first function into two: common measure of value and standard of value. Jevons’ work, Money and the Mechanism of Exchange was written in 1875 and was a continuation of his belief that economics, as a science concerned with quantities, is necessarily mathematical. He contributed to the marginal theory of utility where one explores the change in pleasure or satisfaction by increasing or decreasing one’s consumption of something by one unit.

This overlooks the point that trust, faith, pleasure and satisfaction are psychological and, as such, are subjective. The marginal utility of the same cold drink would seem higher if it was handed to you when you are on a hot beach compared with the arctic tundra. The same drink will likely taste better if served in a frosted glass rather than a plastic cup. In other words, context matters.

Money, and trust in it, is more psychological and in some ways ethnographical than mathematical. This was amusingly illustrated 120 years ago in 1903 when William Henry Furness III, an American physician and ethnographer, visited the island of Yap, now part of the Federated States of Micronesia. There he observed an unusual monetary system based on giant limestone circles known as Rai or Fei, the heaviest of which weighed approximately 4,000kg. What made this even more seemingly absurd was that the stones did not even come from Yap. They mostly came from quarries in Palau, about 300 miles from Yap.

The islanders maintained their ledger of ownership through oral history. Should the owner of a stone wish to purchase something then a deal was done, and the other party took ownership of the stone. However, at no point did the stone move. Even more baffling was a particularly noteworthy and valuable stone was not on Yap as it had fallen overboard during a storm while being transported there. The sailors had all attested to its value and the cause of its loss, which satisfied the Islanders, and it went into ‘circulation’. The Yap Islanders had the same faith in their stone-based system as people have in any other monetary system.

Milton Friedman even saw fit to write a paper on ‘The Island of Stone Money’, highlighting the similarities between the lack of movement of the physical underlying assets – the Rai stones – and the lack of movement of physical gold reserves between France and the United States in 1932, which contributed to the 1933 US Banking Crisis. In that instance the French sold dollar assets for gold and, not wanting to ship the gold across the Atlantic, asked the Federal Reserve Bank to store the gold on the Bank of France’s account. The Fed’s staff moved the gold to different drawers and labelled them as the property of the French. This movement happened in the same vault in the United States. Friedman also pointed out that gold is a scarce resource that is extracted with human labour and is assigned value by people (ironically it also tends to land back underground, albeit in bank vaults). In the context of Yap, limestone rocks were equally scarce, as they had to be mined and transported from the only source the Islanders knew of, which was on Palau.

The settlement of trades in Bitcoin and most other digital assets can work along the same principle. Trades take place between parties and the Bitcoin is reallocated by a custodian. Where the custodian is common to both parties and operates an omnibus account, meaning the Bitcoin is, figuratively speaking, in the same vault, all that is changing is the allocation. Avoiding moving Bitcoin, like avoiding moving gold or Rai, is comparatively cheaper and easier than moving it. In the case of Bitcoin and gold, avoiding taking either out of the custodial vaults that secure them reduces the risk that they could be lost or stolen.

The progression from limestone Rai in Yap to gold in the Federal Reserve, to Bitcoin private keys in a Hardware Security Module operated by a cryptoasset custodian, shows that while the technology has been updated, the faith-based system is the same. Anyone who thinks that owning data is a step too far in abstraction should reflect that a few decades ago most bank accounts were operated by banks on IBM mainframes (many still are) and the Fedwire system, which manages movements of the USD, is an Oracle database. Faith in rocks at the bottom of the sea, faith in gold in a vault, faith in your account on an IBM mainframe, faith in the USD in the Oracle database cluster.

Faith in something, like a good reputation, takes time to build up. It can also be quickly lost. In October 2022, the Governor of the Central Bank of Nigeria announced that the highest denomination banknotes of 200, 500 and 1,000 naira would be redesigned, and all the old notes had to be exchanged for new ones by the end of January. This led to a great deal of unrest and the removal of the 200 note was cancelled (by government fiat), albeit six days after the Central Bank’s (new) deadline of 10 February 2023. However, reports are that the damage has been done and the 200-naira notes are no longer being commonly accepted, yet they remain legal tender (by government fiat), at least until 10 April 2023.

Faith is not easily predicted or explained. Sometimes it defies all logic. Can a Bitcoin, which is really just a 160-bit random number, really be assigned value, particularly in cases where transacting in it does not even involve moving the number anywhere?! The honest answer is, we shall see. If something does not fit the definition, then perhaps it’s the definition that needs rethinking.