Cryptocurrency: Currency, Security, or Both? : NHC History Blog
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Franklin Noll, PhD
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Franklin Noll's Blog on Monetary and Financial History.

Cryptocurrency: Currency, Security, or Both?

by Franklin Noll on 07/28/20

One of the debates raging around cryptocurrency is whether it is actually a currency to be used for everyday transactions or a security to be used as an investment.  The monetary history of the United States can shed light on this debate.  In the past the US issued instruments that performed both functions simultaneously.  I will give two examples.

The Continental Dollar.  The Continental has become infamous as a failed attempt to fund the Revolutionary War by printing money.  After the war, the value of these notes collapsed, becoming worthless.  However, this is not the whole story.  As Dr. Farley Grubb has pointed out in his groundbreaking research, the Continental Dollar was actually a security created to be used as currency.

Continentals were basically zero-coupon bonds issued in small denominations.  Given the economics of the Revolutionary period, the Continental Congress knew that the notes, once issued, would trade hands at a discount, not worth a full gold or silver dollar.  However, Congress promised to redeem the Continental after the end of the war in specie—at full value.  Thus, as a Continental note was used in transactions, it was also gaining value as time passed and the end of the war neared.  However, the plan collapsed when the Congress changed the original terms of repayment, rendering the notes valueless.

The Interest Bearing Note.  During the US Civil War, the Interest Bearing Note was created to act both as currency and as a security.  Issued in denominations as low as $10, the notes paid 5% interest.  This interest would be paid when the note matured and was turned into the Treasury.  So, a $10 note would be used in everyday transactions at full value, knowing that its value was increasing over time.  These notes were a success and were paid off as promised by the US Treasury.

So, what does this tell us about the future of cryptocurrency?  Among other things, it tells us that being a currency and a security are not contradictory and that a cryptocurrency can be both.

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