What is currency?

Article Author: Jacob Wittman Article Compilation: Block unicorn

What is currency?

In July 1944, as World War II drew to a close, representatives from over 40 countries gathered in a small town in New Hampshire, attempting to answer a seemingly simple question: What is currency, and who controls it? The Bretton Woods Conference was not the first time global leaders explored this issue, nor will it be the last. Debates about gold, the dollar, and exchange rates formed the framework of the modern global financial system.

For thousands of years, every major monetary reform has revolved around a core question: where does the value of money come from? Debates about the value of money usually involve its sovereignty and scarcity.

Every monetary change is less about the physical form of currency and more about trust, power, and the rules of the game. Stablecoins are the latest manifestation of this round of change, and trust and power seem to be decentralized. We believe stablecoins are the most influential form of currency.

Commodity Currency Era

The earliest known forms of currency were commodities such as gold, silver, shells, and salt. These items were used for their intrinsic or widely recognized value, which stemmed from their physical scarcity. For example, the supply of gold is limited and requires mining, a process that is both difficult and expensive.

Scarcity creates credibility. If you hold a gold coin, you can trust that it is a good “store of value” because no government or unscrupulous banker can create more gold out of thin air.

On Yap Island in Micronesia, currency exists in the form of large limestone discs, some weighing several tons, mined from Palau. Their value depends on size, transportation difficulty, and origin. Ownership is tracked through community consensus rather than physical movement, indicating that the power of currency comes from shared belief rather than intrinsic value.

However, this form also brings limitations. Commodity money is cumbersome, difficult to transport, and not very efficient in a rapidly growing global economy. These physical limitations hinder payment throughput and suppress economic growth. Long-distance trade requires a system that can transcend the weight of metals and capital restrictions.

Transition of Fiat Currency

Ultimately, the combination of globalization and industrialization pushed commodity money to its limits. Government intervention introduced fiat currency. Initially redeemable for gold or silver, paper money gradually became widely accepted as money itself. The Bretton Woods system established this ecosystem by linking the dollar to gold and linking other world currencies to the dollar.

This arrangement lasted for about 25 years. However, by the late 1960s, the United States’ gold reserves could no longer support the global dominance of the dollar. In 1971, President Nixon suspended the dollar’s convertibility into gold, ushering in the era of pure fiat (without physical backing).

In the next stage of currency, value comes from sovereign credibility rather than material scarcity. The dollar is valuable because the U.S. government claims so, and markets, households, and foreign governments believe it. Trust has shifted from a physical basis to a political and policy basis.

This profound change provides powerful tools for the nation. Monetary policy has become a core lever of economic management and geopolitical strategy. However, fiat currency also brings vulnerabilities such as inflation, currency wars, and capital controls. At certain levels, flexibility and stability are in opposition. Today, the central question surrounding modern monetary structures is not who can create money, but whether we can trust those in power to maintain the value and utility of the currency in the long term.

Digital Representation of Currency

The rise of computers and consumer internet has brought about an important issue at the intersection of electrical engineering and finance: Can currency be represented in the digital world in the form of bits?

In the 1990s and early 2000s, projects like Mondex, Digicash, and eGold attempted to answer this question, promising new methods of electronic payment and value storage. Ultimately, they failed due to regulatory pressure, technological flaws, and a lack of trust and market adaptability.

At the same time, electronic banking, credit cards, payment networks, and settlement systems have become ubiquitous. Importantly, these are not new assets but rather new manifestations of fiat currency, more scalable and suited to the modern world. However, they are still subject to the same institutional trust and policy frameworks, and critically, they rely on closed technological systems and operational networks that are operated by rent-seeking intermediary institutions.

Enter: Stablecoin

Stablecoins leverage this dynamic, but by utilizing open, permissionless infrastructure, they take power away from companies. Fiat-backed stablecoins are inherently hybrid. They inherit the credibility and efficiency attributes of fiat currencies while utilizing programmability and global accessibility.

Link stablecoins to reserves that can be redeemed at par value, leveraging the credibility of sovereign nations such as the United States to make their value predictable. Issue them on a public blockchain to enable instant settlement, operate around the clock, and seamlessly cross international borders.

We believe that the emerging regulatory framework for stablecoins (the intrinsic part of their “monetary nature”) should be consistent with our core principles on how stablecoins serve users.

• No permission needed: Individuals should have control over their own finances, without the heavy restrictions that intermediaries may arbitrarily impose on accounts.
• No Borders: Geographic location should not determine whether someone can make or receive payments, or how long it takes to send or receive a payment.
• Privacy: Consumers should be able to participate freely in commercial activities without worrying about unreasonable surveillance from the government, private sector, or other consumers.
• Trustworthy and Neutral: Global currency flows should be free from discrimination, allowing people from various backgrounds to freely preserve and use their property.

Conclusion

Stablecoins are the next step in the evolution of currency. They rely on sovereign credibility like traditional fiat currencies, but unlike previous forms of electronic fiat currency (and their payment systems), they separate trust in sovereignty from trust in corporate power. The best currency assets are based on the best currency technology and networks.