The Evolution of Money – Part 1:


Any monetary value in our society exists in one of two ways: bearer instruments or registered instruments.  A bearer instrument is an asset that is assumed to be owned by the holder of the instrument for which no transaction record is kept.  An example is physical cash.  You do not need to prove to anyone that the physical cash in your wallet is yours.  You have it and so you are the presumed owner.  Society keeps no record of who previously had the $20 dollar bill that now sits in your wallet.  Registered instruments, on the other hand, are assets whose ownership is determined by referencing a ledger managed by a trusted institution (e.g., properties at the Deeds Office, bonds and equities at the Central Securities Depository, or digital money in a bank account).  While all assets can be categorised as either bearer or registered instruments, assets can also be categorised as either physical or digital assets.  Overlaying asset form (i.e., physical vs. digital) onto instrument type (i.e., bearer vs. registered) helps us understand the evolution of monetary instruments in our society.

Figure 1: The evolution of monetary instruments in society


Physical bearer instruments were the first monetary instruments of humanity (e.g., animal hides, shells, salt, etc.), but communities came to realise that such forms of monetary value had their limitations.  Land, for example, would be a disastrous bearer instrument.  If you left your land to hunt, and came back to find someone else standing on your land claiming it as theirs, one of two outcomes could result:  The loss of the land to the new “owner”; or violence to resolve the dispute.  Furthermore, there would be an incentive to remain on your land to maintain ownership and avoid any potential disputes.  None of these outcomes is conducive to an advancing civilisation.  So as communities came together, physical registered instrumentsemerged where the community collectively agreed on a trusted intermediary to keep the record of ownership (the source of truth) of a particular asset and update it on the community’s behalf.

As computers became more widely adopted, many of these physical registered instruments migrated from physical to digital registers.  The birth of digital registers also gave rise to digital registered instruments – instruments that have no physical form, and are defined purely by an entry onto a digital register (e.g., a government bond or money in a bank account).  Physical forms of value are easy to understand in this framework.  Digital instruments are less intuitive.

A purely digital bearer instrument (e.g., a digital coin) cannot function as a monetary instrument due to the double-spending problem.  Think of a photograph on your smartphone.  Sending this photograph to someone else does not delete it from your phone – you retain a copy.  This poses a problem for anything digital that is meant to represent value.  What is critically important in any monetary system is that when someone spends their money, they no longer have it.  The ability to copy and paste the digital coin ID mentioned above ad infinitum – the ability to double-spend it – reduces its scarcity and ultimately debases its value.  To avoid double-spending of digital monetary instruments, society has established trusted institutions (such as banks, deeds offices, CSDs) that ensure that when someone receives digital value, someone else must by definition no longer have it.  This is a fundamental principle of our double-entry accounting system where every debit must be equal to a corresponding credit.

In summary, three types of monetary instruments have been described:

  • Physical bearer instrument;
  • Physical registered instrument; and
  • Digital registered instrument.

These three instrument types were the only ones available to humanity until 2009.  That year, Satoshi Nakamoto’s seminal paper “Bitcoin: a peer-to-peer electronic cash system” combined advances in computer science, cryptography and game theory to develop what has now become known as blockchain technology.  This technology has allowed the emergence of a fourth type of monetary instrument:

  • Crypto instrument

The crypto instrument is a digital hybrid instrument with characteristics of both bearer and registered instruments.  It’s like a bearer instrument because the holder of a digital private key is the presumed owner of the value it controls, and a registered instrument because that value is recorded on a ledger (albeit a distributed one).  The presence of both bearer and registered instrument characteristics are necessary for the existence of a crypto instrument.  All assets issued onto a blockchain are crypto instruments.

The Evolution of Money – Part 2 coming soon!


by Farzam Ehsani



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