VoxEU Column Financial Markets Monetary Policy

Bitcoin, Vollgeld, and popular views of money

On 10 June 2018, Switzerland will be the first country to have a referendum on the introduction of Sovereign Money ('Vollgeld'). This column argues that the Vollgeld project and cryptocurrencies such as Bitcoin build on popular fantasies about money that are disconnected from the actual operation of the current monetary system. Unfortunately, the latter’s features remain underexplored even among economists.

Money being one of the key symbols of the current economic system, and the monetary and the financial system being a key site of the Global Crisis, the idea that there is something wrong with money is one of the most popular explanations for the crisis among non-economists.

The desire to ‘put money right’ by introducing Bitcoin, Sovereign Money (or 'Vollgeld') or regional currency schemes is a result of this perception.

Old debates in new guises

Among other issues, these initiatives revive two major age-old debates at the heart of monetary theory and history: 

  • Is money (or should it be) a pure asset (i.e. no one’s liability), or a claim on an issuer? 
  • Should money creation be governed by a responsible central entity, such as a central bank, or by a decentralised mechanism, such as markets or regional community governance (Weber 2018)?

The vision for an alternative currency underlying Bitcoin and similar crypto projects is based on replacing a central issuing entity by an automaton embedded in a technical architecture providing market incentives for economic subjects to animate and use it. Most cryptocurrencies are pure assets governed for the most part by market forces (Huberman et al. 2017, Fatas and Weder di Mauro 2018).

Sovereign Money is based on the view that money should be a pure asset, and that the creation of means of payment, subject to strict quantity control, is a prerogative of the state (Bacchetta 2018). 

Both have received the greatest public attention so far among monetary reform projects. Bitcoin and other cryptocurrencies have experienced headline-grabbing price movements in recent months. And a citizens’ movement in Switzerland has managed to enforce a plebiscite on the introduction of Sovereign Money to be held on 10 June 2018. 

Money, trust, and the crisis

The liquidity provided by money is a form of insurance against uncertainty, as long as the purchasing power of the currency concerned follows a stable pattern over time. At the cost of renouncing either the higher returns offered by riskier assets or the joys of consumption, money can be held without committing to a specific time, contract party, or commodity to spend it on. 

When money is a claim on an issuer, it is obvious that holding it puts you in a relationship with this issuer that involves trust issues. The instability triggered by the Global Crisis resulted in an increased desire among economic subjects to hold liquidity, and trust issues involved in financial affairs became the centre of public attention (Jobst and Stix 2017). While money has remained stable (in terms of general acceptance and purchasing power) in major currency areas in a context where many other financial instruments did not, the difference is not always acknowledged among observers.

In this context, projects like Bitcoin and Sovereign Money attract attention by suggesting that money is not safe unless it ceases to be a claim on an issuer. Instead, it should become a pure asset and be put under strict quantity control. Neglecting the inevitable dependence on others involved in holding money or any other non-consumable asset, the underlying idea is that commodity-like money would enable individual possession of money without dependence on an issuer which may suddenly become unable to make good on its promise.

Both concepts share the idea that controlling the quantity of money is key for securing a currency’s value, whereas the process of issuing it is considered of negligible importance. Therefore, both use the creation of new currency units to subsidise economic activities they consider useful.

The rule for receiving new bitcoins is dubbed ‘proof of work’ – miners obtain rewards from the issuing automaton for having contributed to the administration of Bitcoin’s payment system. 

Because Sovereign Money is to be issued primarily as a donation to either the state or all its individual citizens, we could label its money-issuing rule ‘proof of status’.

They differ with respect to the preferred entity to exert the desired quantity control. In Bitcoin and similar projects, technology (i.e. rules encoded in an open-source software) is administering a transparent supply rule for digital units designed to attract decentralized activity. Under Sovereign Money, a state entity has the exclusive right to issue means of payments in official currency in order to control the money supply. 

A key reason for the popularity of both Bitcoin and Sovereign Money lies in the compatibility of their idea of money with a widely held perception among the general public (Mehrling 2015). Widespread ideas of sound money and its creation centre on a fixed homogeneous stock based on centralised quantity control. The crisis has shown that this view is at odds with the balance sheet-based realities of contemporary money and finance, their fragility and flexibility. Popular support for monetary reform projects can be considered one result of this. Unfortunately, much of current economics does not pay much attention to offering economists tools to address these issues (Goodhart 2018).  

Current hybrid monetary system 

With respect to the two major debates in monetary theory referred to above, the current monetary system is a hybrid arrangement. It is based on the historical integration of sovereign coin-based with private accounting-based systems of issuing means of payment. Within each currency area, it combines both decentralised (i.e. market competition) and centralised governance mechanisms. 

Today, new means of payment are created when an issuer swaps liabilities with a debtor based on terms and conditions set by the issuer. The monetary system consists of several issuers creating means of payment that form a hierarchical relation of claims under the common roof of a single unit of account.

Means of payment issued by commercial banks are created against contractual payment commitments of a debtor or a third party (i.e. securities). Liabilities of commercial banks serving as means of payment for users are claims on cash issued by the central bank. A key function of banks is to offer liquidity to deposit owners operating with a small cash reserve, while a major part of the asset side of their balance sheet is committed to credit claims. Banks’ issuing behaviour is governed by profitability and risk concerns, subject to competition, regulation, supervision, and monetary policy. 

The monetary system consists of a hierarchy of issuers, with means of payment issued by lower-ranking issuers being claims on higher ranks in the hierarchy. The top of the hierarchy in any currency area is central bank-issued money, serving as the final means of payment.

Because of its status as the exclusive means to settle tax obligations, official currency may be considered a form of claim on the state. More narrowly, cash and deposits of commercial banks at the central bank are the latter’s liability. Under current flexible exchange rate arrangements, these liabilities are usually not redeemable for users against assets held as counterpart on the central bank’s balance sheet. That gives them some features of a pure asset for the user. But it does not suspend the basic principle that new money is issued only against a counterpart asset that is subsequently held on the central bank’s balance sheet, based on terms and conditions set in view of a public mandate. Money creation is not unilateral wealth creation. Instead, it consists of swapping a new means of payment against a claim on future payments.

Making creditworthiness of counterparties a key criterion for issuing new means of payments establishes an important principle: new money only enters the economy when its initial user has extended a convincing promise to pay it back, or hands over the promise to pay by a third party (i.e. a security). Such contractual commitments of future income support the expectation behind the general acceptance of a currency and money’s stable purchasing power that future economic activity will take place resulting in goods and services available for money. 

Economic models based on abstracting from these institutional details inadequately prepare economists to address a number of key concerns in current public debate.


Money creation can be understood as being based on ‘proof of creditworthiness’. In contrast, issuing a ‘currency’ as a pure asset against either ‘proof of work’ (Bitcoin) or ‘proof of status’ (Vollgeld) severs the link between the creation of means of payments and commitments to contribute to future economic activity. Whether such an asset would be considered by potential users as a currency, a worthless token best avoided, or a kind of collector’s item inviting speculative activity is an open question. Over the last ten years, crypto users’ focus of activity (i.e. speculative activity) has already provided us with a clear answer on the status of Bitcoin and similar projects. Whether Swiss citizens are attracted by the invitation to subject their official currency to an experiment remains to be seen.


Bacchetta, P (2018), “Sovereign money reform in Switzerland would be a mistake”, VoxEU.org, 1 May

Fatás, A and B Weder di Mauro (2018), “Making (some) sense of cryptocurrencies: When payments systems redefine money”, VoxEU.org, 7 May 

Goodhart, C A E (2018), “The Determination of the Money Supply: Flexibility versus Control”, The Manchester School 85(S1): 33-56

Huberman, G, J Leshno and C Moallemi (2017), “The economics of the Bitcoin payment system”, VoxEU.org, 16 December

Jobst, C and H Stix (2017), “The cash comeback: Evidence and possible explanations”, VoxEU.org, 29 November

Mehrling, P (2015), “Why is money difficult?”. 

Weber, B (2018), Democratizing Money? Debating Legitimacy in Monetary Reform Proposals, Cambridge University Press.

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