The attributes that will legitimize a virtual currency are the same attributes that will permanently destroy it at the same time. Ultimately, a virtual currency must possess the attributes applicable to “currency” or “real money.” Those that don’t possess these attributes will be exposed and quickly discarded, as have many prior “alternative currencies” throughout history.

Real money cannot be 'invented', not by the smartest programmers in the world or 'wise' politicians, but must naturally arise from the voluntary actions and exchanges of market participants...

All real money arises out of market transactions in a process that is unplanned and decentralized. In essence, a commodity that does not function as money initially but has value for its own sake (e.g. gold and silver), becomes valuable over a long period of time for another purpose, namely to facilitate exchange between parties. As more transactions are denominated in that particular commodity (or “money”), the value of that commodity as a medium of exchange continues to increase, which then becomes its primary value. Therefore, all real money necessarily possesses stable purchasing power and has continuity of value (since money is a store of value). Because it is widely adopted, all commodities, capital and services within an economy are denominated in the commodity acting as money, allowing for the calculation of economic value and the division and specialization of labor.

Virtual currencies will be legitimized when the current monetary order fails and they arise to fulfill the need for real money with the specific attributes inherent in real money.

To date, no virtual currency possesses all these attributes, as they simply “piggyback” onto existing currencies and must ultimately be exchanged for real money. Although some market participants will accept a “bitcoin” in exchange for their services or products, real money must be exchangeable across the entire cycle of production for all goods and services within an economy to function as money, not only for a few products or services. Additionally, current virtual currencies, such as “bitcoin,” do not serve as a stable store of value, but experience violent fluctuations in price because individuals are purchasing them not to facilitate market exchange, but as a speculative investment to make more money as they buy low and sell high.

Real money cannot be “invented”, not by the smartest programmers in the world or “wise” politicians, but must naturally arise from the voluntary actions and exchanges of market participants. Until then, they are all “permanently destroyed” before they start.

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[JD Supra's new Law Matters series asks experts for their quick take on popular news of the day, and specifically how such matters affect people in their personal or professional lives. Stay tuned for other posts in the series.

Jason R. Wisniewski is a partner in law firm Dorsey’s Corporate group and concentrates his practice in corporate transactional work. He focuses primarily on private equity, mergers and acquisitions, venture capital, the public and private placement of securities and SEC compliance.]

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