Faculty of law blogs / UNIVERSITY OF OXFORD

The Evolution of Currency: Cash to Cryptos to Sovereign Digital Currencies


Anton Didenko
Research Fellow at the Faculty of Law, UNSW Sydney, Australia
Ross P Buckley
Scientia Professor and the KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation at UNSW Sydney


Time to read

3 Minutes

Modern payment systems have changed considerably over the past decade. In developing countries, so-called ‘electronic money’, issued and used on mobile phones, provided a viable digital alternative to cash and bank accounts, with the best-known example being M-Pesa launched by Safaricom in Kenya in 2007. Bitcoin, established in 2009, gave rise to over 2,000 spin-off privately issued digital currencies.

Regulators responded differently to these changes. Whereas issuance of ‘electronic money’ has generally become a regulated activity, regulation of Bitcoin’s copycats has proven distinctly problematic for technical reasons: without a central server or a single operator, it has been rather difficult to identify those to whom regulation should apply.

However, as new privately issued digital currencies kept multiplying, it was perhaps only a matter of time before regulators would devise new strategies. It is therefore unsurprising that multiple governments and central banks around the globe have already started developing new sovereign digital currencies, inspired by the Bitcoin example.

It might be only a matter of time before ‘sovereign Bitcoins’ become commonplace – time will tell. However, the many national initiatives to develop new sovereign digital currencies raise a whole range of issues, such as possible negative impact on the financial system and its incumbent operators, technical challenges in setting up the new currencies and the need for revised regulation. But perhaps the first question should be different: how do these new digital currencies compare to their existing counterparts, most of which are digital as well?

Unfortunately, there is no agreed taxonomy covering the entire range of currencies used in modern payment systems, which can be explained by the rapid pace of technological innovation. For this reason, in our recent article ‘The Evolution of Currency: Cash to Cryptos to Sovereign Digital Currencies’, forthcoming in the Fordham International Law Journal, we propose our own comprehensive taxonomy of existing currency types, from seashells (still used by some Pacific nations) and community currencies (like the Bristol Pound) to Bitcoin and sovereign digital currencies. In doing so, we aim to eliminate the confusion in the literature caused by the emergence of new technologies that has spawned numerous conflicting terms (which are often used interchangeably): ‘electronic money’, ‘cryptocurrencies’, ‘virtual money’, ‘digital currency’ and many other variations.

Our taxonomy has five key features.

First, we apply a functional approach, which allows to group together currencies sharing similar functional characteristics while disregarding terminology adopted in the law, as well as the objectives for which currencies may be used (these features determine their end-use, rather than functionality, and can lead to endless categorisation into types and sub-types).

Second, the proposed taxonomy is regulation-neutral. On the one hand, the law does not always provide a sufficient basis for classification, omitting some currencies altogether or using inconsistent terminology. Little would be gained by confirming that currencies not issued by the state are not considered a lawful currency and legal tender in that state. On the other hand, regulation frequently creates exceptions and exclusions from definitions based not on the underlying features of a certain currency, but instead on its potential to cause trouble when things go wrong.

Third, our taxonomy is technology-neutral. The problem with taxonomy based on technology is that technology changes and – as is demonstrated by the confusion surrounding the blockchain lexicon – can be readily misunderstood.

Fourth, it focuses on the concept of ‘currency’, rather than ‘money’ (although certain references to basic theories and technical concepts are, of course, unavoidable). For the purposes of a functional analysis, the term ‘money’ that is often used in literature is simply too abstract: with enough qualifications (such as the limited ability to perform one or more functions of money), almost anything of value can be classified as such; conversely, if it is interpreted more strictly, many national currencies will not qualify as money either.

Fifth, the different currencies are examined through the lens of two payment systems: (i) formal and (ii) alternative. The distinction is based on their regulatory status, the latter (alternative) being the residual category. This is particularly important in the light of the most recent developments, such as the emergence of new digital currencies issued by sovereign states.

In our proposed taxonomy, formal payment systems utilise two distinct currency types: (a) official currency and (b) surrogates of official currency (SOC). Official currency includes cash as well as accounts with central banks and commercial banks. The SOC category includes products known in various jurisdictions as ‘electronic money’, ‘mobile money’ and ‘purchased payment facilities’ and refers generally to a type of currency issued by private parties that is so closely associated with official currency that it has become recognised as part of the formal payment system.

In contrast, the alternative payment system utilises a whole range of rather distinct currency types we call ‘alternative currencies’. We analyse various categorisation approaches and argue that some of them (like classification based on convertibility into official currency) are flawed and may lead to unsatisfactory results. We also compare and contrast a number of borderline cases between SOC and alternative currencies and analyse the implications of the newest developments in the regulation of alternative currencies, such as the definition of ‘virtual currencies’ in the EU’s fifth Anti-Money Laundering Directive.

Finally, we discuss various implications of the upcoming expansion of the formal payment system through direct intervention by sovereign states. We envisage three different approaches: (i) new central bank accounts with general access, (ii) new central bank accounts with intermediated access and (iii) new digital forms of official currency (the first example of which – the Venezuelan Petro – was launched in February 2018). We argue that one of the biggest upcoming challenges stems from the herding effect that may result from the adoption of a disintermediated state-backed official currency by a major economy, like the US, potentially leading to a sovereign digital currency battle royale.

Anton Didenko is a Research Fellow at the Faculty of Law, UNSW Sydney, Australia.

Ross Buckley is a KPMG Law – KWM Professor of Innovative Disruption at the Faculty of Law, UNSW Sydney, Australia.


With the support of