The Cryptocurrency Phenomenon (Routledge International Studies in Money and Banking) by Gianni Nicolini

1 The Concept of Money and Its 
Evolution Over Time

1.1 Introduction
Cryptocurrencies are one of the most fascinating topics in recent financial history. 
Since the introduction of Bitcoin in 2008, the idea to develop a new concept of 
money, based on a decentralized and peer-to-peer based system, required to ques-

tion the current structure of financial systems, arguing about the need and the role 
of central banks in the issue of money. The blooming of several cryptocurrencies 
and their use as a speculative tool by traders around the world required to question 
even about their inner nature, arguing if they can be considered (crypto)currencies 
or just (crypto)assets.
To address these topics, it is necessary to recall what is behind the concept of 
money and what are the roles of money in a financial system. The aim of this chapter 
is to summarize the evolution of the concept of money and the history of the 
monetary systems to stress when and how a certain asset can be referred to as money, 
and which are the criteria we should use to assess a currency.
1.2 Definition of Money and Its Functions
Cryptocurrencies represent an additional step in the evolution of money. Such evo-

lution dates back in time across centuries and it roots with the concept of finance 
itself. A clear understanding of cryptocurrencies and how they can change the func-

tioning of the financial system require to start from the concept of money and to 
stress the main functions that money has in finance.
Friedman and Meltzer (2022) define money as a commodity accepted by general 
consent as a medium of economic exchange. The same authors add that it is the medium in 
which prices and values are expressed and as currency, it circulates anonymously from person to 
person and country to country, thus facilitating trade, and it is the principal measure of wealth. 
On the role of money in the society, the ECB (2022a) reminds that money is not 
only a means of payment, but it is used as a store of value too. Hence, we can identify 
three main functions of money: (1) the ability to work as a medium of exchange; 
(2) the chance to use it as a unit of account, to price and compare different goods 
and services; and (3) and the use of money as a store of value.

1.2.1 Money as a Medium of Exchange
The first and pivotal function of money is to be a medium of exchange (Lagos 2010). 
People use money to purchase goods and services, and the transaction involves the 
acquisition of the good (or the benefit of a service) by the payment of its price, which 
happens by the transfer of an amount of money. The acceptance of money as a medium 
of exchange by the seller of an item essentially happens on a voluntary base. An indi-

vidual accepts an amount of money in exchange for a certain good or service, under 
the assumption that that money will be accepted for payments by other individuals. In 
that case, it is the general consensus that money is valuable to guarantee its acceptance. 
It is the confidence that the money received – for instance – selling a good, can be used 
to buy another good, that will guarantee the circulation and the acceptance of money. 
It follows that the value of money is related to its acceptance rate, and the bigger the 
number of individuals that accept a money for payment, the bigger is the value of this 
money as a medium of exchange. On the contrary, an item that struggles to be accepted 
for payment in economic transactions will make people lose interest in its use as money. 
In a modern society, the acceptance of money for payments can be supported by the 
fact to be a “legal tender” (Helleiner 2002). It means, for instance, that economic agents 
cannot deny their counterparts a cash payment in the local currency if the Government 
recognizes such currency as a means of payment. However, the assumption to force 
people to use a certain currency by law is pretty weak and creates the premise for the 
circulation of alternative currencies or the rise of “black markets”, where goods and 
services officially not available or not on sale can be traded when the payment is offered 
by alternative means of payments (e.g., foreign currencies, commodities). In conclu-

sion, the acceptance rate of money in economic transactions represents the main value 
of money as a medium of exchange. Higher the confidence that money can be easily 
spent in further transactions, higher is the willingness to accept it in a current trade.
1.2.2 Money as a Store of Value
Money does not represent merely a medium of exchange, and people rely on money 
even if they are not dealing with a purchase. The chance to receive money and keep 
it (not spending it), to use it in future transactions, gives money an additional utility 
function, commonly referred to as its ability to store value (Kubát 2015). To receive 
money, do not spend it or do not switch it for other assets, but to store it for a 
future purchase allows to use money as a basic saving tool. In that manner money is 
a vehicle to transfer purchase power from a current time to a future time. It follows 
that money has not value only for the chance to facilitate spot transactions, but the 
value of money is even due to the chance to store value and transfer it across time. 
In that manner, money works as an asset allocation tool.
1.2.3 Money as a Unit of Account
An additional function of money is the chance to use money to compare the values 
of different items. To express that the value of an item is double than the value of 

The Cryptocurrency Phenomenon (Routledge International Studies in Money and Banking) by Gianni Nicolini