When Satoshi Nakamoto first proposed bitcoin in 2008, he described it as a “peer-to-peer electronic cash system”.

Now, a little more than half a billion people own some amount of cryptocurrency, while the cryptocurrency e-commerce retail market is worth about $500 million and is projected to exceed $2.2 billion in value in a decade’s time.

It is unsurprising therefore, that numerous commentators have begun to query whether at least the major cryptocurrencies should be considered a type of money.

There are two principal theories that are used to determine whether something counts as money.

The first of these is the state theory of money. This posits simply that money is what a given state says it is. This approach is essentially arbitrary and leaves little room for analysis.

This column will therefore focus on the second theory, which is called the functional theory of money. Under this theory, money is something that is: a medium of exchange, a store of value and a unit of account.

The first element of this theory is that the unit is used as a fungible token. Fungibility is defined in Goode on Commercial Law as “assets of which one unit is, in terms of an obligation owed by one party to another, indistinguishable from any other unit, so that a duty to deliver one unit is considered performed by the delivery of an equivalent unit”.

This can be distinguished from transactions where the exchange is based on barter, ie, an exchange of goods based on the subjective value of those goods to each recipient.

Based on the definition in Goode, we can see that cryptocurrencies are fungible in much the same way as physical cash. Most users are not interested in which specific coins are being used in a given transaction. Rather, they are simply concerned with the value represented by those coins.

The second element, that cryptocurrencies are used as exchange tokens, is true at least for a number of the major cryptocurrencies. Bitcoin alone, for example, is accepted by more than 10,000 businesses as a form of payment.

A store of value, as the phrase suggests, is something that is treated by its users as having purchasing power, ie, it is valuable.

Some commentators, particularly in the early years of bitcoin, argued that bitcoin and other cryptocurrencies were poor stores of value because they were highly volatile and lacked any backing, eg, governmental assurance, as in the case of fiat currencies, to make up for its absence of inherent value.

Aside from the fact that, although still volatile, bitcoin and other cryptocurrencies have not only retained their value but increased it, the above argument misses the point.

Fiat currencies have value based on the faith of their users in them. This faith is created by governmental backing, but that backing cannot prevent the faith washing away, as in the case of hyperinflation where a denomination ceases to have any real value — for an example, see the Zimbabwean dollar.

It is much the same for cryptocurrencies, except they at least are generally not as susceptible to inflation.

The third element, unit of account, is the most difficult aspect of money to define. However, the core of it is that the thing in question must be something by which users can reliably determine the price of goods or services.

Many cryptocurrencies, including bitcoin, continue to be volatile, some exceptionally so, and this makes it difficult for users to predict what the price of a particular good or service would be in the short-term future, denominated in those cryptocurrencies.

Many cryptocurrencies, therefore, cannot be classified as money.

However, there is a type of cryptocurrency called a stablecoin. These are often pegged to denominations of fiat currency, and sometimes are backed by commodities.

The most popular stablecoin, tether, tracks the value of the United States dollar. Such stablecoins thus ordinarily have no greater volatility than the fiat currency to which they are pegged. This being the case, and assuming that such stablecoins retain their value and are exchanged, they possess all the essential characteristics of money.

So, answering our question, most cryptocurrencies are not money. They are fundamentally too volatile to be classified as such, due to the inability to use them as a unit of account.

However, the class of cryptocurrencies known as stablecoins — or at least those pegged to fiat currencies — do in theory meet all the essential elements of money under the functional theory.

Those that do, therefore, should properly be understood to be money.

In future columns, we will address the questions of what effect this could have in practice.

In particular, we will discuss some major issues of policy and regulation that the Bermuda Legislature ought to consider regarding the nature of stablecoins as money and the increasing usage of bitcoin and other cryptocurrencies as media of exchange.

• John Wasty is a partner and head of the dispute resolution practice, and Guy Cabral is a trainee in the corporate practice, in Appleby’s Bermuda office. A copy of this column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer