Stay tuned with CashEssentials news ! - beyond payments
By subscribing, you accept our Privacy Policy.

Identification, the Fourth Function of Money

Categories : Cash generates security, Cash is a social network, Cash protects privacy and anonymity
September 10, 2021
Tags : Anonymity, Identitification, Money, Privacy
Monetary theory teaches that the three functions of money are a store of value, a unit of account, and a medium of exchange. This article reveals a fourth fundamental function - identification - and questions the political and social implications for private and public issuers of money.
Patrice Baubeau

Senior Lecturer, History, Economic History, Université Paris Nanterre – Université Paris Lumières

This post is also available in: Spanish

This article was written by Patrice Baubeau (Université Paris Nanterre – Université Paris Lumières) and was first published in The Conversation (France). It is posted as per the original and under a creative commons license. The article was translated from French by Bernardo Bátiz-Lazo. The English translation was reviewed by Manuel A. Bautista-González.

A short detour through history allows us to place the question of the three functions of money traditionally identified: standard of value, intermediary of exchanges, and reserve of value, in a broader framework. This perspective reveals a fourth fundamental function, identification, which denotes the monetary fact’s common, political, and social origin.

Emerging monetary tools, such as bitcoin, state cryptocurrencies, or virtual currencies used in video games, give particular weight to this identification function and its political and social consequences.

The question of identification appears alongside Aristotle’s analyses of money in Politics and Nicomachean Ethics, works that focus mainly on the polis, its limits, its organization, its justice. He thus develops, following Plato, a political and civic reflection that associates the limits of the polis with the birth of money, whose misuse can conflict with the rules of the ideal State: 1) by making the gain of foreign trade take precedence over the solidarity of internal exchanges; 2) by pricing the exchange value over the use-value; 3) by opening the infinite space of desires and speculations over the limited domain of needs.

In short, such a currency, freed from its civic dimensions, tends to become its own end, feeding inequalities and discord within the polis. This is why money, a political artifact, is also a marker of citizenship: its use inserts the user into a political, social, and ethical community and identifies them with it.

This function of identification through currency possession or use has not remained the prerogative of the Greek city-states: a constant feature of currencies is the concern of issuers – unless they are counterfeiters – to identify the origin of their currencies, usually territorial or political, by marks indicating the place of production, the issuer or the date.

The multiplication of social and complementary currencies since the 1970s corresponds, moreover, most often to a “territorial” project constituting a limited-size monetary space of solidarity. In this way, using money can become a militant act (sustainable, alternative, ecological economy…) and support or manifest an identity – this is notably the case with the Basque currency eusko.

Cash is not synonymous with anonymity

This fourth function, this function of identification, is largely neglected in economics – historians and especially numismatists are, on the contrary, very attentive to it. However, taking it into account leads to two important contributions.

First, it reverses the usual perspective on anonymity. Anonymity no longer appears as a property of cash but becomes one of the modalities of identification by money, which allows a much more graduated approach.

Indeed, as we wrote in a research article in 2016, there is no “one” anonymity: anonymity is always, in fact, anonymity concerning a person or an institution. Consequently, it is susceptible to various configurations, which are part of a general identification function.

Thus, the usual payment in cash to a merchant that one knows does not, of course, entail any anonymity of the payer to the merchant. On the other hand, it does guarantee the anonymity of the merchant’s customers to their banker or tax collector.

Similarly, using a contactless payment card results in almost complete anonymity of the customer towards the merchant. The payment receipt does not include any exploitable identity element but precisely identifies the customer to the bank issuing the payment card or the bank holding the merchant’s accounts.

In general, a process of “nationalisation” of money has progressively made the limits of the modern state coincide with those of the monetary spaces of which these states have become the masters.

At the same time, the state assumes another function that is crucial for the proper functioning of civic and social life beyond payment systems alone: the identification of individuals. This function has grown considerably since the 19th century with the development of various forms of civil status and social security and the rise of enfranchisement and personal ballot.

Consequently, in a state governed by the rule of law, not only do individuals have a right to an identity that the State cannot deny them, but the methods of identification fall within the domain of the law, with the legal guarantees that surround it.

Monetary innovations change the game

Today, new monetary innovations remind us of the importance of this fourth identification function. A first model, already old, consisted of delimiting virtual spaces within which specific monetary forms are employed: massively multiplayer “game” platforms generally provide techniques for accumulating symbols of wealth to attach objects, services, or skills avatars.

Already, in this case, the water-tightness between virtual and real is imperfect since player “farms” have emerged to acquire objects or abilities in the virtual universe that are then resold in real currency to players who wish to perform. In a way, this amounts to exchanging virtual currency for real currency via virtual goods and services.

In this context, identification takes place within the closed universe of the platform in question since the “identities” of the avatars are entirely controlled by the provider. The latter also determines the conditions of issue and use of “its” currency. We find again but are limited to a closed and virtual universe, the model of control of money and identities that territorial States carry out.

The second model, which is much more recent, stems from the innovation represented by the blockchain. The blockchain includes an identification device that validates the transaction between a seller and a buyer and makes the record of this validation available to other participants in the payment system.

On the one hand, identifying transactions makes it essential to identify the users who carry out exchanges. But on the other hand, this identity corresponds to the one declared within the virtual monetary space and not to an identity recognized by a State. Moreover, nothing prevents an economic agent from creating a different avatar for each of the existing cryptocurrencies or even associating different IP addresses (those that characterize the machines that access the Internet). It is no coincidence that Bitcoin has quickly become the preferred currency of cybercriminals.

This is where Facebook’s Diem (ex-Libra) virtual currency project makes sense. Users have an identity guaranteed by the platform. More and more, rights and duties are attached concerning freedom of expression, the integrity of the “profile,” and even the post-mortem destiny of accounts.

The risk of a lucrative and selective form of identity

Facebook is, therefore, able to identify its users very precisely. This is the core of its business model: selling the individual characteristics of these profiles. If a currency of its own, or almost, such as Diem, is associated with the Facebook ecosystem, the company or, more likely, the constellation of lucrative interests of which Facebook is the heart, will be able to simultaneously manage its own monetary assets and the proofs of identity-related to their use.

However, leaving money in entirely private hands is not always a good idea, even if the management of money by States has also led to disasters, such as the hyperinflationary episodes in Germany in 1923, Hungary in 1946, or Zimbabwe since 2000. Leaving the identification of human beings in private hands is even worse: what would happen to a human being whose only proof of existence is a private act, possibly transferable and of which third parties cannot become aware?

Thus, abandoning to the highest bidder these two key elements of the construction of the ancient polis or the modern State, which are money and identity, announces the worst of all worlds.

Solutions exist, old and new. Central bank digital currencies (CBDCs), being tested in Asia and Europe, bear witness to this. They limit the risk of substituting a lucrative form of identity for the civic form our rights depend on by subjecting payment to identification rather than the reverse.

In a world where the issuance of monetary assets, the creation of identities, and the management of the corresponding profiles are no longer the sole responsibility of nation-states, it is becoming urgent to reflect on the articulation of these different dimensions. Only then may we preserve the benefits of the innovations brought about by the rise of the Internet without losing our rights, our goods, and our beings. And therefore, we must take into account the fourth function of money: identification.

This post is also available in: Spanish