Bitcoin has a long way to go to be a viable unit of account

James Bullard, drawing particularly on the US experience when multiple versions of the US dollar circulated, has pointed out that such systems are generally disliked by society


Digital currencies have received much attention recently. Bitcoin, especially, has been in focus as some companies have announced they will take payment in it.

The term ‘digital currency’ refers to a form of money that is available in electronic form, is stored in applications such as electronic wallets, and is accessible through electronic devices.

But bitcoin and central bank digital currencies (CBDCs) are quite different.

Several companies have announced they will take payment in bitcoin, while trials of CBDCs, notably the People’s Bank of China’s e-yuan, are taking place. How are these developments related?

Can bitcoin become money?

Money has three functions: for making payments, as a store of value and as a unit of account.

Acceptance of bitcoin as a means of payment suggests it could satisfy the first of these functions but there are serious issues.

Notably, the bitcoin payments mechanism lacks capacity.

The upper limit for bitcoin transactions is roughly five every second, whereas payment processing companies like Visa or Mastercard can process over 2,000 transactions every second.

Bitcoin’s price volatility means it is unlikely to be seen as a stable store of value in the short term; and it seems highly unlikely that it would, anytime soon, be used as a unit of account.

If it were used in presenting a company’s annual accounts, for example, the price volatility would make year-to-year comparisons of accounts when converted into, say the US dollar, almost meaningless.

Bitcoin is also widely associated with illicit transactions and tax evasion, a major reason why it has been outlawed by some countries.

Finally, it is not widely accepted as collateral by banks.

CBDCs - no doubt they can be money

In contrast, there is no doubt that CBDCs can be a widely-used new form of money: able to be used as a means of payment, a unit of account and a store of value. Such CBDCs are currently being researched, planned and trialled by a number of central banks.

In China, an extensive trial is underway and so far seems to be proving very successful.

The e-yuan has legal tender status, meaning it must be accepted as a form of payment.

Other CBDCs will almost certainly have the same feature. Digital payments are already used to a large extent in China, as indeed they are in many other countries, but are provided by private sector companies.

Most important of all, CBDCs are issued by central banks, which also provide the stable monetary framework.

One other important contrast between private sector money and CBDCs is their fungibility.

Central bank issued money is highly fungible: it can change its representation (from physical notes and coin to a bank deposit to a CBDC, for example) or ownership without impediment.

For private digital currencies there is an ongoing debate about their fungibility: bitcoin ownership may be traceable and this may impede its use. For instance, if a particular bitcoin is held as part of an illegal transaction.

Furthermore, with so many private digital currencies available, the rate at which they can be exchanged between each other is an issue.

This is not a new problem. James Bullard, drawing particularly on the US experience when multiple versions of the US dollar circulated, has pointed out that such systems are generally disliked by society.

However, the fungibility issue is being turned on its head in the art world.

Non-fungible tokens (NFTs) are now used to represent some artworks.

Each NFT is a unique token held on the blockchain. There is only one definitive original version of the artwork.

The NFT provides a modern way of ascertaining the provenance of the work. Clearly, this is a technology which could be applied in a far wider context (eg the ownership of many types of physical property).

While we agree with Milton Friedman that it is dubious that the private sector can, by itself, provide a stable monetary framework, and that this will remain an essential government function, the technology behind private currencies opens up a new, interesting range of possibilities.

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