KRWG

Bitcoin may play role of gold in 21st Century

Feb 2, 2018

Commentary: Cryptocurrencies, especially Bitcoin, have received a lot of attention in recent weeks. This attention is motivated by sharp fluctuations in the values. The run up in Bitcoins value has led to speculation about the potential of Bitcoin for being a new global currency—the first since the collapse of the Gold Standard in the 1930s. The recent sell offs have damped this talk. Still Bitcoin remains the most likely candidate for global currency.

The factors that determine what is and isn’t money can be divided into three broad factors—technology, custom, and law. Of these, the first two count for Bitcoin as becoming a true currency; the third against.

The most obvious factor in favor of Bitcoin is technology. Indeed, technology is central to Bitcoin in that it was the development of blockchain technology that is the defining feature of Bitcoin. The key to blockchain is a publicly visible ledger, copies of which exist on multiple computers distributed globally.

Because the ledger is copied to many different locations, fund transfers can easily be tracked. Moreover, this tracking is done by the community as a whole; no bank or other mediator needed. In this sense, Bitcoin is a currency in that it is similar to making a payment with, say, a dollar bill, which also requires no mediator.

The blockchain technology need not and is not limited to just Bitcoin. Ethereum, Bitcoins main competition, also uses blockchain. Custom becomes important here because what is and isn’t money is driven a much by custom as by anything else. By virtue of being first, Bitcoin has become more widely accepted in payment that any of its competitors. In Japan, for example, 260,000 stores accept Bitcoin according to one study. No doubt there are many more accepting Bitcoin in other countries not counted.

That it is becoming customary to use Bitcoin is critical for its success as a currency. I’m willing to accept Bitcoin because I expect that when I want to spend, the next person will also be willing to accept Bitcoin. And the next person will accept Bitcoin because they expect to be able to spend it also. The more routinely the use of Bitcoin, the more the value to using Bitcoin.

Here the third factor—law—comes into play. Traditional currencies obtain their value by virtual of being legal tender, which means that they can be used to extinguish debt owed the government. Status as legal tender has underpinned currency since ancient times. That money can be used to pay taxes underpinned the value of Roman denari, Renaissance florins, and modern U.S. dollars. In the 19th and early 20th Centuries, the gold standard arose precisely because of the requirement that government-to-government payments be made in gold.

Bitcoin is not legal tender. No where in the world can it be used to directly pay taxes. But it is even worse than this. There is a global movement to regulate and rain in Bitcoin. China has outlawed Bitcoin exchanges, greatly reducing liquidity for Chinese residents. Other counties, including the U.S. are contemplating doing the same thing.

I suspect that not Bitcoin, nor any other private Cryptocurrency, will ever be legal tender. What I expect is that ultimately, governments will begin issuing their own blockchain currencies. These will be fixed in value one-for-one with the national currency, greatly improving usability. In the future, we will be talking about blockchain dollars and euros.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. This semester’s section of money and banking is the 100th time he has taught the course. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu