The senior economic analyst Amber Wadsworth declared to BussinessDesk that Bitcoin may fail the definition of ‘money’ test. The main reason is its volatility and central banks would be better to get behind digital currencies.
Wadsworth defines ‘money’ in one of the articles “as a unit of account, medium of exchange and store of value”. You can buy goods and services with money, as a medium of exchange.
The Bitcoin is the most famous crypto-currency with a market value of US$138.5 billion. The recent price of it is US$8,152.25 each. The value of the Bitcoin has gone up 563 percent in the past 12 months. It reached a record US$19,666 last December before declining again. It is worth almost three times more than the No.2 crypto-currency, the Ethereum, at US$51.8 billion, or US$523.40.
“Demand for Bitcoins appears to be driven by a belief that others will be prepared to buy Bitcoins at higher and higher prices,” Wadsworth says in the latest RBNZ Bulletin.
“Bitcoin’s exchange rate fluctuations reduce its usefulness as a medium of exchange for real-world goods and services, and as a unit of account. If Bitcoin cannot be used as a stable medium of exchanges, then it would not be a reliable form of money.”
Declarations about ‘money’ test
Wadsworth uses a ‘Money Tree’ classification to show where crypto-currencies fit with other types of money and says it could provide a base to consider what kind of digital currency a central bank could issue. The Money Tree divides money into physical money or cash and digital money. Digital money is then broken down into those that use conventional ledger technology, including individual bank accounts and mobile wallets, and crypto-currencies, which use distributed ledger technology (DLT) and cryptography and are either at a fixed or variable conversion rate to cash.
Wadsworth compares the digital currencies with money because money has been available electronically from years ago. Recently, a handful of central banks have tries mobile wallets, there people can hold and use a digital currency and money. For example, Ecuador issued a mobile currency called dinero electronico and the Riksbank has issued an e-krona in Sweden.
Wadsworth declares: “One question that central banks are asking themselves is whether they should issue a digital currency to the public and what such a currency might look like.”
She concludes that a central bank could choose to issue a digital currency with a par value or variable exchange rate to cash. “It is conceptually easier to image a central bank issuing a digital currency that trades at par value to cash,” she says. “It appears that crypto-currencies that have fixed exchange rates to fiat currencies are a better unit of account, medium of exchange and store of value than crypto-currencies which do not have fixed exchange rates to cash.”