19 March 2021

Crypto Currencies: A Note

Central Banks are attacking crypto-currencies. An example is Frank Elderson, who is Vice-Chair of the Supervisory Board of the ECB, recently (March 16th) said that:

"Crypto-assets are volatile. They lack any intrinsic value and there is no reliable institution backing them."

Some commentators have, users of Bitcoin for example, have argued that this is outdated thinking, and that Bitcoin is now a currency which is being used across the world for numerous transactions. Hence, it is argued - leaving aside any charges that some Bitcoin transactions may be being used for unlawful exchanges -  that Bitcoin, and other private crypto-currencies are valid currencies, in competition with central bank issued currencies.

Insofar as credit, of which crypto-currencies are, as a form of i.o.u. that is based on trust, as is cash in the form of banknotes, this is correct. It is also argued that, in an era of substantial quantitative easing, central bank-issued currencies may have impaired the trust that citizens have in these currencies. This claim may be, at least partially, correct. However, there is more to the standing of money, whether or not in digital form, than there being a measure of trust being established between the growing number of users of crypto-currencies.

So digging deeper, we find that the standing of currencies, to enable use widely within a country, or countries in the case of the Euro, requires more than transactional acceptability.

One other quality required is for the currency to be able to be used  as a store of value. Interestingly the attraction of Bitcoin was initially as an investment vehicle. The problem is that its increasing use appears to have increased its volatility considerably. For small investors this high volatility substantially reduces its attractiveness.

However, it is the third quality of a currency, only possessed by state currencies issued by central banks (so-called “fiat” money) which is not available to private crypto-currencies. Moreover, this quality goes back to the very origins of money. Fiat money is now, and has always been, since sovereign states emerged, the currency in which fines and taxes are paid to the state.

The digitisation dimension does not change this situation, and supplies the central banks of the world, led by China and Sweden, to be developing and using their own digitised currencies.

 Michael Lloyd

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