Economic text book hold that a legal tender is a medium of payment recognized by a legal system to be valid for meeting financial obligations. Paper currency and coins are common forms of legal tender across countries.
In his 1999 prophetic prediction, Professor Milto Friedman, winner of the 1976 Nobel prize in economics said, “I think the internet is going to be one of the major forces for reducing the role of government and the media”.
After almost four decades of Friedman’s forecast, the one thing that’s remaining, but seem to be locking around the horizon is a reliable and globally acceptable electronic cash.
Bitcoin, and other cryptocurrencies are attempting to fill Friedman’s void.
But can Bitcoin be regarded as money? Since its introduction in January 2009, the currency has expanded by 1,624,036% measured against the U.S. dollar rising from $0.04 to $7,638.62 on June 2, 2018. This growth is phenomenal making Bitcoin the highest performing currency in the world when compared with other popular currencies over the last few years. For instance, during this same period, the price of gold (in U.S. dollars) climbed by 6.4%, and the value of the U.S. dollar against the Eurozone currency, the Euro declined by 9.7%.
To serve as money, Bitcoin must satisfy the key attributes of a legal tender which are; acceptability as a medium of exchange, serve as unit of account and a store of value. How far has the Bitcoin fulfilled each of these criteria?
Medium of exchange (general acceptance): One of the vital roles of Money is in its attribute as a medium of exchange to facilitate transactions. According to Coinmap.org, 11,291 businesses accepted Bitcoin for payment of products and services at the end of 2017. Despite acceptance rates growing by 38% per year, less than one in 700 U.S. businesses accepted Bitcoin as a unit of payment at the end of 2017. Data on the acceptance of gold to purchase goods and services were not available, but 100% of U.S. businesses are legally required to accept the U.S. dollar for payment for goods and services. In more conservative markets such as Africa, Bitcoin remain far less popular as a medium of exchange.
Telling, some apex financial authorities and Central Banks has issued regulatory disclaimers against the Bitcoin. For instance, The Central Bank of Nigeria (CBN) has again cautioned Nigerians to be wary of investments in crypto currency as they are virtual currencies that are not legal tender in Nigeria. It further warned that investing in crypto currencies is a fundamental “own risk” as investors in mediums such as Bitcoin, Ripples, Monero, Litecoin, Dogecoin, Onecoin, and NairaEx are not protected by law or any regulation in the country.
Store of value: In 2017 against the Euro, the Bitcoin varied by 71.3% from its average, the U.S. dollar varied by 7.3% from its average, and gold deviated by only 0.1% from its average. Since the beginning of this year against the Euro, Bitcoin plummeted by 50.2%, the U.S. dollar sank by 3.2%, and gold rose by 2.6%. Evidently, Bitcoin from 2009 to 2018, stand as very shaky and not yet a reliable store-of-value.
Unit of Account: The most important function of money is arguably as a unit of account, the common measure that people use to set prices or record debts. Across the world, people continue to maintain an overwhelmingly incentive to use their national currency—or a claim on the national currency such a bank deposit—for all ordinary transactions including: retailers price goods and services, calculating profits or losses, employee wages and salaries, payment of taxes, levies, utilities and real assets. Bitcoin is yet and very unlikely to challenge national currencies like the US dollar for these purposes over the near to medium term.
Bitcoin has many great qualities as a money because it is durable, easily divisible, easy to move from one place to another, relatively scarce and enjoys growing measure of acceptability. Still, the core functions of money as a store of value, medium of exchange and unit of account are yet to be fulfilled by Bitcoin. In addition, the fact that fiat currency reigns supreme across the world represents a huge obstacle to the mass adoption of any cryptocurrency.
Thus, Bitcoin, for now stand more as a “poker chip” than money. However, the resilience and rapid acceptance of Bitcoin for payment is enhancing its wide-spread use as money in the years ahead but this is not likely in 2018 through to 2021.
By Vincent Nwani
Frontpage September 12, 2017