Cryptocurrencies and Digital Fiat Currencies

• Author: Robert Kirkby
• Published date: 01 December 2018
• Date: 01 December 2018
• DOI: http://doi.org/10.1111/1467-8462.12307

Policy Forum: Cryptocurrencies

Cryptocurrencies and Digital Fiat Currencies

Robert Kirkby*

Abstract

Current generations of cryptocurrencies are

not money, but future ones may be. While

Bitcoin performs poorly as a store of value, it is

actually on par with the Venezuelan bol

ıvar

over the last decade, and the Argentinian peso

over the decade from 1986. I evaluate argu-

ments in favour of central banks issuing digital

f‌iat currency—intended to replace cash—and

digital f‌iat money—intended to replace money

more broadly. Digital f‌iat currency appears a

natural step forward, but digital f‌iat money

would be a bad idea as it makes the central

bank responsible for the entire money supply.

1. Introduction

Cryptocurrencies have bloomed in recent years

following the advent of Bitcoin in 2009. The

usefulness of the blockchain technology

underlying Bitcoin is widely accepted, as is

the innovation in decentralised trust. One

question that is less clear is whether Bitcoin,

or future variants thereof, are money? Is

Bitcoin useful for buying and selling? For

making transactions?

Tax authorities in many countries have

already delivered their verdicts: No. In most

countries cryptocurrencies like Bitcoin are

being taxed as assets, not as currencies (Kumar

and Smith 2018).

But what is the view from Economics?

According to undergraduate Economics text-

books money has three functions: (i) store of

value, that 100 dollars today can be used to buy

roughly the same amount as that 100 dollars

could buy one year from now; (ii) medium of

transaction, that if I want to buy an apple from

you I pay you in dollars; and (iii) unit of

account, that prices are expressed in dollars.

Since any currency widely accepted for trans-

actions can be expected to function as a unit of

account we will ignore this last property from

here on.

I discuss the performance of Bitcoin as a

store of value since its creation, putting it in the

context of national currencies such as the US

dollar during the inf‌lation of the 1970s—

Bitcoin is worse—and the current hyperinf‌la-

tion of the Venezuelan bol

ıvar—Bitcoin is

marginally better. I then discuss the use of

Bitcoin as a medium of exchange: Bitcoin

performs poorly, but most diff‌iculties are

technical and many will be overcome in the

coming decade or two. Of course, Economics

* Victoria University of Wellington, Wellington 6012

New Zealand; email <robertdkirkby@gmail.com>,

<robertdkirkby.com>. The author thanks Lian Allub,

Jonathan Chiu, Javier D

ıaz-Gim

enez, Martin Fukac,

Georgi Kocharkov, Cam Martin, Phan van Nam and

Christie Smith for helpful discussions and feedback. An

earlier version of some of this material appears at

<robertdkirkby.com/bitc oin-cryptocurrencies- and-block

chains/>, which also covers the technology of block-

chains, as well as issues like c rime and cartels.

The Australian Economic Review, vol. 51, no. 4, pp. 527–539 DOI: 10.1111/1467-8462.12307

°

C2018 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd