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6 months ago

IS CRYPTOCURRENCY ABOUT TO REPLACE MONEY

It is the dream of those devoted to cryptocurrencies like bitcoin that it will take over and replace money that is being issued and controlled by the governments of countries through central banks. But there has been a reply by the Central bank that regulates every other central bank that such wishes are only but a dream.

 

 The venerable Bank for International Settlements, an institution that is based in Switzerland that has been in operation for 90 years released a report of its research with the conclusion that cryptocurrencies are afflicted with inherent contradictions that make it impossible to be used as money.

 

According to the report, one has to first come to an understanding of what money really is.

 

Money is a unit of account that gives us the ability to make comparisons of the prices of different goods and services; this makes it a medium of exchange that allows us to buy and sell different products without having to organise swaps; and, finally, a store of value that allows us to save to buy things in the future.

 

Because of the reasons mentioned above, there is a need that whatever that will be used as money has to be stable; its value shouldn’t fluctuate wildly over a short period of time.

 

This hasn't always been the case for many forms of money, as the BIS acknowledges.

 

According to the report by the BIS, "Sustained episodes of stable money are historically much more of an exception than the norm."

 

The BIS has come up with a model that ensures the stability of money even though it is said to be institutionally biased.

 

According to the BIS, "The tried, trusted and resilient way to provide confidence in money in modern times is the independent central bank."

 

This is the first reason why cryptocurrencies just can’t be used as money because most of them only generate trust by trying to limit the amount of currency that is made available to the users. Bitcoin for example has only 21 million. Meaning if the demand for it is more than what is made available, there won’t be able to respond to all the demands.

 

This is theoretically a good feature for the store of value function of money, as your savings theoretically cannot be debased by creating more of the currency. But it's not so good for the stability required for price comparisons or making transactions.

 

For people who may decide to store value, it may backfire because there is no central bank to put downward pressure on the value of money, there's also no institution there to absorb potential losses and prop up the value of cryptocurrencies in times of crisis.

 

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