By Vincent Nwani
Economics textbooks define a legal tender as a medium of payment recognised by a legal system to be valid for meeting financial obligations. Paper currency and coins are common forms of legal tender across countries.
In 1999, American economist and winner of the 1976 Nobel Prize in Economics, Prof. Milton Friedman, predicted that the Internet would become 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 is remaining, but seems to be locking around the horizon is a reliable and globally acceptable electronic cash.
Bitcoin and other crypto-currencies are attempting to fill Friedman’s void. But can it be regarded as money? Since its introduction in January 2009, the currency has expanded by 1,624,036 per cent, measured against the U.S. dollar rising from $0.04 to $7,638.62 on June 2, 2018. This growth is phenomenal, thus 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 per cent and the value of the dollar against the Eurozone currency, the Euro, declined by 9.7 per cent.
To serve as money, Bitcoin must satisfy the key attributes of a legal tender. It must be acceptable as a medium of exchange, serve as a unit of account and a store of value. How far has it fulfilled each of these criteria?
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 cent annually, less than one in 700 businesses in the United States of America 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 per cent of U.S. businesses are legally required to accept the dollar for payment for goods and services.
In more conservative markets, such as Africa, Bitcoin remains far less popular as a medium of exchange.
Some apex financial authorities and Central Banks have issued regulatory disclaimers against Bitcoin. For instance, The Central Bank of Nigeria 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.
In 2017 against the Euro, Bitcoin varied by 71.3 per cent from its average, the dollar varied by 7.3 per cent from its average and gold deviated by only 0.1 per cent from its average. Since the beginning of this year against the Euro, Bitcoin plummeted by 50.2 per cent, the dollar sank by 3.2 per cent and gold rose by 2.6 per cent. Evidently, Bitcoin, from 2009 to 2018, stands as very shaky and not yet a reliable store-of-value.
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. It has many great qualities as 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 the crypto-currency. 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, stands 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.
Dr. Vincent Nwani is a business analyst based in Lagos