One of the big news items over the last week was El Salvador's announcement that Bitcoin would become legal tender. As the New Zealand Herald reported:
Cryptocurrencies have bounced back in a big way this morning after El Salvador voted to become the first nation in the world to adopt bitcoin as legal tender.
Over the weekend, the Central American nation's president crashed a wild bitcoin conference in Miami to reveal his plans for digital currencies to a rapturous reception.
Overnight, those pland [sic] edged closer to reality after they were backed by congress...
"The #BitcoinLaw has just been approved by a qualified majority" in the legislative assembly, President Nayib Bukele tweeted after the vote late on Tuesday (local time).
"History!" the president added.
This isn't the first time that it has been asserted that Bitcoin is money. To be classified as money by economists, Bitcoin must meet certain conditions, as I noted in this 2019 post:
To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875...:
1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services.
2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and
3. It is a store of value - you can keep it and it will retain its value into the future.
Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.
And as I wrote last year in relation to Bitcoin:
...Bitcoin is used to buy at least some goods and services. However, Bitcoin fails on the last two criteria. It isn't used as a unit of account - no one's quoting you prices in Bitcoin, and I bet the vending machines don't report the Bitcoin price of a can of Coke. And, Bitcoin isn't much of a store of value. It fails on both of those criteria because the value of Bitcoin is far too volatile.
What has changed now? Perhaps Bitcoin will now be used as a medium of exchange, at least in El Salvador. But unless sellers start quoting prices in Bitcoin, and debts are recorded in Bitcoin, it is still not a unit of account. And Bitcoin is still too volatile to be a store of value. This year alone a single Bitcoin has fluctuated in value from US$30,000 to $US60,000. Why would a saver want to keep their savings in something that routinely gains or loses half of its value?
Even in terms of medium of exchange, there are some issues, as John Hawkins wrote this morning in The Conversation:
Consider the provision in the new law that “all obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin”.
Even that is complicated. How, and by whom, will the amount of bitcoins necessary to pay a debt be determined? Will it be based on the Bitcoin price at the time the debt was incurred, or when the debt falls due?
The difference of even a few days could be significant.
If the expectation is the price of Bitcoin is going to rise, why would you want to buy things with it? Why not wait? If the expectation is the price is going to fall, why would you want to accept it? For most transactions, using US dollars will still make the most sense.
Hawkins notes that there are serious risks to El Salvador's economy as a result of this move, and that the proclaimed benefits in terms of increased GDP and facilitating international remittances are not all that clear. What is clear is that this change still doesn't make Bitcoin money.
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