Riksbank – the central bank of Sweden – has joined a chorus of other monetary authorities in rejecting Bitcoin’s status as “currency”. It argues that cryptocurrencies are poor at serving the three primary roles of money, and more closely resemble assets instead.
The Litmus Test for Money
As Riksbank explained in a Twitter thread, proper money should effectively function as a store of value, medium of exchange, and unit of account.
If money can store value, that means its purchasing power will remain roughly the same across time or decline at a mostly negligible rate. In other words, it should be resistant to high inflation – something that even the US dollar is beginning to suffer from as of late.
Many Bitcoin bulls push the asset as an inflation hedge and value storage technology, due to its fixed supply and immunity to monetary debasement. However, neither Bitcoin nor other cryptocurrencies operate this way in practice. Crypto prices are highly correlated with stocks as of late, which tend to move at the beck and call of the Federal Reserve.
“The price of Bitcoin has had a high degree of volatility and is thus a relatively poor preserver,” explains the bank.
Bitcoin also pales in comparison to fiat currency as a medium of exchange, as so few merchants accept direct Bitcoin payments. According to Coinmap, there exist about 29,500 Bitcoin ATMs and merchants globally, versus 60 million merchants that accept Visa.
Progress is being made on this front, however. Bitcoin payments company Strike has partnered with both Shopify and NCR, bringing Bitcoin payments to in-person retailers across the United States later this year. A Visa survey in January also discovered that 25% of small merchants in 9 countries were planning to integrate crypto payments in 2022.
That said, Bitcoin is still unsuitable as a unit of account, which is also largely due to its volatility. Bitcoin stood at $69,000 in November but dropped as low as $25,000 early this month.
Even in El Salvador – the first country to adopt Bitcoin as legal tender – products are still mostly priced in US dollars.
Central Bank Aversion to Bitcoin
Last month, the Bank of Canada made similar criticisms of Bitcoin’s potential as an inflation hedge. The nation is also suffering from record-high inflation, and one of its political leaders has pushed Bitcoin as a potential solution.
Monetary authorities from the Federal Reserve to the ECB have unanimously dismissed Bitcoin’s potential as money. The prior has chosen to focus more attention on stablecoins for regulatory purposes – crypto assets that are value pegged to fiat currencies.
In a recent interview, former Fed Chair Ben Bernanke explained why he even denies Bitcoin’s future potential as a store of value.
“Gold has an underlying use value – you use it to fill cavities,” he explained. “The underlying use-value of Bitcoin is to do ransomware or something like that.”