11. Will bitcoin replace fiat currency ?

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Since the emergence of the cryptocurrency of Bitcoin blockchain – the bitcoin, many people believes that bitcoin is going to replace fiat currency as “money” such that the whole country is going to adopt bitcoin as currency on a massive scale: your salary will be paid in bitcoin, every goods and services will be priced in BTC and thus will be paid in bitcoin. 

But – Is it possible that bitcoin will replace fiat currency as money? IN THEORY, it’s a YES. In fact, nowadays fiat currency as a means of payment (i.e. as money) has almost been replaced by bank deposit and e-wallet credits. In reality, I humbly think it’s a NO because it’s hard to happen.

Yes, bitcoin can be used as money to pay for goods and services but may be in a small community where everyone loves bitcoin, believes in the tales of bitcoin and is happy to accept it as a payment for goods and services. They accept bitcoin as a payment for goods and services they offered because they believe they will find other sellers who will accept it as well. 

However, as a tiny bitcoin holder, I still believe most people will still be happy to use fiat currency as means of payment for goods and services (i.e. as money), instead of bitcoin. Here’s why.

From the State Theory of Money and Credit Theory of Money, we learn that money is liabilities and liabilities is money.

Fiat currency (paper money) is the liabilities issued by the State. Bank deposit is the liabilities issued by the bank.

Why do people work to earn the liabilities issued by the State? This is because the State impose tax liabilities on the citizens and ONLY accept the liabilities of the State as a payment. If the citizens failed to pay their tax liabilities owed to the government, they will face serious penalty. Hence a paper notes of $10 guarantees that you can use it to redeem the tax liabilities you owe to the government. So, after you hand in the paper note of $10 to the State, you reduce your tax liabilities you owe to the government by $10.

The strict enforcement by the State saying that they ONLY accept the liabilities issued by the State as a payment for tax make sure that there’s always a demand for their liabilities since every citizen owe tax liabilities to the State. Hence, the citizen is happy to accept the liabilities of the State as a means for payment for goods and services because they know they can use it to redeem (pay off) their tax liabilities they owed to the State.

In short, the citizen is happy to accept the liabilities of the State as a means of payment for the goods and services they offer because they’re confident that others will be happy to accept the liabilities of the State as well. Their confidence of the acceptance is guaranteed by the tax enforcement of the State, who can levy tax and making almost every citizen owe tax liabilities to them, driving the demand of their own liabilities.

What about bank deposit? Bank deposit is not the liabilities issued by the State but liabilities issued by the banks, why people is still happy to accept bank deposit as a payment?

This is because the bank guarantee people that the bank will take back their own liabilities on demand from the people by paying them the liabilities of the State. In other words, the bank guarantees their depositor that the depositors can redeem the liabilities issued by the State using the liabilities issued by the bank on demand. This makes liabilities issued by bank (i.e. bank deposit) as good as liabilities issued by the State.

People are very happy to accept bank deposit as a payment for goods and services because they know and they’re confident that other people will accept it as well. Their confidence of acceptance is guaranteed by the promise of the bank to redeem their liabilities they issued with the liabilities issued by the State (which in turn guaranteed by tax enforcement of the State). So, in a way, the confidence of acceptance of bank deposit is indirectly guaranteed by the tax enforcement of the State too!

When bank ever run out of fiat currency (i.e. liabilities issued by the State) to fulfill the redemption of their depositors (who many need or prefer fiat currency rather than bank deposit now), the bank can always borrow from the central bank (i.e. the State) who is the issuer of the currency and theoretically have unlimited amount of currency because they are the one that issue it. With the fiat currency borrowed from the central bank, the bank could fulfill the redemption of money by the depositor. In fact, this is also known as liquidity guarantee of the central bank on the commercial banks – Central bank will supply as much currency as required by the banks to help the bank to meet its withdrawal or redemption by its depositors. So, no worries on bank failing to meet the redemption of their depositor.

Is there money without direct or indirect guarantee by the tax enforcement of the State? Yes. In fact, a lot of them. For example, the credit you have in your video game and the credit you have in your e-wallet now etc. Let’s say an e-wallet company. We accept credit in the e-wallet as payment for goods and services because we are confident that others seller will accept it as well. The confidence we have here is guaranteed by the integrity and sustainability of the company. Our confidence about the acceptance of credit is further guaranteed by the fact that the e-wallet company is “legal” as it’s subjected to government regulation. The e-wallet company is not going to “run”!

Does the issuer of bitcoin – the Bitcoin blockchain system have an enforcement system that guarantees there will always be a demand for bitcoin? A mechanism that guarantees bitcoin will always be accepted as a means of payment ? In fact, the demand for bitcoin comes from people who want to own and transact in bitcoin. People accept bitcoin as payment for goods and services because they are confident and think other will accept too. Thus, the confidence of bitcoin holder in bitcoin acceptance is guaranteed by the confidence of other bitcoin holders and other prospective bitcoin holders of the acceptance of bitcoin. 

That’s the so-called “decentralization” of money brought by bitcoin– the confidence in the acceptance of bitcoin is not guaranteed by the tax enforcement of State or the integrity of a company, but by the confidence of a population of ever-expanding bitcoin fanbase of the acceptance of bitcoin.

Hence, fiat currency (i.e. paper money) is a money which its acceptance depends on the confidence of the State’s ability to collect tax; bank deposit is a money which its acceptance depends on the confidence of the bank’s ability to redeem bank deposit with fiat currency; bitcoin is a money which its acceptance depends on the confidence of all bitcoin holders. 

In a way, bitcoin is a money in which its acceptance depends on the mood and emotion of the bitcoin holders. As their emotion and mood fluctuates, their confidence fluctuates, as a result, bitcoin acceptance as a payment also fluctuate, the nominal value bitcoin also fluctuates.

Human is creature of emotion. Their confidence will fluctuate as their emotion fluctuates; I see it as a huge risk of using bitcoin as money. Their acceptance is so unpredictable because unlike government tax enforcement and integrity of a company which is predictable and certain most of the time, human emotion is unpredictable; human confidence can be swayed too easily.

For example, if Elon Musk said he will dump bitcoin, and people start to panic, people will not be happy to accept bitcoin as payment the next day and the value of bitcoin will plummet. If Elon Musk said he will dump fiat currency, everyone is still going to be very happy to accept fiat currency the next day as payment because they know other will accept it as well to pay the tax they owe to the State.

Throughout the decade, we have seen bank deposit and e-wallet credit replace fiat currency as money. Could bitcoin replace fiat currency too? In theory, YES. In reality, it’s a NO (at least from my POV) because its acceptance is too uncertain and risky. Decentralization of money brought many uncertainties.

Extra thought: Just like bitcoin, is there any asset people buy where their confidence of acceptance of the asset is guaranteed by the confidence of other people too? Yes. One success story is a commodity: GOLD. (That’s also why people call bitcoin as digital gold) Similar in nature, can bitcoin be as successful as GOLD does? I don’t know.

P/S: This is my POV after researching on the origins of money and my understanding of bitcoin. Any feedback is welcomed!

References:

  1.  What is Money?

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