The head of the People’s Bank of China’s digital currency research department has deplored the use of virtual currencies such as Bitcoin as a form of fiat money.
During a speech delivered at the International Telecommunications Union’s inaugural meeting of the Focus Group on Fiat Digital Currency, Tao Qian (姚前) said that the price of Bitcoin is at present primarily driven by speculation, and that the virtual currency lacks an underlying “anchor” of value.
In addition to speculative drivers, Tao pointed out that virtual currencies were susceptible to usage for illicit purposes, and that despite the buzz surrounding Bitcoin it would be difficult for them to be used as an authentic form of money due to the lack of an “anchor” of value.
Tao notes that the value of commodity bullion money is derived from the value of the materials themselves, with fiat money employing gold as an anchor for its value under a metallic standard.
While fiat money is no longer tied to gold following the collapse of the Bretton-Woods Agreement, its value is still underpinned by the sovereign credit of issuing nation-states.
In Tao’s opinion for money to evolve into statutory digital currency, some form of value anchor must be maintained to underpin its worth.
When it comes to private monies such as Bitcoin however, Tao contends that the source of value is speculation, and that this lack of a value anchor will invariably make it difficult to emerge as a genuine form of money.
Tao further points out that digital currency possesses a credit creation function, and in fact serves as securitisation of the credit of issuing entities, given that the money creation process itself is a form of credit creation.
This credit creation function of money is of the utmost importance to modern economies, especially during periods of financial crisis when they can serve to shore up liquidity and prevent the spread of crises, as well as assist economic recovery.
Taking the 2008 US sub-prime crisis as an example, Tao points out that the US Federal Reserve actively made use of various liquidity support instruments for non-bank financial institutions as well as traditional commercial banks, in order to rapidly stymie the spread of the crisis.
“This is is the key financial reason that the US economic has been able to rapidly recover at present,” said Tao.
Given that Bitcoin’s production value halves every four years, however, and is capped at 21 million, Tao believes that its use as money would be a retrograde step in evolutionary terms.
“This is the equivalent of re-instituting the veil of commodity money and bullion money, and has no substantive significance for the economy,” said Tao. “In the ever-expanding credit economies of the modern era, if we were to use Bitcoin as money, it would no doubt be a disaster.”
Tao further notes that Bitcoin’s proof of work mechanism as well as its “rigid and mechanical” character will make it impossible for the cryptocurrency to adapt to the needs of modern macroeconomic adjustments.
Should digital currencies ever emerge as a viable form of money, Tao believes that they would need “smart rules” that would enable the money supply to fully adapt to multiple macroeconomic variables, which could be achieved via artificial intelligence and machine learning.
Tao’s speech come following a crackdown by China’s central government on initial coin offerings and the use of cryptocurrencies for financial purposes in early September, compelling the country’s top Bitcoin platforms to suspend operations.
As a consequence China’s clout in the global Bitcoin market has plunged, with data from the Coinhills website estimating that RMB-Bitcoin transactions have seen their share on the international market drop to 3.56% from over 20% in the recent past.