Countries have used foreign money not only for international transactions but as a Supplement or replacement for a locally issued fiat currency. In much of the Caribbean, the dollar operates alongside local banknotes in all private and public transactions. In parts of Europe, the local currency is used to buy beer and steak, but only the euro is enough for everything else.
There are many reasons for allowing, and even promoting, foreign sovereign money as a legal form of exchange in a domestic economy. In benign cases, it may be a realization that an economy is too small to support a fiat currency, or that it is pragmatic to adopt the currency of an economically powerful neighbor. In other cases it is a sign of political and economic failure and the refusal of the local population to place any trust or credibility in the financial instruments offered by their government.
A government’s ability to issue a fiat currency that is trusted by its citizens (and beyond its borders) is arguably not only a sign of economic strength and political stability, but also an expression of sovereignty, as is the ability to defend borders against foreign incursion.
It has become a commonplace in recent years dizzying volatility in the face value of bitcoin that cryptocurrencies are speculative assets that are similar to gambling and should not be confused with means of payment, Store of value or unit of account. Yet the El Salvador government announced last week that Bitcoin becomes legal tender alongside the dollar and the ill-fated local currency, the colon, which was replaced by the dollar in 2001 but is still in circulation.
This reflects the launch of the BV wallet in Venezuela in April this year, which allows holders to convert bolivars or dollars to bitcoin. It may or may not replace Petromoneda, an oil-backed cryptocurrency that was launched in 2018 to great acclaim but little international presence.
Similarly, it was recently revealed that the world’s largest number of Bitcoin retailers by nationality are Nigerian citizens, who are reported to have more confidence in cryptocurrency as a repository for their savings than the local naira or even gold. Commentators have welcomed these results as an indication of the replacement of fiat currencies with private digital assets.
It is understandable that some states and their citizens prefer to entrust their confidence in monetary stability to the US Federal Reserve instead of in your own central bank. Still others may prefer to use privately issued stablecoins, provided they are properly regulated, supervised, fungible and secured, which the Bank of England has conceded is conceivable. But Bitcoin and its analogs don’t currently meet any of these criteria and are supported by nothing substantial other than a complex algorithm and a lot of hype.
If a G20 finance minister accepts Bitcoin to pay income taxes, I must admit that I was deeply mistaken. Until then, the ability to issue a widely accepted fiat currency is a competence of a sovereign authority, and the use of stateless cryptocurrencies as a substitute for national currencies is a sign of monetary eccentricity at best.
Philip Middleton is Chairman of the OMFIF Digital Monetary Institute.