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10 INTERNATIONAL NEWS 1.7.2021 Bitcoin has a long way to go to be a viable unit of account DIGITAL currencies have received much attention recently. Bitcoin, espe- cially, has been in focus as some com- panies have announced they will take payment in it. e term 'digital currency' refers to a form of money that is available in elec- tronic form, is stored in applications such as electronic wallets, and is acces- sible through electronic devices. But bitcoin and central bank digital currencies (CBDCs) are quite different. Several companies have announced they will take payment in bitcoin, while trials of CBDCs, notably the People's Bank of China's e-yuan, are taking place. How are these developments re- lated? Can bitcoin become money? Money has three functions: for mak- ing payments, as a store of value and as a unit of account. Acceptance of bitcoin as a means of payment suggests it could satisfy the first of these functions but there are serious issues. Notably, the bitcoin payments mech- anism lacks capacity. e upper limit for bitcoin trans- actions is roughly five every second, whereas payment processing compa- nies like Visa or Mastercard can pro- cess over 2,000 transactions every sec- ond. Bitcoin's price volatility means it is unlikely to be seen as a stable store of value in the short term; and it seems highly unlikely that it would, anytime soon, be used as a unit of account. If it were used in presenting a com- pany's annual accounts, for example, the price volatility would make year- to-year comparisons of accounts when converted into, say the US dollar, al- most meaningless. Bitcoin is also widely associated with illicit transactions and tax evasion, a major reason why it has been outlawed by some countries. Finally, it is not widely accepted as collateral by banks. CBDCs - no doubt they can be money In contrast, there is no doubt that CBDCs can be a widely-used new form of money: able to be used as a means of payment, a unit of account and a store of value. Such CBDCs are currently be- ing researched, planned and trialled by a number of central banks. In China, an extensive trial is under- way and so far seems to be proving very successful. e e-yuan has legal tender status, meaning it must be accepted as a form of payment. Other CBDCs will almost certain- ly have the same feature. Digital pay- ments are already used to a large extent in China, as indeed they are in many other countries, but are provided by private sector companies. Most important of all, CBDCs are is- sued by central banks, which also pro- vide the stable monetary framework. One other important contrast be- tween private sector money and CB- DCs is their fungibility. Central bank issued money is highly fungible: it can change its representa- tion (from physical notes and coin to a bank deposit to a CBDC, for example) or ownership without impediment. For private digital currencies there is an ongoing debate about their fungi- bility: bitcoin ownership may be trace- able and this may impede its use. For instance, if a particular bitcoin is held as part of an illegal transaction. Furthermore, with so many private digital currencies available, the rate at which they can be exchanged between each other is an issue. is is not a new problem. James Bul- lard, drawing particularly on the US experience when multiple versions of the US dollar circulated, has pointed out that such systems are generally dis- liked by society. However, the fungibility issue is being turned on its head in the art world. Non-fungible tokens (NFTs) are now used to represent some artworks. Each NFT is a unique token held on the blockchain. ere is only one de- finitive original version of the artwork. e NFT provides a modern way of ascertaining the provenance of the work. Clearly, this is a technology which could be applied in a far wid- er context (eg the ownership of many types of physical property). While we agree with Milton Fried- man that it is dubious that the private sector can, by itself, provide a stable monetary framework, and that this will remain an essential government func- tion, the technology behind private currencies opens up a new, interesting range of possibilities.