Cryptocurrencies are not currencies

I often get asked about cryptocurrency. And I immediately become bored. The sort of claims that people have made about this phenomenon, which is historically just another speculative asset, are over-the-top to say the least. There are two realities that seem to be ignored. First, we already have mainstream digital money and have had for a long time, before cryptocurrencies emerged. For example, when the central banks credit reserve accounts held by commercial banks as part of the daily payments system clearing, digitial transactions take place. Similarly, when you go on-line and conduct some bank transactions shifting deposits to other owners (paying bills etc) you are using digital currency. Second, cryptocurrencies are not currencies nor are they money, which makes their name rather misleading. In fact, they are just another speculative, non-money asset that are not backed by anything so we say that the fair value is zero. There is an intermediate asset that has emerged – the so called – Stablecoin – which differs from cryptocurrencies, in that the asset is specifically pegged in some way to some national currency or basket of assets. However, the hype surrounding stablecoins is similar to that which has accompanied the evolution of cryptocurrencies, the point being that the ‘stable’ bit is not backed in anyway by any government guarantees. I also distinguish this class of non-monetary assets from the recent developments in central banking known as – Central Bank Digital Currency – which is really just an extension of the already myriad of digital transactions that central banks conduct every day.

We are currently in the final stages of producing the second edition of our – Macroeconomics – textbook, which will be published sometime in the new year (date not yet known).

This textbook provides a comprehensive coverage of the first two years of undergraduate macroeconomics from a Modern Monetary Theory (MMT) perspective and the publishers have informed us that it has sold very well.

Hence the invitation to produce an updated, second edition.

We have also agreed to a new contract to produce a cut-down version aimed solely at first-year students who may or may not be intending to pursue a major sequence in macroeconomics.

It will be a more concise book with less chapters and will be more accessible to a wider array of students.

That project will not be completed until 2027.

In the process of revising the topics and content for the second edition we decided (after receiving feedback from reviewers – who we thank greatly for their comments) – to add a treatment of cryptocurrencies.

We wanted to disabuse the readers of the notion that cryptocurrencies were about to replace monetary currencies, issued by national governments.

Let’s deal with cryptocurrency first.

Despite the claims, cryptocurrency is not a currency nor can we consider it to be ‘money’.

If we want to be faithful to the meaning of language then we consider a currency to be the financial asset which is issued by national governments.

A currency is denominated in the unit of account that the government deems to be that which it accepts as payment for all the liabilities it issues – for example, relinquishing tax obligations.

Almost no governments accept cryptocurrencies as a means of relinquishing tax obligations it imposes on the non-government sector.

In 2021, El Salvador recognised Bitcoin as legal tender.

However, on January 29, 2025, the government of El Salvador amended the 2021 law that had legalised Bitcoin and allowed it to be used in commercial transactions.

The two major shifts in policy were: (a) repealing the provisions that allowed Bitcoin to be used as a valid means for relinquishing tax obligations; and (b) removing the obligation of private businesses to accept Bitcoin as payment.

The amendments were conditions imposed by the IMF on the government of El Salvador in return for a $US1.4 billion loan.

There was widespread concern about the stability of Bitcoin and the possibility that the wild fluctuations would cause financial turmoil.

The amended legislation removed the word ‘currency’ from the text of the bill relating to Bitcoin.

It was accepted that the Government’s attempt to be an innovator in this field had failed and that the characteristics of Bitcoin were not compatible with treating it as a ‘national currency’.

The reality was that they recognised that Bitcoin is not a currency and is rather a speculative, non-monetary asset.

Unknowingly, the El Salvadorian government had further reduced their sovereignty by allowing Bitcoin to be used to honour tax obligations.

I say further because the official currency in El Salvador is the US dollar and that nation is the only Central American country that doesn’t have its own currency.

Why are cryptocurrencies not equivalent to national currencies?

In the textbook, we will explain that cryptocurrencies are not denominated in the ‘national money of account’, which means that the owner of the liability is not identifiable.

The Australian dollar, for example, that I hold in my bank account deposit is clearly the legal liability of the bank I choose to deal with (a building society in fact).

There is some risk in my bank deposit wealth holdings but in general, and especially given the size of my deposits are small, I know that the government will step in as the monopoly issuer of the national unit of account to safeguard that deposit should the building society collapse.

Some people buy corporate assets (debentures etc) denominated in the unit of account which are more risky but the fact remains that the corporation which issues the debenture or bond is legally liable to honour it.

That might prove to be difficult in the case of a corporate collapse but in legal terms the liability is well defined and actionable in law.

Cryptocurrencies are quite different.

Yes, they have reference values against the monetary unit of account – so today one Bitcoin, for example, is supposedly ‘worth’ $A172,015.92, having fallen around $A3,000 over the course of today’s trading.

But it has no intrinsic value.

Then ask yourself what the – Fair Value – of cryptocurrency is.

Fair Value is defined under international standards as:

… the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date.

You can consult, for example, – Fair Value Measurement – published by the – Financial Accounting Standards Board – if you want a more detailed treatment.

Fair value fluctuates according to market conditions.

For example, we might encounter a situation where the fair value of a bond is $A90 but its face (coupon or par) value is $A100.

The difference would occur during a period of rising interest rates.

Say, the bond was issued when interest rates were 2 per cent, which means the $A100 coupon would deliver a nominal annual return (yield) of $A2.

If interest rates rose to say 4 per cent, then that nominal yield, which is fixed for the bond’s life, would not deliver a market competitive return on an investment of $A100.

The bond would now have a market value of only $A50, where a return of $2 would deliver a 4 per cent yield, concordant with the shift in market interest rates.

So the bond would fall in value in the secondary bond market so the fair value is below the face value and we say the bond is selling at a discount.

The liability (promise to pay) is still legally defined as $A100.

In the case of crytocurrencies the face value is zero because a there is no legal liability (in general).

Which brings me to the concept of the – Stablecoin – which is a sort of half-way house, where issuers make promises that the coin will hold its value against some other asset(s).

For example, the stablecoin might be tied to a fiat currency, some commodity or a basket of other cryptocurrencies.

Most are pegged to the US dollar.

This article from the Bank of International Settlements Bulletin No 108 (July 11, 2025) – Stablecoin growth – policy challenges and approaches – notes that:

… almost 99% by market value, are denominated in dollars

That is, US dollars.

The BIS research also shows that:

Despite promising a stable value, stablecoins have experienced episodes of high price volatility. Indeed, some stablecoins exhibit volatility in excess of stocks or even unbacked cryptoassets, such as bitcoin … Yet even fiat-backed stablecoins – by a good margin the least volatile within the stablecoin space – rarely trade exactly at par relative to the unit of account in secondary markets, even during tranquil times and more recently as the market matured … This stands in stark contrast with current forms of money used for everyday transactions such as bank deposits, questioning stablecoins’ ability to serve as a reliable means of payment …

Moreover, despite the pretence that the stablecoin is backed by the peg to say the US dollar, the issuer of the US dollar, the US government provides zero guarantees to holders of the stablecoin.

There is no definable, legally-enforceable liability or fair value.

There was an Op Ed in the Japan Times last week (August 20, 2025) – Currency dominance in the digital age – which ran the line that:

… if a stablecoin breaks its peg — say, because its liquidity buffers prove insufficient — its credibility could collapse, triggering a run. If the stablecoin’s interconnections with other assets is sufficiently dense, this may have systemic consequences. A disorderly run on U.S. dollar stablecoins — privately issued digital tokens that are backed significantly by U.S. Treasuries and can theoretically be exchanged one-for-one with dollars — could prove particularly disruptive.

However, the operative word is “theoretically” – there is no enforceable convertibility between stablecoins and US dollars or any fiat currency for that matter.

The questions the article asks are relevant:

Who is responsible for governing the ledger? To what extent is the system protected from malicious actors? What happens if a currency’s cryptographic backbone is compromised by developments in quantum computing?

Private ‘money’ has collapsed before.

We use the – Tulip mania – as an example in the textbook.

The price tulip bulbs started rising rapidly in 1634 and then in February 1637 “dramatically collapsed”.

It was the “first recorded speculative bubble … in history”.

Cryptocurrencies and the derivative class called stablecoin are just another in a long-line of speculative, non-monetary asset – just like the Tulip bulb.

In the Tulip mania, the speculative traders pushed the price up in forward contracts and no bulbs ever exchanged hands.

The contracts were agreed outside the official Exchange.

When the collapse came, the “buyers no longer had any interest in honoring the contracts, and there was no legal basis for enforcing them.”

The matter ended and “most contracts were simply never honored”.

Some honest stablecoin traders might honor the ‘peg’ but most will never guarantee convertibility into the pegged asset.

But the tulip bulbs still retained their value as flowers.

Crypto has no alternative value.

Finally, central banks are working increasingly to introduce the so-called – Central Bank Digital Currency – which many people confuse or conflate with cryptocurrencies.

The conflation is totally invalid.

As the RBA information article notes, the central bank is “actively researching central bank digital currency (CBDC) as a complement to existing forms of money. Consumers currently have access to two forms of Australian money”.

The two existing forms are:

1. Cash – issued by the government – banknotes and coins – which are non-digital.

2. Bank account balances – which “is a digital form of money that is issued by commercial banks”.

The central bank also makes digital transactions already when it provides reserves to the commercial banks.

It notes that:

CBDC would be a new digital form of money issued by the Reserve Bank.

This research report (issued September 2024) – Central Bank Digital Currency and the Future of Digital Money in Australia – by the Australian government (combined work of RBA and Treasury) – provides a lot of useful discussion about CBDCs.

The fact is that CBDCs will have all the characteristics of the fiat currency in terms of guarantees for the liability.

There are many technological issues that need to be resolved before CBDCs will become the norm.

But the characteristics of CBDCs sets them apart from the (scam) cryptocurrencies.

Conclusion

My guess is that cryptocurrencies will never be fully adopted by any significant government as being akin to their fiat currencies.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.