Why Libra passes the money test and bitcoin doesn’t

Private digital money just doesn’t work. Or so say the doubters, and they’ve been right. Wildly fluctuating cryptocurrencies — bitcoin and thousands of variants — have demonstrated that the miracle of blockchain-driven digital currencies, altcoins, crypto tokens and other forms of electronic cash cannot serve the role of money.

A true currency, as monetary economists have argued for more than a century, must have three core attributes before it can be described and accepted as money: It must be able to serve as a medium of exchange, a store of value and a unit of account, which means something that can be used as a steady measure to track the price and value of products, assets, business transactions, or to establish accounting reports.

Bitcoin fails two of the tests.

We could be one innovation away from something that could be seriously useful — and therefore seriously disruptive

Timothy Lane, deputy governor of the Bank of Canada

Anyone who bought a bitcoin this past June for $17,000 and stuck it in a digital wallet is now looking at an asset worth about $9,000, a clear indication of its uselessness as a store of value. Large value fluctuations also mean Bitcoin is chaotic as a unit of account.

Central banking systems, of course, use laws and regulations in an attempt to stabilize their currencies (a.k.a. public money) to meet the three tests.

But although Bitcoins fail as money, Libra could pass the tests, Timothy Lane, deputy governor of the Bank of Canada, said during a digital currency discussion in October at the Institute of International Finance. With the Libra stablecoin model, he said, “you actually do have stability of value, potentially.”

Perhaps the best real-world demonstration of the concept behind the Libra plan is the Hong Kong dollar, which is managed through a currency board structure rather than a formal central bank. Established in 1983, the Hong Kong Monetary Authority issues currency that is fully backed and exchanged,…

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