In recent years, the rise of virtual currencies like Bitcoin has sparked intense debate about the true nature of money, the role of central banks, and the future of digital finance. As a member of the academic committee at the International Monetary Institute, I aim to clarify these complex topics by exploring the essence of money, assessing whether Bitcoin can function as real currency, and examining how central bank digital currencies (CBDCs) fit into this evolving landscape.
This discussion is not just theoretical—it has real-world implications for regulation, financial stability, and global economic architecture. By understanding core concepts such as monetary value, credit-based issuance, and digital currency design, we can make more informed judgments about the legitimacy and potential of emerging financial technologies.
The True Nature of Money
At its core, money serves three essential functions: a medium of exchange, a unit of account, and a store of value. These roles have evolved over time, but one principle remains constant: money must be tied to value.
Historically, money began as commodity money—items like shells, salt, or cattle that had intrinsic worth. Over time, societies converged on precious metals like gold and silver due to their durability, divisibility, portability, and scarcity. These qualities made them ideal for facilitating trade across regions and cultures.
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However, as economies grew in scale and complexity, physical metal became impractical for everyday transactions. This led to the invention of paper money, initially backed by gold reserves. People trusted paper notes because they could theoretically redeem them for precious metals. But gradually, governments and central banks moved away from this system.
The final break came in 1971 when the United States abandoned the gold standard, ending the Bretton Woods system. From that point onward, global currencies transitioned into what we now call fiat money—currency whose value is guaranteed not by physical assets but by government decree and public trust.
Yet even in today’s purely fiat system, money does not appear out of thin air. It enters circulation through two primary channels:
- Reserve-backed issuance: Central banks purchase assets like gold or foreign exchange (e.g., U.S. dollars) to inject new money into the economy.
- Credit-based creation: Commercial banks create money when they issue loans, expanding the money supply through fractional reserve banking.
While credit-based expansion offers flexibility, it also introduces risks—especially over-issuance, which can lead to inflation or asset bubbles. That’s why central banks exist: to manage monetary policy independently and prevent short-term political pressures from distorting long-term economic stability.
Crucially, today’s financial system operates largely on book-entry accounting, not physical cash. When you transfer funds online, no paper changes hands—only digital records are updated. This shift toward a cashless society is accelerating worldwide, driven by efficiency, security, and technological innovation.
Why Bitcoin Cannot Be Real Money
Bitcoin was introduced in 2009 as a decentralized digital currency designed to operate without central authority. Its creators envisioned a system immune to government manipulation—a “digital gold” with fixed supply and algorithmic control.
But despite its popularity and price volatility, Bitcoin fails to meet the fundamental criteria of real money.
Lack of Intrinsic Value
Unlike gold—which has industrial uses and cultural significance—Bitcoin is purely a digital construct. It exists only within its own network as a string of code generated through energy-intensive mining. While mining requires labor and electricity, not all labor creates value. If no one accepts Bitcoin as payment or believes in its worth, its underlying effort becomes economically meaningless.
Moreover, Bitcoin’s deflationary design—capped at 21 million coins with halving rewards—discourages spending. When people expect prices to fall (or coin value to rise), they hoard rather than transact. This undermines its function as a medium of exchange, making it more speculative than functional.
Volatility Undermines Stability
For money to serve as a reliable unit of account, its value must remain relatively stable. Yet Bitcoin’s price swings wildly—from thousands to tens of thousands of dollars in short periods—render it useless for pricing goods or services consistently.
Imagine running a business where your revenue doubles overnight… then halves the next day. Such unpredictability makes long-term planning impossible and defeats the purpose of using any currency.
Anonymity Enables Illicit Use
Bitcoin’s emphasis on privacy and decentralization makes it attractive for illegal activities such as money laundering, tax evasion, and ransomware attacks. Because transactions are irreversible and pseudonymous, they’re difficult to trace—posing serious challenges for regulators and law enforcement.
While proponents argue this freedom protects users from surveillance, unchecked anonymity erodes trust in financial systems and increases systemic risk.
Scalability and Environmental Costs
The computational power required to mine Bitcoin consumes vast amounts of electricity—more than some entire countries. This raises ethical concerns about sustainability and resource allocation. If digital currencies are meant to improve financial inclusion and efficiency, their environmental footprint must be considered.
Furthermore, Bitcoin’s blockchain struggles with scalability. Transaction speeds are slow compared to modern payment networks like Visa or Alipay, limiting its practical use in high-frequency commerce.
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Rethinking Bitcoin’s Legal Classification
Currently, many jurisdictions—including China—classify Bitcoin as a “virtual commodity.” But this label is outdated and misleading. Calling Bitcoin a “commodity” implies it has utility or market demand beyond speculation, which is rarely the case.
A more accurate classification would be network-based digital token or crypto-asset—a form of digital ownership within a specific ecosystem. Like arcade tokens or airline miles, these assets only hold value within closed systems unless linked to real-world economies.
Some digital tokens are backed 1:1 by fiat currency (like stablecoins), while others derive value from community consensus or platform usage rights. But none should be allowed to function as parallel legal tender without strict oversight.
To prevent abuse, regulators should focus on controlling conversion points—where digital tokens interact with traditional banking systems. Key rules include:
- Mandatory real-name verification for all exchanges
- Strict limits on cross-account transfers
- Requirement that users redeem tokens into the same fiat currency and original bank account
By tightening access at these gateways, authorities can contain risks while preserving innovation in blockchain technology.
The Case for Central Bank Digital Currencies (CBDCs)
Unlike decentralized cryptocurrencies, central bank digital currencies represent a digitized form of national money issued directly by monetary authorities. They are not new currencies but digital versions of existing fiat—like electronic cash.
China’s digital yuan (e-CNY), for example, is being tested as part of M0 (cash in circulation). But rather than thinking in terms of traditional monetary aggregates, we should view CBDCs as programmable wallets with enhanced features:
- Instant settlement
- Offline transaction capability
- Smart contract integration
- Greater transparency for anti-fraud measures
Two implementation models are under consideration:
- Direct (one-tier) model: The central bank issues and manages accounts for all citizens.
- Intermediated (two-tier) model: The central bank supplies digital currency to commercial banks, who distribute it to the public.
Most experts favor the two-tier approach to preserve financial intermediation and avoid disintermediating commercial banks.
Importantly, CBDCs do not aim to eliminate private cryptocurrencies overnight. As long as alternative networks offer unique services or communities find value in them, they will persist—much like niche games or private loyalty programs.
But CBDCs can provide a secure, regulated foundation for digital finance—one that supports innovation without sacrificing stability or sovereignty.
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Frequently Asked Questions (FAQ)
What gives money its value today?
Modern money derives value from trust in institutions—especially central banks—and legal recognition as legal tender. Unlike commodity-backed currencies, fiat money relies on confidence that it will be accepted in exchange for goods and services.
Can Bitcoin replace national currencies?
No. Due to extreme volatility, limited scalability, lack of intrinsic value, and regulatory resistance, Bitcoin cannot function as a mainstream currency. It may serve as a speculative asset or store of value for some investors, but not as reliable everyday money.
Is mining Bitcoin economically productive?
Mining secures the network but consumes massive energy without generating tangible societal benefits. While miners earn rewards, the overall economic output does not justify the environmental cost—especially when compared to productive investments in infrastructure or technology.
How are CBDCs different from cryptocurrencies?
CBDCs are centralized, government-issued digital currencies with legal tender status. Cryptocurrencies like Bitcoin are decentralized, privately issued tokens without official backing or universal acceptance.
Will digital currencies eliminate cash?
Cash will likely coexist with digital forms for years due to privacy preferences, accessibility needs, and infrastructure limitations in rural areas. However, the trend is clearly toward reduced cash usage in favor of faster, traceable digital alternatives.
Can a cryptocurrency become “supranational”?
While the idea of a global currency independent of any nation-state is appealing—especially after crises like the 2008 financial meltdown—no current crypto meets the requirements for widespread adoption. Trust, stability, regulatory compliance, and macroeconomic backing are missing. Even SDRs (Special Drawing Rights) remain limited to intergovernmental use.
Final Thoughts
The debate over virtual currencies reflects deeper questions about trust, control, and the future of finance. While innovations like Bitcoin challenge old paradigms, they also expose weaknesses in purely decentralized models.
True progress lies not in replacing existing systems entirely but in enhancing them—with secure, efficient, inclusive digital tools built on sound economic principles.
Central bank digital currencies represent a balanced path forward: embracing technology while maintaining accountability, stability, and public confidence. As we move toward a more connected financial world, clarity in definitions, regulation, and design will be key to sustainable growth.
Let us support innovation—not disruption for its own sake—but evolution grounded in purpose and responsibility.