by Antonio Fatas and Beatrice Weder di Mauro
Do you value bitcoin in dollars or dollars in bitcoin? Few serious economists imagine that the new cryptocurrencies, for all the hype, will make national currencies redundant. By and large they are right, because conventional money actually does a pretty good job. The U.S. dollar and other reserve currencies have historically performed well as a medium of exchange and as a store of value — the two principal functions of a currency. Bitcoin and its derivatives perform poorly on both accounts and will not disrupt money as we know it.
But that doesn’t mean that new technologies aren’t going to usher in a lot of disruption to the financial system. Traditional economists (and, yes, that label could well describe both of us) often ignore a crucial separation between money (the “what”) and the payment technology (the “how”). This confusion originates in the fact that for older forms of money — gold or bank notes — there is no distinction between the “what” and the “how”; you simply pay by handing dollar bills or gold coins to the seller.
Today, however, we pay out physical cash less and less often. Instead, when we transact, we usually transfer digital code in exchange for the good or service we’re buying. And it is through the technology that digitizes money that new entrants are challenging……Read More