Keep your (bit)coins, I want change

Dr Patrick Carvalho
Insights Newsletter
11 October, 2019

From cowry shells to metal coins, promissory notes, paper money and plastic, humans have adapted to different currency types over the millennia.

Then the first Bitcoin was issued on 3 January 2009.

After a decade, a trove of cryptocurrencies globally is finding it hard to earn cache with the spending public.

Perhaps auspiciously for early adopters of digital coins, New Zealand has just joined the select group of countries such as the US, UK and Australia to issue tax guidelines approving salary payment agreements in cryptocurrencies.

But while the new IRD ruling accepts digital currency remuneration for tax income purposes, it does not provide them with any legal tender.

In other words, you may earn your salary in digital kind, but you may likely not be able to buy a bottle of milk with it. (You definitely cannot pay your income tax in the cryptocurrency the IRD just approved).

Another hurdle for digital coins becoming a mainstream method of payment regards their inherent price volatility – which leads some to call them “crypto-assets” instead of cryptocurrencies.

For example, the dollar value of a Bitcoin was less than $1,000 in 2016 rising to almost $20,000 at its peak in 2018, before crashing to around $3,500 at year end. Currently, it is hovering at $8,000.

Such large price variations make it hard not only to determine how many Bitcoins you need to buy a loaf of bread, but also to be a safe place to park your savings like the dollar and pound do.

Addressing the issue, “stablecoins” such as Tether and NuBits were designed to reduce price uncertainty. Even so, these digital coins are still struggling to act as a true means of payment.

The fundamental feature of money as a medium of exchange lies in its liquidity (i.e. how easily it can be transported and be readily accepted everywhere). So far, all cryptocurrencies have failed the liquidity test.

Recognising the problem, Facebook has proposed a new stablecoin called Libra. The hope is to capitalise on its 2.4 billion monthly active users to make Libra a household form of payment.

But first, the social media giant needs to prove it can handle the responsibility of administering a global currency. Not an easy task, given Libra’s cold reception from authorities on both sides of the Atlantic.

So for now, take your employer’s offer to pay you in digital coins at your own peril.

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