Friday, February 3, 2023

Bitcoin’s 21M Limit Means It Can’t Be a Currency: China Central Bank Adviser

Bitcoin’s 21M Limit Means It Can’t Be a Currency: China Central Bank Adviser

Bitcoin’s 21 million supply cap is one reason Bitcoin can’t work as a currency — says one adviser to the People’s Bank of China. However, he said, it can still be considered an asset.

Also read: Craig Wright Supercomputing Firm Liquidated by Australian Tax Authorities

Currency Must Have ‘Fundamental Attributes’

Reuters reported that PBOC adviser Sheng Songcheng made the comments in an interview with financial magazine Yicai on Thursday. The reasoning behind his viewpoint was:

“Bitcoin does not have the fundamental attributes needed to be a currency as it is a string of code generated by complex algorithms … But I do not deny that virtual currencies have technical value and are a type of asset.”

He also cited price volatility and the 21 million BTC cap, which will be complete in the year 2140, as other reasons. Such inflexibility meant Bitcoin could not meet modern economic development needs, which requires the money supply to be flexible according to the current condition.

Echoing similar ideas the Chinese government has mooted since 2016, Sheng said the PBOC should look at creating its own digital currency — one it could properly regulate.

Does Money Supply Need to Be Flexible?

Bitcoin’s 21 million coin hard limit is deliberate and ideological. As such, it’s considered a kind of “sound money”, like precious metals.

Chinese money currency RMB OTC tradingWhether money supply should be hard-limited or infinite is a contentious point that varies between different economic schools.

Sheng’s views represent the current global consensus among central bankers. These banks (whether formally controlled by governments or not) create monetary value by fiat (i.e.: by decree) and can raise or lower the supply of currency.

If economic activity is moribund and the central bank wants to stimulate action, it increases the supply. This (hopefully) increases lending, business expansion and consumer spending, among other things.

On the other hand, if economic activity is “too hot” then central banks remove currency from circulation. This is called “tightening the money supply” — it’s necessary when conditions like high interest rates or inflation begin to appeal.

Bitcoin Is More ‘Sound Money’

The Austrian School (most closely aligned with libertarianism) favors a strict limit. According to the Foundation for Economic Education (FEE) this referred to commodity-based money (usually gold or silver). Its value comes from the “inherent value” of the commodity and government’s only role is to guarantee authenticity and standard weight.

Gold sound moneyThe reasoning behind this is the economy is too complex to be centrally planned in any way — and that governments may have motives other than economic rationality to pull their levers. Several times in the past, central banks have been accused of causing or exacerbating financial crises by misjudging conditions. Non-interventionists point to economic disasters in countries like Zimbabwe and Venezuela as extreme examples, though even governments in developed economies can make costly mistakes.

We should note that monetarists, such as Milton Friedman, also favor libertarian-style economic freedoms while maintaining that money supply should fluctuate. Also, not all cryptocurrencies have a hard supply limit — Ethereum’s ether and dogecoin have limits that can be raised in the future.

Sheng’s Comments Like All Central Bankers

The monetary philosophy you follow tends to match how much government and central control you prefer over the economy.

All this helps to explain why central bankers since 2013 have tended to praise Bitcoin’s technological innovation — but criticize its utility as a currency or money in today’s economy. Therefore, Sheng’s comments are entirely predictable.

As well as a central bank adviser, Dr. Sheng Songcheng is adjunct professor of Economics and Finance at the China Europe International Business School (CEIBS). He formerly worked at the PBOC itself as a deputy director at the Department of Statistics and Research. He is a specialist in monetary economics, monetary theory and policy.

Is Sheng correct? Fixed supply or flexible? Let’s hear your opinions.

Images via Pixabay 

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