To see the issue more clearly, consider a simple value function for an item that might be employed as a medium of exchange
This status quo notwithstanding, we need to live in and with the current rudimentary norm and therefore our fiscal policy needs a legal definition in consonance with our ideology and we certainly need to devise a defense policy for the management of the medium of exchange
The rationale for an efficient medium of exchange
was highlighted by Friedman (1960), who argued that government-issued money should bear the same rate of return as other risk-free assets (Friedman and Schwartz 1986 also discussed the fundamental rationale for a government-issued currency).
Contrary to conventional wisdom, our research shows that fiat currencies crowd out Bitcoin, not the reverse, and that the design and size of the Bitcoin market deprives the currency of its intended use as a medium of exchange
," KiHoon Hong said.
Rather than forcing money into the economy, some economists began to make headway on understanding the frictions that gave rise to a medium of exchange
This requires that the item be a general medium of exchange
, acceptable to most people for purchases and sales, and at least as of 2015, bitcoin has not (yet?
2014) (holding that Bitcoin transactions can give rise to liability under a federal money laundering statute, even though the IRS treats virtual currency as property, because "Bitcoins can be either used directly to pay for certain things or can act as a medium of exchange
and be converted into a currency which can pay for things").
So under Islamic principles, invested funds can only create returns on the basis of sharing risks and rewards in a business venture, whereas money is just a medium of exchange
Another way to express the point that Bitcoin is not at this time a quantitatively important money is to reflect on the economist's standard definition of money--namely, an entity that serves as a medium of exchange
, store of value, and unit of account.
The Bank of England (UK Central Bank) appears agnostic; in its Quarterly Review for Q1 2014, in a paper entitled Money in the Modern Economy, the Bank's analysts state, "Digital currencies are not at present widely used as a medium of exchange
They concluded that the virtual currency is currently a speculative financial asset that can be used as a medium of exchange
As a medium of exchange
, Bitcoin has a clear potential for growth.