Traditionally, a currency is produced by a nation’s government. In the United States, the U.S. Treasury, through the United States Mint and the Bureau of Engraving and Printing, produces the coins and bills we spend. The Federal Reserve System (the central bank of the United States) distributes money through the banking system. This money is fiat money; that is, its value is not backed by gold or some other commodity. Instead, its value comes from its general acceptance as money. In other words, U.S. dollar bills and coins are useful as money because of the way people use them in the economy. 

Money serves three functions in an economy: medium of exchange, store of value, and unit of account. To be an effective medium of exchange, money must be acceptable in exchange for goods and services. Bitcoin can be used as a medium of exchange for a limited number of goods. Bitcoin’scredibility as a medium of exchange was enhanced when Richard Branson.accepted Bitcoin from the Winklevoss twins for a rideon his spacecraft.1 While the number of companies thataccept payment in Bitcoin has been growing, these transactions still represent a tiny part of the economy. In addition, while Bitcoin was created as a peer-to-peer paymentsystem, many of the Bitcoin transactions that occurbetween consumers and companies involve “middlemen”who facilitate the transactions by exchanging Bitcoininto conventional currencies.2 A transaction itself can becostly in both time and money—on average, it takes 78minutes to confirm a transaction (although it can takemuch longer) and costs $28 to complete a transaction.3In addition, people generally prefer a medium of exchangethat maintains stable value over time (as compared withservices or a basket of goods). For example, the FederalReserve’s inflation goal is 2 percent annually. If this targetis achieved, the U.S. dollar will lose purchasing power at2 percent per year. The Federal Reserve considers thisinflation level to be “price stability”; that is, a rate of inflation that is low and stable enough to be nearly irrelevantto people’s economic decisions. Bitcoin’s value, however,has not been stable over its history.Because money also serves as a store of value, the stabilityof that value is even more important. Bitcoin’s value hasgrown quite dramatically in recent years. Now, volatileprices might not seem to be a threat to the store-of-valuefunction of money when prices are rising; but whenprices are falling, people are reminded that stable valueis an important aspect of store of value. For example,Bitcoin has had several periods when prices fell dramatically, including a 20 percent decline in value on the morning of November 29, 2017.4 In fact, Bitcoin experiencedfive different episodes of at least 20 percent losses (whatmarket watchers describe as a “bear market”) during2017.5 Economist Robert Shiller says this volatility damages Bitcoin’s store-of-value credibility and is a majorhurdle to its acceptance as a currency.6The store-of-value function has also been diminishedbecause of hacking attacks, thefts, and other securityproblems.7 For example, hackers brought down Mt. Gox,which in 2014 was the largest Bitcoin exchange, and850,000 Bitcoins went missing at the same time (valued at$14 billion at a price of $17,000 each).8 On December 7,2017, hackers stole $70 million worth of Bitcoin.9 Bitcoinowners lack the ability to hold Bitcoin as a deposit in abank; instead, owners must hold them in a digital wallet