The rise of digital assets has sparked global conversations about the future of money, payments, and financial infrastructure. In a 2018 speech at the Treasury Markets Summit, Norman Chan, then Chief Executive of the Hong Kong Monetary Authority (HKMA), offered a clear-eyed analysis of virtual currencies like Bitcoin—examining their function, limitations, and broader implications for financial stability and innovation.
While the landscape has evolved since then, the core questions remain relevant: Can virtual assets become real money? What role should regulators play? And how can emerging technologies like Distributed Ledger Technology (DLT) transform finance for the better?
This article explores these themes through the lens of Chan’s insights, updated for today’s context with SEO-optimized clarity and depth.
What Is Money? Revisiting the Three Key Functions
Before assessing whether virtual assets qualify as money, we must first define what money actually is. According to economic principles, money serves three essential functions:
1. Medium of Exchange
Money must be widely accepted for the purchase of goods and services. Cash, bank transfers, and digital wallets like those linked to fast payment systems fulfill this role daily.
2. Store of Value
A reliable currency maintains its purchasing power over time. While modern fiat currencies aren’t backed by physical commodities like gold, they derive trust from institutional credibility—central banks, monetary policy, and legal frameworks.
3. Unit of Account
Money acts as a standard measure for pricing goods, recording debts, and calculating profits or losses. Businesses rely on stable units of account to operate efficiently.
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Beyond these functions, Chan introduced the concept of "moneyness"—a spectrum that measures how closely an asset behaves like money. Gold, for example, has some moneyness due to its liquidity and historical value, but it's far less convenient than electronic payments. Similarly, while Bitcoin may trade like an asset, its practical use as money remains limited.
Why Virtual Currencies Fall Short as Money
Despite their popularity and media attention, virtual assets such as Bitcoin fail to meet the fundamental criteria of money. Here's why:
❌ Limited Use as a Medium of Exchange
Bitcoin transactions are slow and costly. On average, a single transaction takes around 20 minutes to confirm—far longer than traditional electronic payments, which settle in seconds. During peak network congestion, confirmation times can stretch to hours. Transaction fees have also spiked dramatically; in December 2017, the average fee reached $34 per transaction.
Compare this to modern retail payment systems: contactless cards, mobile wallets, or instant bank transfers—all of which are faster, cheaper, and more scalable.
❌ Poor Store of Value
Bitcoin lacks intrinsic value and is not backed by any government or institution. Its price is driven purely by supply and demand dynamics, leading to extreme volatility. Such unpredictability makes it unsuitable for everyday economic activity or long-term savings.
While all currencies experience fluctuations, fiat money tends to remain relatively stable under sound monetary policy. In contrast, Bitcoin’s volatility appears structural—not temporary—making it more akin to a speculative asset than a reliable store of value.
❌ Not a Practical Unit of Account
Due to price instability and limited adoption, no economy uses Bitcoin as a standard unit of account. Imagine pricing your rent, salary, or grocery bill in an asset that could swing 20% in value overnight—such impracticality underscores why virtual currencies haven’t replaced traditional money.
The Risks of Unregulated Virtual Assets
Even if virtual assets aren’t true money, their growing use poses real challenges to financial integrity and consumer protection.
🔒 Risk of Illicit Activities
Most virtual asset platforms allow pseudonymous transactions without central oversight. This creates opportunities for money laundering, terrorist financing, and other illegal activities. Because users can transfer assets across borders quickly and with minimal traceability, enforcement becomes extremely difficult.
In response, the HKMA issued guidance in 2014 requiring banks to apply anti-money laundering (AML) and “Know Your Customer” (KYC) rules when dealing with virtual assets—a move aligned with global regulatory trends.
🛑 Investor Protection Gaps
Many virtual assets trade on unregulated exchanges with little transparency. These platforms are vulnerable to market manipulation, including fake trading volumes ("wash trading") and pump-and-dump schemes fueled by misinformation.
Moreover, exchange failures—such as security breaches or insolvencies—have led to significant investor losses in the past. Without robust oversight, users bear full risk.
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The Bright Side: DLT’s Transformative Potential
While virtual currencies face serious limitations, the underlying technology—Distributed Ledger Technology (DLT)—holds immense promise beyond speculation.
✅ Trade Finance Innovation
The HKMA has partnered with Hong Kong banks to launch a DLT-based electronic trade finance platform. By digitizing letters of credit and documentation, the system reduces fraud risk, speeds up processing, and cuts costs.
✅ Cross-Border Connectivity
Building on this success, Hong Kong is developing interoperable DLT platforms with international partners like Singapore. This will enable seamless cross-border trade financing—a major leap toward global financial efficiency.
✅ Faster Retail Payments
To meet public demand for instant transactions, the HKMA rolled out FPS (Fast Payment System), branded as “PayMe” or “TransferNow.” By linking bank accounts to phone numbers or emails, FPS enables free, real-time peer-to-peer transfers—demonstrating how central authorities can lead innovation in digital payments.
Central Bank Digital Currency: A Future Possibility?
One area under active exploration is Central Bank Digital Currency (CBDC)—a digital form of sovereign money issued by central banks.
Initial research suggests CBDCs may offer greater benefits in wholesale (interbank) markets than in retail. For instance:
- Instant settlement of interbank transactions
- Reduced counterparty risk
- Improved cross-border payment efficiency
However, key questions remain: Would CBDCs displace commercial bank deposits? Could they destabilize the financial system during crises? More research is needed before any large-scale rollout.
The HKMA has committed to sharing findings publicly as part of its transparent innovation agenda.
Frequently Asked Questions (FAQ)
Q: Are virtual assets the same as digital currencies issued by central banks?
A: No. Virtual assets like Bitcoin are decentralized and unregulated. Central Bank Digital Currencies (CBDCs) are official digital forms of national money, fully backed by the government.
Q: Can Bitcoin replace the US dollar or Hong Kong dollar?
A: Not in the foreseeable future. Due to scalability issues, high volatility, and lack of regulatory support, Bitcoin is unlikely to serve as a mainstream currency.
Q: Is DLT only useful for cryptocurrencies?
A: No. DLT has broad applications in trade finance, supply chain tracking, identity verification, and secure data sharing—far beyond speculative digital tokens.
Q: How do fast payment systems like FPS differ from crypto payments?
A: FPS uses existing banking infrastructure to deliver instant transfers in regulated fiat currency. It’s free, secure, and integrated with KYC/AML safeguards—unlike most crypto platforms.
Q: Should individuals invest in virtual assets?
A: Investors should proceed with caution. These assets are highly volatile and largely unregulated. Only those who understand the risks should consider exposure—and never with funds they cannot afford to lose.
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Final Thoughts: Innovation with Responsibility
We live in an era of rapid financial transformation. Technologies like DLT offer real potential to improve efficiency, transparency, and inclusion in global finance.
But innovation must go hand-in-hand with responsibility. As Norman Chan emphasized, regulators must stay ahead of risks while remaining open to progress. Virtual assets may not be money—but they remind us to keep improving our monetary systems.
The goal isn’t to resist change, but to guide it wisely—ensuring that tomorrow’s finance is not only faster and smarter but also safer and fairer for everyone.
Core Keywords: virtual assets, distributed ledger technology (DLT), central bank digital currency (CBDC), financial innovation, digital payments, cryptocurrency regulation, money functions