Into The Final Days of Fiat Currencies
As the world is facing an unprecedented test with coronavirus striking more than a million people worldwide amidst economic uncertainties, the end of the fiat dollar is nigh.
Money is an asset used everywhere in the modern world for everyday purposes like bills, shopping, deliveries, investment, etc. Due to the political differences, the world is currently split across more than 190 countries, with many owning their own money. Called “Legal Tender,” this money (or fiat currency) is backed by the government and must be accepted as a form of payment in that country. While most people stick to fiat currencies for everything that has a monetary value, a growing number of people who have more confidence in technology and the latest market trends are using cryptocurrencies.
Since the creation of the first cryptocurrency known as Bitcoin, there have been debates about which currency type is more trustworthy and convenient. Cryptocurrencies are built on blockchain technology and use cryptography for added security. As promising as it sounds, cryptocurrencies are not “Legal Tender” as they are yet to be backed by governments and financial institutions. Thus, the long-running discussion is predominantly made on the conflicting view of whether cryptocurrency or fiat currency is better.
Cryptocurrencies are decentralized and are designed to be accessible by anyone in the world, whether or not that person has access to a bank, instead of centralized entities like governments or financial institutions. Cryptocurrency transfers also happen within minutes, with no banking fees involved and no way to counterfeit cryptocurrencies since blockchains verify all transactions, ensuring immutability and transparency, making this new asset class viable as a future form of money. But the cryptocurrency market appears to be highly manipulated, and there is no way to control it currently. Due to the design of cryptocurrency transactions being private, it makes insider trading harder to track by authorities. Also, innovative solutions like crypto mixers made it harder for authorities to track cryptocurrency transactions.
Meanwhile, government bodies are looking into numerous ways to legitimize the use of cryptocurrencies for tomorrow as a likely replacement for the old traditional monetary system that has been used for centuries.
Will Fiat Currencies Be Ever Replaced?
A fiat’s value depends on the state of the respective country and banks. As the government controls the supply, centralized control means it is subjected to inflation based on its decision. A recent example would be the United States government’s decision to “print trillions of additional dollars” to stimulate its economy during a national crisis to protect the interest of its people and businesses. Therefore, it is well-known that fiat has an unlimited supply and is highly susceptible to inflation. Additionally, fiat could be taxed based on a person’s location and amassment. Other issues with fiat currencies include the slow (and often costly) transaction process, the risk of counterfeit paper notes, and a currency usually backed by a variety of resources (e.g., Gold), making fiat currencies an uncertain asset during uncertain times.
With the onset of an ongoing global recession brought about by the worldwide pandemic, many in the cryptocurrency community are seeing a promising future that cryptocurrencies will someday take the place of fiat currencies. Although some indicators point to cryptocurrency making its way into the traditional business space, it is more likely for mass adoption to occur if one or more cryptocurrencies successfully ‘infiltrate’ the market with real-world use cases. Encouragingly enough, a few ‘crypto-contenders’ are potentially disruptive and could develop success outside today’s relative niche blockchain and cryptocurrency space.
Bitcoin: The Father of Cryptocurrencies
Most people are betting on Bitcoin (BTC) as the cryptocurrency most likely to achieve mainstream adoption on a global scale. The growing awareness of Bitcoin may be attributed to more air-times on traditional finance media such as Forbes and Bloomberg, innovative cryptocurrency products such as Cryptocurrency debit cards, Bitcoin ATMs, and In-browser crypto wallets, which enable cryptocurrencies to be used for daily purchases and online payments.
Bitcoin has offered the world a new method of using money – offering round-the-clock borderless infrastructure, unlike traditional banking for anyone with an internet connection. Unlike conventional banks, bitcoin transactions are secure as ledgers are stored on the blockchain. Chile and Argentina are some countries with collapsing financial systems, and there are seeing an aggressive growth in the volume of Bitcoin transactions.
Alternative Cryptocurrencies (Altcoins)
Today, there are thousands of different cryptocurrencies which try to emulate the success of Bitcoin. Known as altcoins, they are designed to not only act as a form of payment but could also be used for various purposes. However, they tend to see lower acceptance levels outside of the cryptocurrency space. Ethereum was created in 2016, and its blockchain has introduced smart contracts to the developer world. This feature enhanced the blockchain by allowing an infinite set of rules to be created and implemented, opening up many possibilities for using the technology.
Many large corporations and governments have utilized Ethereum for their blockchain-based projects as they explore the use of blockchain technology in everyday applications. However, its cryptocurrency – Ether (ETH), struggled to find an actual use case for mainstream transaction purposes, aside from being the native currency within its ecosystem. It is pretty representative of many other altcoins as well.
Asset-backed Cryptocurrencies
These asset-backed cryptocurrencies, known as Stablecoins, are blockchain-based payment instruments that aim to eliminate the volatility of cryptocurrencies. Fiat currencies often back them (e.g., USD or GBP), commodities (e.g., Gold), or assets on the blockchain (e.g., MakerDAO), thereby representing real fiat currencies like USD or GBP. Thus, this type of cryptocurrency allows the mainstream audience to interact and transact with cryptocurrency as they do with familiar fiat currencies without worrying about price volatility and simultaneously driving adoption growth.
While Bitcoin provided an opportunity for people to be their bank, stablecoins are likely to become the stepping stone for governments and financial institutions to introduce cryptocurrencies to the masses. It is evident through the government’s and corporations’ race towards creating their digital currencies that the widespread use of cryptocurrency is inevitable and may happen sooner than we think.
Corporate Stablecoins: Libra
Facebook’s project – Libra, was formally announced on June 18, 2019, which aimed to create a global cryptocurrency built on blockchain to promote ‘financial inclusion. If the project is successful, it could leverage its operational network of software that boasts over 2.5 billion people worldwide. However, it is largely criticized on the global stage as it represents an existential threat to central banks and financial institutions. Furthermore, Facebook was embroiled in running battles for user safety and data privacy. Nevertheless, a smooth launch of this project would allow the seamless movement of money across all its software and give Facebook even more authority and influence than they already have. On the other hand, many of its users with access to a mobile phone are currently unbanked. Libra could usher in a new ‘cryptocurrency era’ as they introduce cryptocurrency as the new form of money for the world.
Central Bank Digital Currencies
As corporations are getting their hands on creating their cryptocurrencies, governments worldwide are looking into blockchain and the possibility of creating ‘national digital currencies’ which could co-exist with fiat currencies. In recent years, countries like the People’s Republic of China (PRC), the United Kingdom, and even the United States have announced plans to roll out Central Bank Digital Currencies (CBDCs) – digital monies issued by the national bank. As stated by the Bank of England, a CBDC “would not necessarily be a cryptocurrency” but would essentially offer the same benefits as Stablecoins: programmability, decentralization, and security, but they could also be thought of as digital bank notes. With the rapid decline of cash in society and more private banks, this could potentially give an edge to central banks to offer more lucrative tools to users.
Beyond The Foreseeable Future
While the idea of cryptocurrency is slowly gaining traction worldwide, it remains to be seen which cryptocurrency may be able to break into the mainstream market. With its popularity and market capitalization, Bitcoin may have an early mover’s advantage. However, several altcoins with real-world use cases are also catching up in terms of popularity. Demands for products like Bitcoin ATMs and Cryptocurrency Debit Card/Payment apps are growing worldwide, accelerating the use of cryptocurrencies online and offline. Although corporations trying to innovate in this field were caught up in regulatory concerns over the creation of their cryptocurrencies, it will be worth noting that if they collaborate in tandem with governments, there is a chance that the eventual replacement of fiat currencies will be highly likely, driven by the corporations-governments cooperation to introduce cryptocurrencies to the world as the new form of money.