Will cryptocurrencies be able to replace fiat money
The fight between fiat money and cryptocurrencies is a confrontation between two different ideologies. But what is cryptocurrency lacking to become comprehensive full-fledged money?
The first money appeared in the VI century BC. Over the two millennia, their form and functions have been constantly changing, and the process is still ongoing. However, the very goal for which mankind invented money is a medium of
exchange that allowed us to separate in time the process of buying and selling goods, the simultaneity of which was inherent in pure barter.
With the advent of the digital era, business and the state are trying in every possible way to digitise their services and products, including the paper money, which is also called fiat.
Fiat money and cryptocurrencies: what is the difference
At its core, fiat money is symbolic state money that is not backed up by anything other than people's faith that something valuable can be acquired for it. We use them as a means of payment, because doing so is prescribed in state law.
In turn, Bitcoin was conceived as online
cash. Its main difference from fiat is in decentralisation. It means that no one in any decree can allow or prohibit its use. In order to use BTC, all you need is to have a special wallet, but you will still have to buy cryptocurrency for fiat money, or mine it using special equipment.
Another feature of cryptocurrencies is that the user directly owns them, in contrast to non-cash money, which essentially belongs to banks. In other words, no regulator or financial institution can block a
crypto account or seize all the money.
How to overcome cryptocurrency volatility
However, the main minus of cryptocurrencies is volatility. None of the existing assets are subject to such price spikes. For example, the cost of bitcoin can sometimes drop by 20% per day, which makes it a risky investment tool. So, it’s not the kind of money that we are used to.
One solution to this problem is stable coins. Those are cryptocurrencies that are backed by stable assets, such as gold or, for example, fiat tokenised currencies. By the way, the central banks of Uruguay, the Bahamas, China, Sweden and
Ukraine are now exploring the possibility of their emission. However, since those are government projects, they are centralised and, due to the use of the blockchain, are more transparent for monitoring and controlling cash flows, which contradicts the idea of freedom of cryptocurrencies.
When cryptocurrencies will replace fiat
The head of the European Central Bank, Mario Draghi, recently stated that he is studying cryptocurrencies and stable coins in order to assess their “potential impact on monetary policy, security and payment efficiency, as well as market infrastructure and financial system stability.” However, so far, according to the official, cryptocurrencies do not particularly affect these areas and "do not have the characteristics that would make them a suitable substitute for money."
According to the head of the ECB, the reason for that is that the main issue is not the technological implementation of the blockchain project, but the expediency of their use in the context of costs and benefits for society.
On the other hand, according to economist Yevgeny Romanenko, money is a competitive product, so it is for the market to decide whether cryptocurrencies will replace fiat.
“The decision on what will become money and what will not, will not be made by Mario Draghi or the stable-coins creators, but the market. So stable-coins are missing one thing, namely the time needed to be tested and proved for the role of money. For example the fiat money, Draghi is supporting, has passed the test of time - and the whole world knows that this is the worst “money” in the history of mankind,” explains the specialist.
Having cited the Austrian school of economics as an example, Yevgeny Romanenko emphasised that the modern fiat system is a unique “example of counterfeiting by states on a planetary scale” in the history of mankind.
All due to the fact that the idea of honest money with which the case over millennia, in the 20th century in conditions of a metal standard was deliberately discarded and replaced by fiat money imposed on humanity, beleives the economist.
Thus, honest money was a sign of real wealth, since one gold or silver coin was actually equal to one or another equivalent in precious metal, in contrast to the paper, plastic and electronic debt instruments that we are using today.
“Cryptocurrencies are an attempt by the greatest minds to return humanity the sound money, in the world where a return to the gold standard is impossible. The competition between cryptocurrencies and fiat is a competition between a high-quality product and a worst-quality product, in a situation where the producer of the latter (Central Bank) cannot force them to buy their product, ”says Evgeny Romanenko.
Anyway, we shall not forget that the Bitcoin network has about 700,000 active BTC addresses, which is 0.1% of active fiat users in the EU. So for now, those figures are too small. In order for cryptocurrencies to replace fiat money, there should be at least 10 times more users. Until then, the war between fiat and cryptocurrency will remain a local conflict.