Fiat money, or fiat currency, is a currency that a government (usually a national government) has declared to be legal tender. This currency, unlike older styles of currency, is not backed by a physical commodity (the way U.S. dollars were once backed by gold). It’s the type of currency we’ve all relied on for the past 50 years or so and constitutes all the dollar bills, coins and digitally held U.S. dollars you have to your name.
There’s an implicit expectation that fiat currency will last forever, barring any international takeover or radical transformation (such as how the euro became the standard for the European Union in the early 2000s). But now a fundamentally different type of currency is starting to rise: cryptocurrency.
So, could cryptocurrency have the power to replace cash and fiat currency entirely?
What a cryptocurrency takeover would look like
Let’s start by looking at what a crypto takeover could look like:
1. Growing consumer interest
The Bitcoin rally in 2017 was mostly due to an explosion of consumer interest. Millions of new people were interested in the currency, buying, mining and selling it, and the price rose in response to that increased demand. Currencies are only as valuable as people think they are, so for cryptocurrency to become a stable household currency, we would need to see levels of consumer interest and adoption far above where they are now. This is the first phase of the transformation; without consumers actively using the currency, no other steps will happen.
2. Industry impact and response
We’re starting to see more businesses accepting Bitcoin and other cryptocurrencies, and assuming consumer interest grows, that acceptance will only increase. At some point, the prevalence of digital currency will make online shopping even more attractive, and physical stores will need to start adopting it to catch up -- that way, the war between physical and digital retail will continue. Other industries, like finance, might gravitate to more crypto-oriented products and services, creating a feedback loop that responds to and creates consumer demand.
3. Governmental impact and response
Governments have a vested interest in keeping their fiat currency active; it’s something they can directly control and has an enormous impact on the economy. They won’t be incentivized to accept (or even tolerate) cryptocurrency, which is why countries like China are locking down on Bitcoin altogether. Still, as more consumers start trading cryptocurrencies freely, governments will need to start imposing stricter or better-defined trading regulations and will be forced to acknowledge the currency.
4. National adoption
The big step forward is national adoption. At this stage, the majority of a population will be using cryptocurrency openly, and its federal government would have ample, crypto-friendly policies to allow those trades to happen. The government may recognize the advantages of an all-crypto model, or else concede to its inevitability, and start putting a plan in place to transition the country from a fiat system to a digital one.
5. International adoption
The process would be gradual, but as more countries get on board with the same cryptocurrency and similar measures for adoption, we could eventually have an international system that relies on one (or a series of very similar) currencies.
The advantages of an all-crypto future
So why are we even considering this as a possibility? Why would an all-crypto future be good for us?
One of the biggest advantages of cryptocurrency is the fact that it’s completely decentralized. Each cryptosystem relies on a complex, interconnected network of users to manage the system. No single government would be able to seize control of the system, nor would any single player be able to take advantage of it.
2. Manipulation protection
Along similar lines, cryptocurrency would be marginally protected against manipulation efforts. Printing too much money can lead to hyperinflation. Small-cap stocks can be prone to price manipulation based on trading volume. But, at sufficient volumes, cryptocurrencies with a fixed supply are practically immune to these tactics.
3. Circulation costs
For years, the American penny has cost more than 1 cent to create -- 1.5 cents as of 2016. While fiat currency is completely dependent on consumer trust to hold its value, it still costs money to print and mint new currency and manage old forms of currency. Since cryptocurrencies exist only in a digital environment, those costs could be eliminated.
Cryptocurrencies rely on the blockchain to acknowledge and verify the legitimacy of every transaction. This makes it much better protected against fraud than cash or any other method we have to exchange traditional currency. Granted, fiat currency could adopt a blockchain-style exchange. However, that would make it a digital currency.
5. Intermediary abolishment
The peer-to-peer nature of crypto transactions means we could do away with at least some financial intermediaries. That means consumers will be responsible for fewer transaction fees. Plus, payments may process faster for more transactions.
The disadvantages of an all-crypto future
That said, there are also some key downsides to an all-crypto future:
1. Fiat currency woes
The majority of people still rely on fiat currency and will for the foreseeable future. If our federal government were to transition to a fully crypto system, the value of fiat currency would plummet, leading to significant asset loss in some portions of the population.
2. Infrastructure and transition
To re-create a financial system for a modern, developed country would take an enormous effort. We’d have to build new infrastructure. This would also involve plans for a gradual transition to take place over years or decades. This would likely create financial volatility and possibly increase consumer uncertainty.
3. Industry collapse
Some industries might be negatively affected by the release of a fully crypto system. Financial institutions might not be able to charge transaction costs or hold consumer assets as reliably as they used to. The economic impact of losing an entire industry would be harsh on consumers.
4. Lack of oversight
One of the advantages of a crypto-based system would be the lack of a single entity capable of manipulating the currency. However, some oversights and manipulations can actually be valuable. This includes directly controlling the amount of currency in circulation to prevent inflation. Some cryptocurrencies have built-in parameters for controls like these like a finite amount of minable currency. However, the lack of experienced, capable oversight could result in other problems.
Right now, there are hundreds of cryptocurrencies available. This is already causing issues in the market with regard to ICOs and consumer confusion. If a national government or the international community decides to adopt a cryptocurrency as its main standard, how would we decide which coin to offer? Would we accept and use a variety of different coins? How would we keep track of the exchange rates? There are many difficult questions to answer.
So. is it possible for cryptocurrency to completely overtake our contemporary system of fiat currency? Absolutely. However, it’s going to take years, if not decades, to even start making that transition. We would need to accomplish several key steps. This includes dramatically improving user adoption and trust before crypto can even rival fiat currency in terms of spending power or reliability. Of course, if we can solve the main problems with adoption and build the right infrastructure, we could end up reaping all the advantages such a system would offer.
(By Peter Daisyme)