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Can Crypto Currency Takeover Fiat Currency? Comparative Study of Fiat Currency and Cryptocurrency

Introduction

Since Bitcoin’s inception in 2009, several cryptocurrency enthusiasts forecasted that it would eventually take over and substitute fiat currencies worldwide (Islam et al., 2018). They may partially have been right. The world has since witnessed an explosion of different cryptocurrencies, with about 5,000 cryptocurrencies being in the marketplace with a market capitalization of more than $1 trillion and an average everyday turnover of approximately $200 billion (Jumde & Cho, 2020). Eichengreen (2019) reasons that the irrepressible exchange and trade of cryptos have resulted in many worries among governments. Nonetheless, a number of countries are at the verge of legalizing cryptos, leading to prediction by a Morgan Creek Capital Management that cryptos would replace at about 30% of fiat assets by the year 2030 and replace fiat eventually in the future. This view has been supported by venture investors, like Tim Draper, and various studies. However, to date, there is a noticeable connection between fiat exchange and the crypto: the market capitalization and worth of cryptocurrency is expressed in terms of fiat currencies, while most fiat currencies are fast embracing digitization (Gandal & Halaburda, 2016). Whereas cryptocurrencies started lazily, they are fast becoming adopted by individuals and governments across the world relative to wire transfers or bank cards (Eichengreen, 2019). It is against this mixed background that this paper critically examines into the possibility of cryptocurrencies taking over fiat currencies in the future.

Cryptocurrencies Vs Fiat Currencies

At the start of crypto boom, Bitcoin appeared to be the undisputable leader. Recently, PayPal Holdings, Inc, declared that they would start accepting cryptos, making them join big names in the marketplace, like Tesla and Microsoft, in the cryptocurrency-mania (Jumde & Cho, 2020). Up to this year, the crypto accounted for a majority of the sector’s market capitalization. Nonetheless, other currencies have emerged, like Ripple, Ethereum, and other cryptocurrencies. While Bitcoin remains the market leader, the fast turnover in the sector has raised questions as to whether cryptocurrencies are actually currencies. It is hypothesized that the cryptocurrencies will revolutionize ways of money transactions. Notwithstanding their grasp of the market, debates and controversies abound among experts on the future of cryptocurrencies eventually. Cryptocurrency’s markets high volatility, along with its intricacies, make it hard for many people to understand the viability of cryptocurrency as a substitute currency (Islam et al., 2018).

There are a number of factors that experts have advanced to be giving cryptocurrencies an advantage over fiat currencies. First is market capitalization. Mell (2019) notes that in 2019, the Coinmarketcap, the total marketplace capitalization of 2420 cryptos summed up to about $303 billion (Yuneline, 2019). Nonetheless, the fiat marketplace stood at $81 trillion, with the fifteen fiat currencies acknowledged at the United Nation (UN). As of February 2021, Bitcoin held a market capitalization of $647.3 billion, followed by Ethereum at $122.7 billion, Tether $24.3, and Litecoin $9.3 (Eichengreen, 2019). The total market capitalization of all cryptos amounted to $950 billion, an indication that the numbers have increased and that cryptocurrencies have been performing fairly in the marketplace. 

The second factor that gives cryptos advantage over fiat currencies is the fact that there are cheaper services associate with cryptos. While the cryptocurrencies are in their growth and development phases currently, the potential that they posses can thoroughly be witnessed. According to a study by Blockchain CloVR, of 707 respondents, 112 indicated that they use cryptos to send money their homes and families (Jumde & Cho, 2020). The study predicted that the figure is likely to rise further.

Among the reasons that were associated with the increasing use of cryptocurrencies are that they can save time and costs both for consumers and merchants (Gandal & Halaburda, 2016). Irwin and Milad (2016) reason that merchants dislike credit card usage because of the risks of charge-backs and processing fees which are expenses that outweigh consumers’’ convenience. Nevertheless, with cryptos, traditional banking charges apply no more (Islam et al., 2018). While transaction charges are not entirely discarded, they are fairly much lower relative to a traditional monetary system.

The third factor that cryptos have over fiat currencies is the steadily increasing cryptocurrency trading. Not only are cryptocurrencies increasing in the payment and transactional spaces, but equally in the trading sphere as well, with most investors including cryptocurrencies in their portfolios. Eichengreen (2019) explains that cryptos help in diversification and absolute risk mitigation. As at 2017, there were a total of approximately 35 million verified cryptocurrency accounts, a number that has doubled since then with 2018 having about 17 million additions (Mell, 2019). The implication of these figures is that traders are fast joining the cryptocurrency trades as the number of cryptocurrencies continue increasing. Yuneline (2019) reasons that financial service providers along with online brokers are playing a significant role in this, with brokers, like ETFinance, rendering flexible and customizable cryptocurrency trading services. Gandal and Halaburda (2016) add that these financial service providers are producing trade in huge cryptocurrencies with comparatively low charges, thus leading to an increase in cryptocurrency in the global trading sphere. 

Another factor is the cryptocurrency payment mechanism that is cutting the middlemen. Islam et al. (2018) reason that Bitcoins facilitate exchange and payment of transactions between parties without the engagement of third parties. Whenever a transaction is executed, the computer relays the communication and records the same in the blockchain. Upon the verification of the transaction, a distinct address is prescribed to that transaction. One substantial advantage with this structure is that while the transactions are recorded, no individual information can be revealed or leaked (Irwin & Milad, 2016). This way, the cryptocurrency payment mechanism results to utter transparency and protects the transactions. Dissimilar from fiat currency methods of payment, the costs are minimized since there is no intermediary involved.  According to a study by McKinsey, more than 2.5 million individuals globally are underserved by the currently ongoing monetary system structure. Most people, therefore, can face significant costs while facilitating transactions.

Mell (2019) reasons that cryptos are more transparent and decentralized than fiat currency. A decentralized financial system implies that the control of the whole financial system changes from governments, elites, and bankers. Debatably, the most crucial contribution of cryptos is the introduction of the decentralized finance (DeFi). Peprah et al.  (2018) explain that owing to the fact that DeFi is founded upon the Ethereum platform, anyone is allowed to develop a financial service by creating the riles about how the service will function. Once they deploy it upon DeFi, it becomes decentralized – the developer does not anymore have control over it. This suggests that people can globally trade with one another without stringent regulations and rules in the traditional monetary system. DeFi, thus, eliminates the fiat monetary systems’ challenges and places all on the same level notwithstanding their influence or financial status (Yuneline, 2019). Owing to the fact that the banking system is largely predicated upon confidence and trust, it could imply that this confidence and trust mean that the confidence and trust by the general population is vulnerable to abuse by elite financiers, regulators, corrupt governments, and bankers (Irwin & Milad, 2016). Fiat currencies’ history was full of trust breaches. Nonetheless, blockchain knowhow will make ‘robust entities’ surrender their control over financial institutions, and allow transactions be addressed on the basis of ‘peer-to-peer’ (Mell, 2019). By so doing, consumers are relieved to establish that their individual identities are protected. Similarly, consumers have an unprecedented and complete autonomy over their monetary plans without third parties’ involvement (Gandal & Halaburda, 2014). The wealthy and elite do not any more need to put their wealth in the Swiss bank and offshore banks. Islam et al. (2018) explains that blockchain knowhow keeps transactions in blocks, which are thereafter connected in a chain. The linking prevents any of the chained boxes from being changed. Each block consequently strengthens other blocks’ verifications, implying that one has to tamper with all blocks without being discovered if one has to change anything (Peprah et al., 2018). This makes it hard and tough to trace a transaction. Additionally, transactions are cryptographically encoded, making it hard for third parties to change or reverse engineer past inputs.

The new positioning of cryptocurrency in substantial nations is another factor giving cryptocurrency a vantage ground over fiat currencies. Cryptocurrencies, according to Gandal and Halaburda (2014), facilitate cashless transactions in a kind of decentralized manner. This transforms the whole global trading as dealings can happen without the use of the US dollar. A country facing problems of global economic sanctions can employ cryptocurrencies the most. Nonetheless, most nations are yet to embrace the digitization or cryptocurrency payment mechanism with other nations, such as India and Japan, are yet very cash-centred (Irwin & Milad, 2016).

Contrarily, fiat currencies’ proponents reason that fiat currencies will continue to exist. They base their reasoning upon the volatility of crypto markets that make it highly unrealistic for adoption as a currency in a country. Peprah et al. (2018) justify that one principal, characteristic of cryptos is that the marketplaces are extremely volatile, adding that the volatility of costs reached about 8% within a short span of three months during 2017. The main challenge is how unpredictable prices are compared to current currencies, implying that large transformations in their worth will lead to the worth of services and goods experiencing frequent variations (Eichengreen, 2019).

Jumde and Cho (2020) further argue that the lack of policies and regulations governing cryptocurrencies is a great challenge when fluctuations in price go out of control. Moreover, the lack of third parties, particularly regulatory agencies with authority, according to Mell (2019), may engender unscrupulous behaviours. Eichengreen (2019) points out that life will be short, brutish, and nasty if hackers took advantage of the lack of policies and regulations, and exploit cryptocurrencies for individual gains. Unlawful undertakings, like the sale of firearms, drugs, and human trafficking will become new normal, and this remains difficult to correct as long as transitions between the consumers and merchants remain secret.

The Future of Cryptocurrencies

Proponents of cryptocurrencies hold the belief that there will be developed international frameworks to make sure that consumers remain safeguarded and that monetary systems are maintained properly (Peprah et al., 2018). However, governments are themselves optimistic regarding the future of cryptos and have actively been facilitating transition towards them (Gandal & Halaburda, 2014). For instance, Temasek Holdings, Singapore’s state fund, has given a nod to the use of cryptocurrencies, while Vertex Ventures already have invested in Biannce to enable cryptos’ translation into SGD. Cryptocurrencies’ success, eventually will largely rely upon the global population. It is positive indication that many people are globally branching to cryptos in their investment portfolios. As has been demonstrated by history, it may take years and even decades before cryptos can shift from their infant phase. This is because time is required for monetary intermediaries to adopt and adapt to the changing situations, and most significantly for people and investors globally to comprehend the intricacies (Jumde & Cho, 2020). It is until then that cryptos progress from budding concept to a fundamental exchange medium for future generations.

From the foregoing, various concerns emerge if cryptos eventually substitute fiat currencies. According to Mell (2019), should cryptos outpace fiat currencies in terms of usage, the usual cryptocurrencies will lose worth without a means of recourse. Yuneline (2019) contends that should cryptos entirely take over, new infrastructure would need to be developed to permit the world to acclimatize and adapt. Inevitably, there would be complexities with transactions since cash would quickly be incompatible, leaving some individuals with lost assets. Peprah et al.  (2018) reason that established monetary institutions would possibly have to ascent to transform their ways. Moreover, it is crucial to note that whereas the initial Bitcoin mania witnessed a few business establishments offering to accept the crypto, that list has dwindled steadily bringing back skepticism regarding its employment as a medium of exchange. 

In addition to the effect of a crypto future upon personal consumers and financial institutions, governments would also suffer.  Governmental regulation upon central currencies is fundamental to control in a number of ways, and cryptos would operate with significantly less government view/purview. For instance, governments are no longer determine the amount of currency to print in their response to internal and external pressures (Peprah et al., 2018). Instead, the production of new tokens or coins would be reliant on independent mining functions. Notwithstanding how individual investors are or may feel regarding the prospect of switching from the traditional currencies to cryptos, it is possible out of the hands of anyone.

Conclusion

This study has evidenced that cryptocurrencies are likely to takeover the fiat currencies because of various reasons. Nonetheless, this is likely to take years and decades as people adapt to the new medium of exchange. Among the most crucial considerations is that cryptos cannot be manipulated easily compared to fiat currencies, principally because of cryptos’ unregulated and decentralized status. Additionally, cryptos could better back up the notion of a global fundamental income compared to as fiat currencies would. For instance, some programs have been experimented already with the employment of cryptos as ways of distributing a global fundamental income. Additionally, cryptos could assist in getting rid of intermediaries in daily transactions, and this could minimize costs for businesses besides helping out consumers. Notwithstanding the immense efficiency and opportunities that cryptos and their remarkable blockchain knowhow renders, many countries are apprehensive concerning crypto substituting overtaking the fiat currencies in aspects of traditional bank notes and coins. Nevertheless, it is globally evident that cryptos are forming their foundation in payments, transactions, and trading very rapidly and firmly. It can, therefore, be concluded that figures and research suggest that cryptocurrencies are here to stay and may eventually replace fiat in the coming unpredictable future.