Will Cryptocurrency Ever Replace Fiat?

In 2018, futurist Thomas Frey stated that, by 2030, roughly 25% of national currencies would be replaced by cryptocurrency. Frey believed that one day, cryptocurrency will replace fiat currency.

Clearly, that’s a bold statement, but Frey isn’t the only one who believes that cryptocurrency has the potential to revolutionize how people use money. Analysts over at Morgan Creek Capital Management went a step further and stated that fiat currency would one day be completely replaced by cryptocurrency. Back in 2017, venture investor Tim Draper made the same prediction, but with an even shorter timeline; he believed that cryptocurrency would replace fiat in as little as five years.

Related: Crypto Isn’t Just a Currency

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Cryptocurrency’s potential to do what fiat does, but better, has clearly caused a buzz. However, is it actually possible for cryptocurrency to replace fiat entirely? Even setting timelines aside, how can cryptocurrency possibly overtake fiat currencies, and is that even a desirable outcome? What can cryptocurrency do that fiat currency can’t? To answer these questions, you’ll need to understand the differences between fiat currency and cryptocurrency.

Cryptocurrency vs. Fiat

First off, let’s define fiat currency. It’s a currency issued by a central authority, commonly the central bank. Fiat currencies are legal tender and not often backed by physical commodities.

That means they’re at a higher risk of becoming worthless because of hyperinflation. Fiat currencies, like the US dollar, derive their value from the market’s supply and demand.

On the other hand, we have cryptocurrencies. They are virtual or digital currencies that work as an exchange medium. Being virtual means they utilize technology to secure, process, and verify transactions. Unlike fiat, cryptocurrency is not issued or controlled by any central authority.

Instead, they are a limited entry in complex tech, like the blockchain, which cannot get manipulated or changed until specific conditions are met.

Satoshi Nakamoto, the anonymous person who was the brains behind Bitcoin, didn’t intend to create a currency but rather a P2P electronic cash system designed to enhance transactions without oversight from a central authority.

The decentralization of cryptocurrency means that no central server or authority hosts the transactions. Instead, they are displayed in a way that anyone can see. However, the identities of the people making transactions are hidden, showing only a public key.

As long as you use a secure crypto wallet to store, send, and receive currency, it’s almost impossible for someone to trace your transactions.

Key Differences

Next, let’s cover five key differences of cryptocurrency vs. fiat:

  1. Tangibility

It’s impossible to hold cryptocurrency since they operate digitally physically. On the other hand, fiat currency exists as coins and notes, making it possible to hold them in your hands.

That tangibility that fiat has can pose some challenges. For example, Fiat currencies can be a nuisance and even a security threat when you walk around with large amounts of cash.

  1. Storage

Because cryptocurrency is all virtual, they only exist online. Therefore, you can only store the currency in a cryptocurrency wallet; however, not all wallets are secure. Some of them have been breached in the past, and investors have lost significant amounts of their holdings.

Therefore, when choosing a crypto wallet, ensure to do your due diligence and choose the best one for you. Most crypto experts recommend choosing a wallet that eliminates the need to store your currency in multiple places.

Fiat currencies are versatile, meaning you can store them in many different forms. For example, you can store them in a bank, through services like PayPal, or even under your mattress (though we don’t recommend doing that).

  1. Divisibility

One important aspect of any currency is its divisibility. Why? Because divisibility is what makes something valuable able to turn into exchangeable money.

You can divide both fiat and cryptocurrency into smaller units. The primary difference between the two is that crypto is more feasible for micropayments than fiat currency.

You can divide Bitcoin into tiny units (0.00000001), known as a satoshi. That value means that a single BTC can be divided into 100,000,000 units, whereas a US dollar can only be divided into 100 units.

  1. Deflationary vs. Inflationary

Thinking about fiat currencies, the government or central authority can print more cash at any time. That makes fiat currencies inflationary. To better understand inflationary currency, let’s look at an example. If you have $10,000 in the bank right now and don’t withdraw it for ten years, it will have a different value in 2031.

The value of the fiat currency would’ve dropped significantly, and you wouldn’t have the same amount of purchasing power as you would today.

Because central authorities don’t control cryptocurrencies, no one is changing monetary policies. Crypto runs on an algorithm; take Bitcoin, for example—once 21 million coins exist, mining will stop. Once that happens, 1 BTC today will be the same as 1 BTC in ten years.

  1. Legality

Governments issue fiat currency and that currency is regulated by the central bank. That means fiat currency is legal tender and the official means of confirming and finalizing transactions. Laws constantly change to control fiat currency supplies, which affects their value.
On the other side, crypto is a digital asset that acts as an exchange medium that no government or central authority controls. However, some countries have outlawed crypto as a currency due to links to money laundering activities.

Why Accept Fiat?

To understand how cryptocurrency can replace fiat, it’s important to know why fiat currencies work in the first place. Fiat currencies like USD work because its holders believe that it has value. Businesses accept USD as a medium of exchange, granting the currency purchasing power. 

Of course, belief in a currency’s value isn’t the only thing that gives it purchasing power. How a country’s economy is performing will affect a currency’s value as well. If a country is experiencing an economic downturn, political instability, or inflation, the value of its currency will likely become unstable. As a result, the holders of that country’s currency will lose faith in that currency’s ability to reliably hold value. Government backing of a currency also plays a role in giving it value. 

Lastly, fiat currencies work because they can be used widely. Fiat currency is highly portable too.

To see cryptocurrency replace fiat currency, cryptocurrency needs to match fiat currency on all these points. Like fiat currencies, users of cryptocurrency need to believe that it has intrinsic value. Cryptocurrency needs to be stable, and it should ideally see some sort of regulatory support. Cryptocurrency also needs to be usable on a wide scale. 

Does cryptocurrency rise to this challenge?

Where Cryptocurrency Needs Improvement

Cryptocurrency and Intrinsic Value

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There’s no doubt that cryptocurrency is valuable, at least as an investment. Back in 2017, Blockchain Capital stated that about 30% of millennials would rather invest $1000 into Bitcoin, as opposed to stocks or government bonds. Cryptocurrency is a way to take control of your finances and invest in something that can gain value in the future. At least one unnamed Citibank industry insider believes so; according to leaked reports, he believed that this cryptocurrency could be worth over $300,000 per coin by the end of 2021. 

While this is great news for investors, this kind of speculative trading is actually detrimental for cryptocurrency’s chances of being used as a legitimate type of currency. Cryptocurrencies like Bitcoin are being seen as an investment, something to be held onto until it reaches its peak value before ultimately being dumped. 

Instead of being seen as a way to gain short-term gains, there needs to be a shift in how cryptocurrency is viewed and used. Instead of being seen as an investment, it needs to be seen as a legitimate form of currency that holds intrinsic value. 

The Issue of Volatility

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The issue of speculative trading ties into issues of volatility. Currently, large amounts of a cryptocurrency can be bought by “crypto-whales.” These crypto-whales who participate in speculative trading can sway the price of a cryptocurrency by moving huge amounts of it all at once. While a single crypto-whale generally can’t crash a cryptocurrency all by themselves, they can still influence other investors into inflating or deflating the price. 

A bigger issue is when an entire group decides to influence the price of a cryptocurrency. Dogecoin is a great example of this. What started off as a light-hearted joke based on an Internet meme soon gained cult status. As a result, Dogecoin increased over 5000% in value thanks to a concerted effort by Reddit users. 

While cases like these are rather unusual, it does highlight the fact that cryptocurrency has some growing pains to get through. There have been some attempts to solve this issue. Stablecoins is one such attempt. As a type of cryptocurrency backed by a stable currency, like the USD, stablecoins may partly solve cryptocurrency’s volatility problem. 

Either way, until cryptocurrency gains stability, cryptocurrency still has a ways to go.

Related: Could Crypto Challenge the Gold Standard?

Regulatory Uncertainty

Cryptocurrency cannot overtake fiat until it can be exchanged widely for goods and services. Unfortunately, businesses are still unsure of whether they should accept cryptocurrency. Regulations surrounding the legality of cryptocurrency are shaky at best. Many countries outright banned cryptocurrency, including Vietnam, Pakistan, and Bolivia.

Even the United States, which generally accepts cryptocurrency, has few formal rules regulating it. Without solid regulations regarding cryptocurrency, businesses are worried about sinking time and resources into accepting cryptocurrency and whether this is really a smart decision to make. 

Difficulties with Technology

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The technology surrounding cryptocurrency isn’t quite there yet. The biggest difficulty lies in its lack of interoperability, which makes cryptocurrency hard to use on a wide scale. 

What is interoperability? In this case, interoperability is the ability for one system to quickly exchange information with another system. Right now, the blockchain technology that is so foundational to cryptocurrency has been broken up and tailored for different types of cryptocurrency. This means the Bitcoin blockchain system can’t exchange information with the Ethereum blockchain system and vice-versa. 

For cryptocurrency to be usable on a wide scale, different blockchain networks need to be able to access information from one another. This will make the user experience more friendly and will facilitate the scalability of cryptocurrency. 

Why Switch to Cryptocurrency?

Cryptocurrency faces many challenges that prevent it from replacing fiat. It’s currently more like an investment opportunity, rather than a legitimate currency. Cryptocurrency faces issues with stability, and the technology isn’t quite there yet. So why switch to cryptocurrency at all?

What Cryptocurrency Can Do Better than Fiat

Decentralization and Equality

Cryptocurrency transactions occur between two parties without needing to involve a third party, like a bank or credit card company. Not only does this make transactions cheaper, but cryptocurrency can also facilitate the development of a decentralized financial system

In a decentralized financial system, control shifts away from financial elites and banks. Instead, control is back in the hands of ordinary people. At the same time, a decentralized system still fulfills many of the functions of the current banking system, including facilitating transactions, storing money, investing, and more. In this way, cryptocurrency may be a path to financial equality. 

Faster Distribution of Funds

Without a third party involved, cryptocurrency users distribute funds faster. In fact, this makes cryptocurrency a possible candidate for facilitating Universal Basic Income programs (UBI). In a UBI program, money needs to reach people safely and quickly. Mailing checks can be slow, and checks can get lost in the mail. Bank deposits are an option, but that leaves out underbanked or unbanked Americans

Cryptocurrency is a way to quickly distribute funds to the people who need it. Programs like uCoin and Cicada are already implementing cryptocurrency-based UBI programs, as well as Cubecoin, Strangecoin, and Kiwicoin in New Zealand. Even less radical programs, like unemployment benefits and federal student aid, benefit from cryptocurrency’s quick distribution capabilities. 

Banking for the Unbanked

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Roughly 7.1 million Americans are unbanked. Unbanked Americans do not have access to traditional financial services, meaning they can’t get loans or mortgages, nor can they invest their money in any meaningful way. They lack quick access to their funds, and many find themselves stuck in a cycle of poverty.

Cryptocurrency may be a way to serve unbanked Americans. The barriers to entry are low since all you need is something that can access the internet. There are no minimum balances required, no interest fees that need to be paid, and it gives unbanked Americans easy access to their funds. By switching over the cryptocurrency, unbanked Americans may finally gain access to a system outside of traditional banks. 

Increased Transparency

Although current blockchain technology holds back cryptocurrency in some ways, it does present one advantage that fiat doesn’t have: the ability to be completely transparent. Since the blockchain acts as a ledger and records every transaction ever made by a certain cryptocurrency, blockchain makes cryptocurrency transactions completely transparent.

There are many advantages to having increased transparency. For one, transactions are more easily verified or safeguarded. No one can claim you made a transaction that didn’t happen, making it harder to commit fraud. Secondly, tracking illegal activities paid with cryptocurrency is easier since everything is recorded.  

Better Security

Cyber attacks are one of the biggest threats to the current banking system, with attacks increasing in number and intensity. Although financial institutions are always looking to improve security measures, they face an increasing number of challenges on this front. 

Cyber attacks concentrate on gathering credit card information. In 2017, a hacking and credit card theft group called FIN7 used stolen credit card information to take over one billion dollars from Americans, and that’s just one group alone. The outlook for those who don’t use banking systems and mostly hang onto cash is even more dire. 

In contrast, cryptocurrency uses blockchain technology to keep your funds safe, but that’s not the only security measure it employs. Cryptocurrency can be safely kept on a cryptocurrency wallet, which comes in hot and cold wallet varieties. Paired with a strong password and good security practices, cryptocurrency is safe and secure. 

New cryptocurrency security features are also rolling out all the time, which an individual can implement more quickly than a financial institution. This is another benefit that cryptocurrency technology has over current banking technology. 

Cryptocurrency Societies: A Case Study

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An interesting case study to look to when discussing cryptocurrency societies is Nigeria. Nigeria is not only Africa’s largest economy, but it’s also Africa’s largest Bitcoin market

How it got to this point is fascinating. A combination of the COVID-19 pandemic and dropping prices of crude caused Nigeria’s currency to become unstable. To make things worse, Nigerian banks reportedly began limiting cash withdrawals and offshore debit card transactions. In a country that still heavily uses cash, this was a devastating blow. 

With faith in Nigeria’s currency lost, the popularity of cryptocurrency took off. Nigerians lauded cryptocurrency for its ability to make seamless, quick transactions. Cryptocurrency also enabled Nigerians to get around bank withdrawal limits, and it gave them another avenue for investing their money. 

However, the country’s government wasn’t quite as impressed as its citizens. The Nigerian government eventually cracked down on cryptocurrency, banning it from the country outright. 

Nigerians were far from pleased. For regular Nigerians, cryptocurrency empowered them in a way that the country’s currency failed to do. It was easy to use, and it was outside the traditional banking system. It was a way for Nigerians to pay for services and goods as their country’s currency wavered. 

Nigeria shows that a switch to cryptocurrency is possible. Some more technological innovations may need to be made, and regulations that are friendly toward cryptocurrency will need to be passed, but Nigerians, at least, briefly found success in a cryptocurrency system.

What Happens If Cryptocurrency Replaces Fiat?

From what we’ve covered, you might be understanding that cryptocurrency replacing fiat is a possibility, but that brings some challenges and concerns as to what will happen.

If cryptocurrency takes over, many countries would need to create the infrastructure needed for the adoption. And in the case of crypto outpacing fiat currency in terms of usage, those currencies will significantly lose value without means of recourse.

The transition would have challenges, and fiat currency would likely become incompatible quickly, causing people to lose assets.

Additionally, many established financial institutions would have to scramble to change their ways, and small organizations might close for good.

For cryptocurrency to replace cash, there are three hurdles to overcome:

  1. We need a robust digital finance system that can contain potential risks like cyber-attacks.
  2. We need to build alliances with the broader payment industry.
  3. We need an acquisition of legitimacy from governments and central authorities.

Many crypto experts believe that if we can put a regulatory framework into place worldwide and the governments back the move towards a cashless system (like we’re slowly seeing today), there’s a great potential for cryptocurrencies to replace fiat in the future.

So, will cryptocurrency replace fiat? We think it’s likely, but don’t expect a full transition in the next few years. It’s time to prepare for a cashless future.

Related: How Digital Currency Is Changing Sports

More Support Needed for Cryptocurrency

Cryptocurrency is still in its infancy, despite the speed at which it’s taking off. At the moment, it doesn’t quite have the infrastructure that’s needed to replace fiat. Issues regarding the volatility of cryptocurrency and its scalability need to be solved. However, cryptocurrency can increase economic equality, be more transparent, and more secure than fiat. 

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It’s too early to say whether cryptocurrency will replace fiat, but there are too many benefits related to cryptocurrency to ignore. If you want to know more about cryptocurrency and how cryptocurrency can benefit you, check out some of our other articles on unBanked. 

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