“A purely peer-to-peer version of electronic cash”: that’s how Satoshi Nakamoto defined Bitcoin in the original whitepaper. Electronic cash or not, Bitcoin has now attracted the attention of everyone: tech enthusiasts, consumers, traders, investors, bakers, and even regulators.
Although Bitcoin dominates the multitrillion-dollar market, there are tens of thousands of other cryptocurrencies; some were developed for particular purposes, while others are based on mere internet jokes.
So, the question remains: Does Bitcoin or any other cryptocurrency have the potential to replace existing forms of fiat currencies?
Well, the governments of two sovereign countries, El Salvador and the Central African Republic, think so, as Bitcoin is a legal tender there. However, things are different in other countries, especially the developed ones that dictate the global economy.
Understanding the Basics
Before diving into the details, it is crucial to understand the fundamental difference between fiat currencies and cryptocurrencies. Although the basics might be distinct on the surface, the adaptation of both has created co-relations.
Fiat currencies, such as the US dollar, euro, or yen, are issued by the central banks of the countries. The World Bank defines fiat currencies as “any legal tender designated and issued by a central authority that people are willing to accept in exchange for goods and services because it is backed by regulation.” The government backs them, ensuring legal guarantees for them. Interestingly, some fiats, like the Belize dollar, the Hong Kong dollar, and the United Arab Emirates dirham, are pegged to the US dollar.
On the other hand, cryptocurrencies are decentralised and not backed by any centralised authority. According to the World Bank, cryptocurrencies are “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”
But what was the psyche of Satoshi Nakamoto, the creator of Bitcoin, in creating it?
In the Bitcoin whitepaper, the mysterious Satoshi Nakamoto wanted to create “an electronic payment system based on cryptographic proof instead of trust.” He structured the controlling infrastructure of Bitcoin as “an electronic payment system based on cryptographic proof instead of trust.” It is beyond the controlling scope of any central bank or other governmental authority.
Proof-of-work-based blockchains also consider security, as the transactions on the blockchain cannot be reversed or modified without a majority consensus of the node operators, which is practically impossible.
What Makes Money, Money?
The ancient economy was based on barter systems. Cows and pots in that age had the same use as a dollar bill today—they were all widely accepted in exchange for goods and services.
Then, the modern monetary system came. Coins made out of precious metals were pumped into the markets. As the economy and institutions modernised further, paper money took over. Although the use of fiat money can be traced back to the 10th century by the Song Dynasty in China, the global use of it came in recent centuries.
The key behind the trust in fiat currencies is the government’s guarantee.
Cryptocurrency, as it is decentralised, has eliminated the necessity of such guarantees. However, people still need to trust and accept it as a payment to make it replace fiats. Unless people accept or believe in its value, it is just a number on the internet.
Although going by the architecture of blockchain, cryptocurrencies might look promising, there are other factors, like technological challenges.
Can Crypto Be the Next Money?
Cryptocurrencies can break the barrier of centralisation when it comes to payments. However, the real benefit of using cryptocurrencies comes from the underlying technology - blockchain.
One of the most highlighted advantages of cryptocurrencies in the monetary system is cross-border payments. The existing cross-border payment system involves intermediary banks, and the settlement sometimes takes days. Further, the SWIFT-based cross-border paymentsinfrastructure is opaque and costly—the fees can be significant.
Blockchain-based cryptocurrencies can directly impact and mitigate these challenges. Due to its decentralised nature, the crypto settlements do not involve banks or other authorities. Also, the transfers can be fast and cost a fraction of the traditional systems.
Many blockchain companies, likeRipple, mainly focus on this area with their services. And instead of excluding banks, they are working with banks, offering them blockchain-based infrastructure for cross-border payment settlements using cryptocurrencies.
Another selling point of cryptocurrencies as a currency is the safety net against inflation. Bitcoin, the dominant cryptocurrency, has a hard cap of 21 million Bitcoins in its supply, meaning only that many Bitcoins can exist. “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation-free,” the Bitcoin whitepaper explains, adding that “the incentive may help encourage nodes to stay honest.”
Now, when it comes to fiat currencies, inflation is a significant problem. While strong economies often succeed in keeping inflation in control, many countries like Venezuela, Argentina, and Zimbabwe are experiencing hyperinflation—their currency notes are more valuable as scraps of paper than their face value. Under such circumstances, using cryptocurrencies, like Bitcoin, in inflation-hit currencies also skyrocketed.
Trump just gave full credit to Vivek for alerting him as to the dangers of a CBDCHe proceeds to promise that he will never allow for one to be createdThis is really good news. A CBDC would lead to complete financial tyranny. pic.twitter.com/StMUixt9ct
— Clint Russell (@LibertyLockPod) January 23, 2024
Cryptocurrencies Are Not Immune to Challenges
The advantages of cryptocurrencies as a payment mode must be considered in the challenges - and there are some significant ones.
The most notable challenge for Bitcoin or any other top cryptocurrency is the increase in its dollar value. Due to its rising value, Bitcoin has more resemblance to an asset class rather than a payment system. The cryptocurrency even attracted the attention of Wall Street investors as an asset, and exchange-traded funds tracking its value are being traded on stock exchanges globally. "The market characteristics of the Bitcoin easily make it an asset and not a payment mode. Any legal tender must be stable, even the fiats," Ultima Markets' Regional Business Director, Freddy Wu, pointed out, adding, "Any legal tender must be stable, even the fiats... Bitcoin’s volatility will never make it an effective payment mode."
Another major roadblock to usingBitcoin or other cryptocurrencies as a payment mode is their decentralised architecture, based on privately controlled nodes. If such a decentralised payment mode takes over, it will undermine the role of central banks in controlling the monetary system. Further, regulating a cryptocurrency as a payment instrument is very complex, if possible.
Although El Salvador and the Central African Republic made Bitcoin legal tender, the success of such moves is highly questionable. Top regulators around the world are inclined to regulate Bitcoin and other top cryptocurrencies as assets rather than as payment modes.
Also, there is the question of scalability. The infrastructure of Bitcoin or another existing cryptocurrency is not a match for handling payments on a mass scale. During many high-demand hours, the Bitcoin network is clogged, resulting in slower transaction times and massive transaction fees.
I don’t want to see a digital yuan world. To have every transaction centrally tracked in that way by a hostile state is like slapping a digital dog collar on your neck.But that doesn’t mean I’m in denial about the fact that RMB is quietly gaining strength, and that we need… pic.twitter.com/fqHzGiWgJB
— Balaji (@balajis) April 1, 2023
The Future of Money
Bitcoin has already been accepted as an asset class by investors, and regulators are also moving in that direction. Also, many cryptocurrencies explicitly launched for micro-payments are now struggling. Although the chances of cryptocurrency dominating as a mainstream payment mode are very slim, the promise of blockchain technology has been acknowledged. "While I believe coins and tokens, in their present format, have no place in the existing fiat system I do feel that the stable coin concept has great promise." added the CEO of EBC Financial's UK unit, David Barrett, adding that "regulatory and central bank concerns around the lack of clarity of its operations have hindered its acceptance within the fiat world."
Although central banks are hostile towards Bitcoin and other cryptocurrencies, most are working on the digital version of fiats, otherwise known as central bank digital currencies (CBDCs), which are based on blockchain.
Although these CBDCs are built on top of blockchain-based infrastructures, they are exclusively controlled by central banks. In other words, they are just the other version of the existing physical fiat currencies. Barret continued that "CBDC’s are the solution to the confidence side, their ability to draw in the fiat system will make legitimate stable coins very important to the financial systems evolution."
Three countries, the Bahamas, Jamaica, and Nigeria, have fully launched their CBDCs. Among the G20 nations, China is leading the CBDC race and has been piloting digital yuan at a mass scale for years now. Eighteen others in the bloc are also in the advanced stages of CBDC development, and multiple are in the pilot phase.
There is no doubt that Bitcoin's development, particularly its underlying technology, blockchain, has disrupted the existing monetary system. However, the burning question is how that change is coming. Based on the regulatory actions, digital fiat will likely co-exist with physical fiat currencies, while cryptocurrencies like Bitcoin will dominate as an asset class rather than a payment mode.
This article was written by Yen Sim at www.financemagnates.com.
You can get bonuses upto $100 FREE BONUS when you:
💰 Install these recommended apps:
💲 SocialGood - 100% Crypto Back on Everyday Shopping
💲 xPortal - The DeFi For The Next Billion
💲 CryptoTab Browser - Lightweight, fast, and ready to mine!
💰 Register on these recommended exchanges:
🟡 Binance🟡 Bitfinex🟡 Bitmart🟡 Bittrex🟡 Bitget
🟡 CoinEx🟡 Crypto.com🟡 Gate.io🟡 Huobi🟡 Kucoin.
Comments