Can Crypto Takeover Fiat Currencies Soon?

Can crypto takeover fiat currencies soon? Whether it is Bitcoin or any other active ecosystem of Altcoins that are available over hundreds of crypto exchanges all over the world, the universe of digital currency has emerged gradually.

And, there are lots of specific use cases across all different types of industries that substantiate it.

Over the years, crypto has grown into a full-blown industry and has become more mature so that it is poised to become mainstream and take over fiat currencies.

However, whether that will happen sooner or later is a matter of debate.

If you consider Bitcoin specifically, since its launch more than a decade ago its primary objective was to provide an autonomous payment system to the users which will allow them to go around the traditional financial system and its intermediaries.

However, looking at the present scenario of it as well as other crypto coins it seems that crypto has a lot more to do in order to achieve that goal completely to replace fiat currencies and the traditional financial payment systems.

As of now, at least in practice, it is out of reach.

Now, there one too many reasons to say so and most of the reasons are unknown to common crypto investors and traders.

This article is typically intended for them. In this article the currency economics as well as the future of cash is discussed along with other related aspects to understand whether crypto will take over fiat.

Rise of digital currency and CBDCs, effects of COVID 19, and significance of crypto are also discussed in brief.

You will understand the reasons and will also have a clear idea about the subject when you read this article in its entirety.

Can Cryptocurrency Takeover Fiat Currencies Soon?

Can Crypto Takeover Fiat Currencies

The correlated intentions of crypto and the proposals for financial inclusion all over the globe as an equitable financial service seems to be a lofty one, especially when the huge number of nearly 2 billion unbanked people worldwide is considered.

However, with the advancements in blockchain technology and the scalability and interoperability of the several platforms it has created better chances.

Now the central banks are weighing the potential and possibilities of digital currency to resolve the biggest bottlenecks in finance.

In the past decade both technology and finance have evolved dramatically and it is interesting to have and see Bitcoin evolve as the original crypto into a potent disruptor of traditional finance.

As it is, finance and payment systems are ever-evolving spaces.

Traditional currencies of gold and silver coins of the past were replaced by paper currencies and now it is the plastic cards that are being used widely as an acceptable medium of payment.

All these are however facilitated by the digital ecosystem which has expedited and transformed the way money is understood and being used today.

Technology emerged gradually over the years and the world saw the extensive use of Artificial Intelligence, Internet of Things, and a multitude of other technologies permeating into the lives of people.

These new techs have replaced the traditional technologies and older models that tried to keep up with the pace of development, with a few falling and fading away.

As of now, the world is sitting on the precipice of yet another significant financial revolution that is linked with the 4th industrial revolution – blockchain.

With the boom of this innovative technology the world experienced the emergence of cryptocurrencies.

However, crypto, in spite of the fact that it is older in comparison to iPad, has only been able to permeate into the mainstream space in the past couple of years or so.

Nevertheless, though slow, the impact of it has been felt really strongly across all industry sectors over and above finance.

The growth and impact of crypto has been so severe that several major banks started to build their own digital tokens based on blockchain technology such as JP Morgan and Wells Fargo.

The impact and potential of crypto has also been felt by other major enterprises as well as a lot of governmental agencies.

With such an impact, potential, and consequence, it is but natural that the question of when crypto will replace fiat currencies will crop up into the minds of the general public.

These concerns are not irrational or irrelevant because crypto has already taken the center stage in several countries such as Sweden and has usurped cash making it obsolete.

Moreover, a few major banks such as the Deutsche Bank have shown a strong interest in staying pertinent with their eyes on the future.

These banks predict that by the end of this decade the existing financial system will come to a grinding halt when something new like crypto will take over the open stage.

Currency Economics

Understanding currency economics will be of great help at this point.

There are several good reasons why countries all over the world shifted from gold and silver coins and adopted fiat money.

For example, consider the case with the United States.

If the US dollar was backed by gold then the Internal Revenue Service or the IRS and the Department of Treasury would have to issue stimulus money.

This would have amounted to trillions of dollars spanning just over a couple of months and that too without mining a copious amount of commodity first.

This would have been impossible for both and add to that it would have resulted in chronic depression in place of facilitating a quick recovery.

But, on the other hand, fiat currencies can be issued at whatever amount necessary by the government as well as for the length of time as needed.

This, however, increases the chances of the economy facing different levels of inflation which is mostly, not entirely, negative for the economy.

The need for printing more fiat money than necessary can also be felt by the countries going to war.

These countries need to print money repeatedly to meet their military budgets and create a lot of funds in order to save the motherland.

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However, in the process, the savings of the citizens of the country are wiped out.

Sadly, financial mismanagement during the times when a country has huge debts to pay off may also compel the government to print excessive amounts of money for it.

This may lead to even a more serious economic misadventure just as it had happened with countries like Zimbabwe and Venezuela.

In such situations, the governments of these countries are even afraid to raise taxes in apprehension that it would result in an economic collapse which may further result in a revolution and even a civil war.

Adverse things may also happen even during peaceful times due to inflation, and such situations have been experienced by almost all the governments of this world.

Inflation typically results in a persistent loss of savings in the long run when the rate of interest typically touches rock-bottom levels.

This also has a very long term effect. For example, the US dollar lost its purchasing power significantly when in 1971 President Nixon took dollars off the gold standard.

The loss then and the cumulative loss till 2020 amounted to 84.4%, according to reports.

It is true that the gold and silver backed paper currencies by definition will have a minimum level of inflation due to their scarcity.

This prevents hyperinflation by itself but the market conditions may force it to swing to hyper-deflation, and sometimes in the most ridiculous ways. However, this is a less known fact.

So, you may ask now which is good among fiat and gold or silver currencies. Well a case study will make things clearer to you.

According to a purely domestic economic policy in 1934, President Franklin D. Roosevelt signed on a Silver Purchase Act.

The main intention of it was to revive the silver industry which felt the aftermath of the Great Depression.

Silver was being purchased then continuously until the total supply of it reached one-third of the total gold reserves of the Treasury.

This resulted in a quick increase in the price of silver from nearly $0.24 per ounce to $0.58 per ounce in just a year.

This resulted in some unintended yet serious consequences all over the world which even devastated a few economies such as that of the then Republic of China which followed a silver standard.

Shanghai felt the shock pretty much of all places creating frenzy among all the banks to melt down those Chinese Yuan coins made of silver in huge quantities and shipped bars of silver to America to sell them.

This resulted in the fall of utility of the Chinese Yuan so much that it was believed that it was much more profitable to smuggle those coins to the US Treasury instead of lending them out to entrepreneurs and businesses on interest.

As a consequence, prices of products in China fell dramatically but the GDP plunged even at a much higher rate.

This led to an apparently impossible recipe of stag-deflation.

Eventually, the Chinese government threw in the towel and was forced to move on to a fiat currency system in the following year after failing to convince President Roosevelt to stop this frenzy.

However, this resulted in hyperinflation and the collapse of the economy a decade later.

Therefore, in the end it can be said that both fiat currency and gold or silver standards have their characteristic drawbacks.

Now, what is the relation of these with crypto taking over fiat currencies? Well, tarry a little and move on, step by step.

Significance of Bitcoin Milestones

Now, it is good to take a look at Bitcoin and its different milestones along with its significance in the economy of a country supporting it.

One of the most significant milestones reached by Bitcoin is its third halving.

Apart from that, the other significant milestones of Bitcoin in last couple of years are:

  • The number individual Bitcoin accounts with a balance of more than 0.1 BTC crossed the 3 million mark for the first time
  • The number of individual accounts holding a minimum of 1 BTC in them increased and reached 800,000 which is an all time high and
  • The number of non-zero Bitcoin accounts added up to more than 29 million.

Good as stats, these figures signal the adoption rate of Bitcoin, which is notorious for its volatility.

However, due to the COVID 19 crisis, the past couple of years were not as good as it was expected by the Bitcoin account holders.

The markets rattled and the world of commerce had to be reshaped all over the world.

Moreover, the central banks all over the world along with the US Federal Reserve took on significant amounts of debt since the outset of the virus in order to keep businesses and people afloat by paying out economic stimulus.

This type of inflationary monetary policy combined with uncontrolled debt created economic uncertainty.

Bitcoin, at that time, had the opportunity to prove itself as an insulated and reliable alternative investment to some extent and that is not something absurd to expect.

It had created a great amount of enthusiasm in people in the past such as in Argentina during the currency crash and in Greece in 2015 during the sovereign debt crisis.

Sadly, Bitcoin too experienced almost the same ups and downs in 2020 and onwards with no sign of a ‘boom.’

Therefore, it raises a natural question: if Bitcoin is considered as a safe haven and has the potential to thrive during times of havoc, then why was it so shaky at that moment?

Well, the primary reason is that Bitcoin alone cannot be everything to all users.

It is a platform which is as such hard to scale and add to that it still operates in an uncertain and unregulated space.

Apart from that, Bitcoin, in spite of being the most widely used, known, and favored crypto coin, is not suitable for most use cases that involve making a payment. The main reasons behind it are:

  • Its volatility
  • Its inconsistent transaction fees and
  • The long confirmation time.

However, more importantly, the price of Bitcoin is not the only factor that affects its success or failure.

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Trading pairs can also move up, down, or sideways.

This means that the developers need to work more closely and build, test and deploy features to ensure that the functionality of the platform is improved so that it still stays the number one blockchain network.

One such innovation is the Lightning Network which tends to make it pretty fast.

In the meantime, the developers of the second-highest market-cap crypto, Ethereum, are also trying hard to move it to Ethereum 2.0 which will make the platform more accessible and scalable.

Altcoins are also entering the market in large numbers which makes the crypto market much more competent, if not efficient.

2.0

The difference between Bitcoin and Ethereum lies in their respective origins.

While the origin of Bitcoin remains shrouded in mystery with the true identity of the creator still unknown, Ethereum, on the other hand, boasts of its founder Vitalik Buterin.

Buterin and the team behind Ethereum launched the first phase of Ethereum 2.0 that will transform the commonly used Proof of Work consensus mechanism that is used by Bitcoin as well to the Proof of Stake algorithm.

Though two more phases of it are yet to come out, with the next involving an upgrade that will merge the mainnet with the Beacon Chain of Ethereum 2.0 which will enable full staking, its full release is expected to be sometime in 2023.

This means that the network will operate on nodes and these nodes will be operated by the stakeholders of Ethereum and not by the miners who need to solve complex mathematical puzzles, taking them out of the picture altogether.

This will reduce the power concentration in the hands of big mining corporations, energy consumption required to validate a transaction and also the negative impact on the environment.

This will pave the path for the Ethereum network to become a more solid blockchain for smart contracts and decentralized apps or dApps.

However, all these changes may make the blockchain much more efficient but that does not mean it will result in a mass adoption as it is in the case of Bitcoin or any other type of crypto coin.

Therefore, crypto replacing fiat currencies is far from reality, at least as of now.

For this, the financial institutions that Bitcoin and other cryptocurrencies want to circumvent must be brought to the same value of crypto or somewhere around it.

Till then, crypto will be seen as a backdoor when it comes to the payments market and their outings will not go down as smoothly as it is hoped.

However, since last year major private sectors have started to show their interest in the progress of blockchain technology and its several real-world use cases.

At the same time, even the public sector is also showing a lot of interest and they are warming up to accept the concept of digital currency, finally, but that does not necessarily equate to Bitcoin itself and only, as of now.

This is a good signal that crypto has been able to shake off its tag of being nothing more than an illegal payments channel.

COVID 19 Woes of Global Financial System

Since the outbreak of COVID 19 pandemic, governments of the world including the United States had to plan several economic relief programs, and it is then that some flaws came to the fore.

It is mainly due to the ineffective disbursement of the payment system followed by the Internal Revenue Service.

While a few citizens started to receive the relief payments, others were kept waiting, and waiting since payments were made directly to the bank accounts of the taxpayers on file.

As for the others, a few received the check in the mail and a few received it in their prepaid debit cards.

This not only resulted in the lack of uniformity but also to delays in receiving the payments which were, as it is, very erratic.

There were lots of discrepancies reported such as:

  • Receiving two checks
  • Payments made in the name of dead relatives and
  • Not receiving any payment at all.

The most significant and worrying factor is that there were more than 10 million unbanked eligible adults as well as undocumented people in the US alone who were left out of the list.

This happened in almost every country.

This ineffective relief payment system due to COVID 19 brought up a debate in the Congress – whether or not it is possible to create a digital dollar or a blockchain version of US dollar, which will be run by the government.

This led to a movement all over the world and initiatives to create such a digital asset were underway.

Yes, it will take years for it to become a reality but still the fact that it has started is a good sign.

The central banks of China have already gone a long way in releasing their Digital Yuan and other countries are considering such a proposal such as South Korea, Canada, Ghana, Sweden, Uruguay, and many more.

It is here the real concerns come in which may change the fate of the digital dollar completely.

During COVID 19 where direct payments of relief were considered to a need it also caused a significant economic upheaval.

Payments and commerce all over the world moved online to deliver products directly to homes following the ‘no contact delivery’ concept.

It is also thought that as of now it will not be a very prudent or a realistic decision to get rid of cash altogether.

Also, it is thought that when a parallel digital version of the fiat currency existing and backed by the government is created and may even prove necessary considering the COVID 19 effects, it will create a serious issue. It is that the first major power that does so will enjoy the benefits of being the pioneer.

This will allow it to set specific benchmarks that the other countries of the world will have to follow.

It is true that Bitcoin, Ethereum, and the Central Bank Digital Currencies may address similar bottlenecks but it is the diverse approaches and limitations on leadership of these particular currencies that are the main issues. For example:

  • Bitcoin may prove to be the best store of value
  • Ethereum may prove to be the best decentralized computing platform and
  • The CBDC or the government-backed digital currencies may turn out to be the new standard for G2P and P2G or government to person and person to government payments.
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This means that there will be no single technology that may prove to be the silver bullet to do away with the woes that are faced or will be faced by the global financial system.

However, there are two things worth taking note here.

These are the diversities in the use cases rising after the COVID 19 pandemic and the need and opportunity to address the needs of the unbanked population of the world today in this increasingly digital world.

Due to these factors crypto may finally see the much needed push to adoption that it has been waiting for.

If this does not happen by the end of 2022 itself, then it will surely happen pretty soon.

Rise of Digital Cash

Bitcoin and other crypto coins as you may know come with a hard cap on their total supply.

Bitcoin, for example, has a supply limit of 21 million coins.

This causes a scarcity given the fact that a majority of it has been mined already and some are lost forever due to loss of private keys.

This results in the rise in price that has outpaced that of inflationary fiat currencies.

The protocols of these cryptocurrencies are live and according to Keynesian economics these are subject to change.

This means that the market participants and the governments can modify the protocols temporarily.

This will allow issuing new coins for stimulus which can be bought back when the economy recovers.

Another significant reason for the rise of digital currency is that it does not need any physical storage space like gold, silver, or even paper money.

It is therefore easy to carry across borders being digital in nature. All these factors increase its investment value.

Therefore, it can be used as a useful means to meet the financial goals of the individuals such as creating an emergency fund or saving for retirement.

This means that the individuals will be less reliant on fiat for social spending.

The developments in technology and its innovations have also caused the rise in the need and utility of digital currency.

This has even given rise to the CBDCs or Central Bank Digital Currencies which are simply the digital version of fiat currency.

Overall, the crypto space is evolving but it is still far from taking over fiat, at least a decade.

Till then it is a good option to invest in due to its growth potential.

Future of Cash and Cards

So, will crypto bring cash and card to an end, no matter when it is?

Well according to a Deutsche Bank report, it is time to spend some considerable time on looking at the prospects of crypto to find out the future of finance.

According to the report, crypto is more of an addition to the global supply of money rather than its substitution.

Crypto has never been able to prove to be a means of payment irrespective of its benefits such as:

  • Easy storage
  • Security
  • Low transaction fees
  • Higher transaction speed and
  • Relevance to the digital age.

However, this can change entirely depending on the future of cash and cards.

With respect to cash which sits in a very insecure position, it will remain so in the coming decade which will surely benefit crypto.

However, to replace the status quo of cash as of now, crypto has got a lot to do as said earlier. Especially, there are three specific hurdles to overcome which are:

  • It must be considered as legit by the regulators and the governments
  • It must have stability in price to benefit both consumers and merchants and
  • It must have worldwide reach in the payment market.

This is not an easy task and there will be more issues in the future with the fall of cash and popularization of crypto.

However, if crypto can overcome these hurdles successfully, it will surely jeopardize the future of cash and cards.

Growth of Central Bank Digital Currencies

Finally, the growth of CBDCs or Central Bank Digital Currencies may cause some unrest with the future of crypto compared to what it is now.

These own cryptocurrencies of the central banks, many people think, can offer all the benefits of a new digital world being controlled and regulated.

Moreover, new policy instrumentation has been designed to ensure the growth of the Central Bank Digital Currencies.

Most of the banks in England and other European countries believe that if the governance of these CBDCs can be obtained and standardized, it will create a lot of opportunities for it.

Therefore, in the end it can be said that a proper framework for the digital currencies needs to be created so that it really has the attributes necessary to replace fiat currencies.

This framework should focus on specific aspects such as:

  • Security
  • Legitimacy
  • Efficiency and
  • Open and fair competition.

It will take time for it and the longer time it takes fiat currencies will be alive and kicking.

Conclusion

As it is evident from this article that crypto has all the potential to replace fiat currencies but that is not going to happen soon.

This is because cryptocurrencies still have a lot to do to prove that it is really capable to replace fiat money and sustain.