Can Cryptocurrency Eventually Replace Fiat Money?

There has been growing interest in cryptocurrencies in the recent past, which has made most people suggest that banks will become redundant soon. The idea behind Bitcoin and the entire cryptocurrency movement is to decentralize banking and eliminate the blocks that come with centralized management.

But can cryptocurrency replace the current banking system? Can it solve the issues of financial inequalities that we find today? Let’s explore the arguments for and against the idea.

Lower and middle-income countries have seen an increase in cryptocurrency use in the recent past and the numbers are still going up. On the other hand, in the developed world, the adoption rates are going down. Most people believe the places where adoption rates are going up are areas where the current systems suffer inefficiencies and high costs.

What Fiat Issues that Cryptocurrencies Solve

Money is anything that is a widely accepted means of exchange, unit of account, and store of value. Fiat currency is called physical money and meets all other requirements. However, as advancements in the financial industry continue, there has been little need to have physical money in the financial systems. Cryptocurrency will do the same in the following ways:

Need for Trust

One of the biggest demerits of fiat money systems is the need to have third parties verify that every transaction that is made is valid. The third party is usually a bank or a payment processor that must approve a transaction before it is valid. These third parties must be paid for their service, which increases the cost of transactions.

This is the first and major thing that cryptocurrencies come to solve with decentralization. They eliminate the need to have a third-party service provider verify transactions and instead use algorithms that require lower amounts to maintain. According to Roulette.Guide, this lowers the cost of transactions, ensuring each coin goes to where it is needed, especially for roulette casino gamers.

In the e-commerce marketplace and gaming world, the cost of transactions can have a significant impact on financial standing, especially for people who make regular transactions. The lower cost of transactions has enhanced the adoption rates in these two industries.

Control of Financial Systems

Another major demerit of fiat money is control of financial services. The providers of these services may choose to deny anyone access to the services due to discriminatory reasons, lack of collateral or not meeting any of the requirements set by lenders. Many do not offer their services in some regions, leaving many people unbanked.

However, most of the people in the unbanked category have access to internet and phone services. There are two conditions needed to access cryptocurrencies. They can access funds through cryptocurrencies and are not at the mercy of the players in the financial industry.

Influence of Exchange Rates and Money in Circulation

Another argument is that central banks determine the amount of cash that is in circulation to influence exchange rates, which includes purchasing power. They also control the interest rates in a bid to influence spending and inflation.

However, with decentralized finance, there is no player behind the scenes that pulls the strings in terms of money in circulation and interest rates. Most cryptocurrencies have a fixed number of coins in circulation, and their creators do not have the power to remove coins from circulation. It means that the market forces are left to determine the exchange rates and interests. Additionally, crypto-backed DeFi systems provide a secure way to raise capital without actually requiring the borrower to have physical collateral.

What Prevents Businesses and Countries from Accepting Cryptocurrencies?

There are significant drawbacks that prevent the use of cryptocurrencies in several sectors of the economy. Here are the major ones.

Regulatory Uncertainty

The regulatory framework surrounding the use of cryptocurrencies is still evolving. Unlike in fiat currencies, where the laws are generally harmonized across many countries, different jurisdictions have varying regulations. For example, in some countries, cryptocurrencies are regarded as securities rather than a means of exchange. This makes it hard for businesses to navigate the compliance landscape and use fiat money as their primary means of exchange.

Volatility and Price Fluctuations

Volatility has been a major challenge for altcoins. In the past, we have witnessed various currencies plummet by over 20% of their value in a few days. This is quite risky to businesses, as it could wipe off their entire money reserves. Besides, this makes it hard for businesses to price their goods and services conveniently. On the other hand, most stablecoins are based on the very fiat money that cryptocurrencies seek to replace. Therefore, they cannot be said to be the ultimate replacement, despite their relative stability.

Cybersecurity Risks

Despite the presence of blockchain technologies, there have been cases of theft and hacking, most in exchanges and wallets. Any business or country that wishes to adopt cryptocurrencies must invest in security systems to protect their digital assets from theft. This is a significant investment compared to just taking the money to the bank.

Is There a Chance that Cryptocurrencies Will Replace Fiat Money?

It is highly unlikely that cryptocurrencies will eliminate fiat money from circulation. The main reasons are those we explored above. Secondly, it will take quite long for cryptocurrencies to enjoy support and widespread adoption, as has been the case with fiat money. Our best bet is the two will go hand in hand in the financial future.

Governments and businesses can leverage the strengths of each to enhance the macro- and micro-economic environments. For example, governments may recognize the use of cryptocurrencies and foster the development of innovative financial solutions to reach the unbanked. On the other hand, they could have the right fiscal policies to ensure that their fiat money does not bow under inflationary pressure and erode the buying power of their citizens.

For businesses, it is good to have both options available to users. Let the customers decide the method to pick with the information the business has shared. This way, the businesses create convenience for everyone while taking advantage of the growing innovations in the crypto marketplace.