Cryptocurrency is a medium of exchange through a computer network. It is a digital currency and is not dependent upon any central authority. This particular feature distinguishes cryptocurrencies from fiat currencies. Cryptocurrency needs online crypto payments gateways. It allows merchants to accept payments just like online transactions.
Fiat currencies or paper money are government-issued currency. After 1971, almost all fiat currencies were no longer backed by any precious commodities such as gold. Central banks in every country control the economy and print fiat money accordingly. The US Dollar is a prime example of a fiat currency. The most common danger of fiat currencies is that governments sometimes can print too much of it and that can lead to hyperinflation. The other unsolvable problem associated with fiat currencies is that they constantly lose value and increase debt levels.
Whether cryptocurrencies will completely replace fiat currencies or not can only be answered by highlighting the current issues of fiat currencies.
Fiat currencies are facing a recurring problem of inflation. This is self-created. Many governments print excessive amounts of money and it leads to devaluation of the money already in circulation. For example, in 2018, inflation in Venezuela reached 13,000%. It subsequently led to a huge price rise. This prompted many Venezuelans to choose cryptocurrencies. Many have already mined cryptocurrencies like Bitcoin and Ethereum.
Fiat currencies need insignificant economic and physical inputs to be produced. They do not have any links with the needs of human life. The central planners in a bank decide the amount of currency in a fiat currency scheme. This always creates errors in the actual demand and supply of currencies in the market. In case the error is too big, it can create hyperinflation, price instability, and cause economic depression.
Central banks and governments have full authority over the issuance of currency. They issue it by claiming intangible concepts of value like full faith and credit. The problem is that the currency itself does not have intrinsic value. Due to inflation, the purchasing power of a fiat currency continuously decreases. Many fiat currencies have lost over 90 percent of their original value. Examples include the Argentinian Peso, Turkish Lira, Mexican Peso, Indonesian Rupiah, and even the US Dollar. Since the 1930s, the US Dollar has 92 percent of its purchasing power.
Fiat currencies cause the concentration of wealth in a few hands. The privileged elite often takes undue advantage because of flaws in the system. Sometimes, excessive income inequality can be harmful to the economy.
Fiat currencies are a moral hazard. This is because it provides a legal way of obtaining something from nothing. This makes central bankers wield extreme influence on both economic and political activities in a country.
There are many advantages that cryptocurrencies have over fiat. These advantages give hope that someday in the future, cryptocurrencies will replace fiat.
Decentralization and transparency are key advantages of cryptocurrencies over fiat. This is because fiat currencies are controlled by central banks and governments. The cryptos operate using blockchain technology. The network used in cryptocurrencies is decentralized.
The decentralization feature eliminates the need for intermediaries to indulge in peer-to-peer transactions. It also allows blockchain to verify transactions, reduce risks of fraud, and enhance trust.
Cryptocurrencies are borderless. This helps in better global accessibility and financial inclusion. The traditional banking system dealing with fiat currencies tends to discriminate or exclude marginalized communities. In developing countries, it has become a trend. Moreover, the fiat currencies require good infrastructure and proper documentation.
Cryptocurrencies can provide a viable alternative to resolve this problem. It has the potential to empower many unbanked individuals. Due to its borderless nature, it can help in better access to financial services such as remittances and savings.
Fiat currencies since the last 15-20 years are causing jobless growth. In some countries, it has lost so much value that people are forced to look for viable alternatives such as cryptocurrencies.
Cryptocurrencies can encourage new waves of innovation. It can lead to better development of technologies and business models. The blockchain technology used in cryptocurrencies can be helpful in various sectors. The sectors are healthcare, financial services, supply chain management, and even voting systems.
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Cryptocurrencies have become popular only because of the shortcomings of fiat currency. It can challenge the hegemony of central banks. The notable advantages of cryptocurrencies such as international accessibility, improved security, reduced transaction costs, etc. may someday substitute fiat currency everywhere. However, there are regulatory concerns regarding cryptocurrencies that need to be addressed before mainstreaming them.