Can Bitcoin or other cryptos replace fiat?

Fiat money permits countries to bounce back from economic downturns and invasions, the attendant costs being inflation. Commodity money can hold back inflation. Given their restricted size, however, it becomes difficult to release stimulus during crises. Owing to limited supply and a modifiable protocol, cryptocurrencies have the capacity to take on the mantle of a new medium of exchange. Growing evidence is nibbling away at naysayers’ criticism. Even as some orthodox financial institutions are beginning to grow receptive to blockchain technology. The idea that Bicoin or other cryptos could replace fiat is still mostly unpalatable to most. 

September 7, 2021. El Salvador became the first country globally to embrace Bitcoin as legal tender. Despite the rollout having been far from friction-free, a number of notable companies, such as McDonald’s, Pizza Hut, and Starbucks, have taken to Bitcoin enthusiastically as a preferred payment form. 

Bitcoin and altcoins replacing fiat: the next evolutionary step? 

There were excellent reasons why nations globally moved away from the silver and gold standards, adopting fiat currencies. Hypothetically, were the US dollar to be supported by gold, it would have been close to impossible for the Treasury and the IRS to sanction the issuing of trillions of dollars worth stimulus money without mining copious amounts of gold first. Even if that were physically doable, there would have been a tendency to chronic Depression thereafter. 

Conversely, fiat currencies are issued by governments for different durations leading to fluctuating inflation. The negative impact of this is a necessary evil. Still, there are redeeming factors. 

Nations embarking on wear can continually print money, thus wiping out the citizenry’s savings. Fiscal mismanagement is akin to war, too, in the sense that, here, governments take to printing excessive amounts of money to pay off debt. Zimbabwe and Venezuela are examples. There is no question of raising taxes since that would precipitate collapse. 

In times of peace, inflation targets tend to cause a chronic savings loss in the long term, even when interest rates are close to the bottom. US Dollar purchasing power loss only gained momentum after Nixon took the currency off the gold standard in 1971. 

Owing to their meagre availability in Nature, silver and gold have peculiar effects on the currencies they have been known to support. Precious metal backed paper currencies suffer from minimal inflation levels. They are said to be hyperinflation resistant. They might, however, be prone to hyper deflation. 

The limitations of precious metal-backed currencies

In 1934, FDR signed the Silver Purchase Act to reinvigorate the silver industry post-Great Depression, asking for ongoing silver purchase till the supplies nudged the Treasury’s gold reserves. As a result, silver’s price swiftly doubled from close to $0.24 per ounce to $0.58 per ounce inside a year. These happenings had ramifications as far as the Republic of China, which then used a silver standard. 

Of all places, it was Shanghai that bore the brunt of FDR’s policy. Chinese bankers proceeded to meltdown silver-backed Chinese yuan coins in massive quantities, shipping silver bars to the US. Rather than lend silver to entrepreneurs and businesses, smuggling the metal to the US Treasury was way more profitable. Chinese exports suffered in terms of competitiveness, given that the silver-backed yuan rose sharply against the USD. 

All this culminated in stag-deflation, as GDP plummeted, goods within China experienced an abrupt fall in price. All Chinese entreaties fell on FDR’s deaf ears. China shifted to the fiat system, which saw collapse a decade later owing to hyperinflation. 

Whether metal backed or conventional fiat, currencies suffer from both models. 

Bitcoin or other cryptos replacing fiat: the appeal of digital money 

Bitcoin and altcoins with limited supplies are swiftly becoming a model that could combine the best features of preceding models. It is a very strong candidate. Despite 34% of its 21 million lost due to careless owners losing their private keys, Bitcoin has had its price rally outstrip the inflationary pressure on fiat currencies.

 Cryptocurrency protocols are live. Moreover, bitcoin and other cryptos have more investment value since there are no storage hassles. There have been notable improvements among altcoins/other cryptos. For instance, Luna and Reserve Rights are two dual token platforms enabling consumers to make purchases using stablecoins. Simultaneously, investors soak up the volatility owing to their ownership of Luna and RSR tokens, via buy/sell swapping of the investment tokens for the aforementioned stablecoins, investors may keep the USD exchange rate, even as they are paid commissions. 

Digital fiat: central bank digital currencies

China needs cryptos – China must reduce dependence on the USD, thus it must develop an alternative. It will not destroy the mining ecosystem but bring large parts of it under control. Developing avenues for the digital yuan to displace USD in the international finance system is a determined aim. 

The People’s Bank of China projects becoming the first major central bank to issue a central bank digital currency. While the West’s PBOC counterparts have taken a more cautious approach, the Chinese entity has held trials in a number of major cities, including Shenzhen, Chengdu, Shanghai, and Hangzhou. The benefits of e-currency are above ordinary calculus. As an increasing volume of transactions is made using a digital currency controlled centrally, there’s an accelerated expansion in the government’s ability to monitor the economy and the people. 

The CBDC rollout is also considered as part of Beijing’s push to weaken the power of the US dollar. China holds that internationalising the yuan can whittle down its dependence on the dollar-dominated global banking system.

A digital currency would permit direct transfer between global banks that could hypothetically bypass the SWIFT monitoring system but still have the support of a central bank (rather than cryptocurrencies like Bitcoin that are unregulated). An alternative government-backed currency directly transferable would allow US-sanctioned countries to buy and sell with China. 

The digital yuan could give those the US seeks to penalise a way to exchange money without the US being aware of the same. Exchanges would continue without SWIFT, the messaging network used in money transfers between commercial banks and monitored by the US government.

Conclusion 

While the US, Japan, and several other countries are also concentrating on digital currencies, China is relentlessly going after the advantages that accompany global currency dominance. 

The passive acceptance of the rest of the world could mean an authoritarian model of privacy and governance being exported abroad to other countries developing their own [Central Bank Digital Currencies]. Here, the implication would be other countries adopting the “controllable anonymity” model the [People’s Bank of China] is currently using for its digital RMB. In the latter case, the central authority has access to one’s transaction information, while counterparties may keep their anonymity with one another. Can Bitcoin or other cryptos replace fiat? There’s a good likelihood that they can.