There’s an implicit expectation that fiat currency will last forever, barring any international takeover or radical transformation (such as how the euro became the standard for the European Union in the early 2000s). Now a fundamentally different type of currency is starting to rise: cryptocurrency.
Could cryptocurrency have the power to replace cash and fiat currency entirely?
What a cryptocurrency takeover would look like
Let’s start by looking at what a crypto takeover could look like:
1. Growing consumer interest
Millions of new people were interested in the currency, buying, mining and selling it, and the price rose in response to that increased demand. Currencies are only as valuable as people think they are, so for cryptocurrency to become a stable household currency, we would need to see levels of consumer interest and adoption far above where they are now.
2. Industry impact and response
We’re starting to see more businesses accepting Bitcoin and other cryptocurrencies, and assuming consumer interest grows, that acceptance will only increase. At some point, the prevalence of digital currency will make online shopping even more attractive, and physical stores will need to start adopting it to catch up– that way, the war between digital and physical retail will continue. Other industries, like finance, might gravitate to more crypto-oriented products and services, creating a feedback loop that responds to and creates consumer demand.
3. Governmental impact and response
Governments have a vested interest in keeping their fiat currency active; it’s something they can directly control and has an enormous impact on the economy. They won’t be incentivized to accept (or even tolerate) cryptocurrency, which is why countries like China are locking down on Bitcoin altogether. Still, as more consumers start trading cryptocurrencies freely, governments will need to start imposing stricter or better-defined trading regulations and will be forced to acknowledge the currency.
4. National adoption
The big step forward is national adoption At this stage, the majority of a population will be using cryptocurrency openly, and its federal government would have ample, crypto-friendly policies to allow those trades to happen. The government may recognize the advantages of an all-crypto model, or else concede to its inevitability, and start putting a plan in place to transition the country from a fiat system to a digital one.
5. International adoption.
The process would be gradual, but as more countries get on board with the same cryptocurrency and similar measures for adoption, we could eventually have an international system that relies on one (or a series of very similar) currencies.
The advantages of an all-crypto future
Why are we even considering this as a possibility? Why would an all-crypto future be good for us?
One of the biggest advantages of cryptocurrency is the fact that it’s completely decentralized. Each cryptosystem relies on a complex, interconnected network of users to manage the system. No single government would be able to seize control of the system, nor would any single player be able to take advantage of it.
2. Manipulation protection
Along similar lines, cryptocurrency would be marginally protected against manipulation efforts. At sufficient volumes, cryptocurrencies with a fixed supply are practically immune to these tactics.
3. Circulation costs
For years, the American penny has cost more than 1 cent to create– 1.5 cents as of 2016. While fiat currency is completely dependent on consumer trust to hold its value, it still costs money to print and mint new currency and manage old forms of currency. Since cryptocurrencies exist only in a digital environment, those costs could be eliminated.
Granted, fiat currency could adopt a blockchain-style exchange. That would make it a digital currency.
5. Intermediary abolishment
The peer-to-peer nature of crypto transactions means we could do away with at least some financial intermediaries. That means consumers will be responsible for fewer transaction fees. Plus, payments may process faster for more transactions.
The disadvantages of an all-crypto future
That said, there are also some key downsides to an all-crypto future:
1. Fiat currency woes
The majority of people still rely on fiat currency and will for the foreseeable future. If our federal government were to transition to a fully crypto system, the value of fiat currency would plummet, leading to significant asset loss in some portions of the population.
2. Infrastructure and transition
To re-create a financial system for a modern, developed country would take an enormous effort. This would likely create financial volatility and possibly increase consumer uncertainty.
3. Industry collapse
Some industries might be negatively affected by the release of a fully crypto system. Financial institutions might not be able to charge transaction costs or hold consumer assets as reliably as they used to. The economic impact of losing an entire industry would be harsh on consumers.
4. Lack of oversight
One of the advantages of a crypto-based system would be the lack of a single entity capable of manipulating the currency. Some cryptocurrencies have built-in parameters for controls like these like a finite amount of minable currency.
Now, there are hundreds of cryptocurrencies available. This is already causing issues in the market with regard to ICOs and consumer confusion. If the international community or a national government decides to adopt a cryptocurrency as its main standard, how would we decide which coin to offer?
Currencies are only as valuable as people think they are, so for cryptocurrency to become a stable household currency, we would need to see levels of consumer interest and adoption far above where they are now. Governments have a vested interest in keeping their fiat currency active; it’s something they can directly control and has an enormous impact on the economy. Still, as more consumers start trading cryptocurrencies freely, governments will need to start imposing stricter or better-defined trading regulations and will be forced to acknowledge the currency.
While fiat currency is completely dependent on consumer trust to hold its value, it still costs money to print and mint new currency and manage old forms of currency. Some cryptocurrencies have built-in parameters for controls like these like a finite amount of minable currency.
It’s going to take years, if not decades, to even start making that transition. This includes dramatically improving user adoption and trust before crypto can even rival fiat currency in terms of spending power or reliability. Of course, if we can solve the main problems with adoption and build the right infrastructure, we could end up reaping all the advantages such a system would offer.