Could Cryptocurrency Replace Fiat Eventually? What Experts Say

With the rise in cryptocurrency, many people find themselves wondering whether crypto has the potential to replace fiat in the future. There are two sides to the spectrum. Some feel that the benefits of crypto, such as low transaction fees, quick processing times, and transparency, will lead to it replacing fiat. Others feel that crypto could just supplement fiat, even if widespread adoption occurs.

Take a closer look at some of the factors experts consider when deciding whether crypto could replace fiat in the future. With opinions all across the spectrum, there are numerous strong points to consider.

It Would Have to Become Stable First

A common view is that if cryptocurrency were to replace fiat in the future, it would first have to gain stability. Cryptocurrency is notoriously volatile, and that volatility would be incredibly harmful and challenging in a major currency. Some experts feel that if cryptocurrency can be stabilized, it will be in the right direction toward replacing fiat.

Can Stablecoins Solve the Problem?

Others feel that a solution to this issue is already in existence. They feel that stablecoins offer the perfect option as they are pegged to fiat currencies. As such, they have the benefits of crypto with the stability of fiat. Of course, stablecoins could not replace fiats. After all, they are pegged to them so fiat currencies must remain.

However, even stablecoins, such as Tether, can have a poor reputation. There were concerns about whether Tether had the financial reserves its developers claimed, causing its value to drop below the pegged $1 USD.

BitUSD is another type of stablecoin but is based on calls and puts. This crypto comes from a loan against crypto collateral. There is a system in place to automatically sell the coin if the collateral’s price drops significantly, allowing for backing via that collateral. Dai is another stablecoin with its own complicated mechanism that helps it stay stable.

Transaction Speeds May Be an Issue

Some also argue that the transaction processing speeds for cryptocurrencies are too slow to allow it to replace fiat. This was a more significant problem several years ago when Bitcoin was the only major cryptocurrency. Now, other cryptocurrencies use their own blockchains or variations of the Bitcoin blockchain that allow for shorter transaction speeds.

EOS, for example, was launched in 2018 and quickly became the quickest blockchain. It also offered the first instance of crypto breaking the Visa TPS speed of 1,700 at a time. If crypto can process transactions more quickly than Visa, then there is no reason to assume its processing speed will hold it back from replacing fiat. Other quick cryptos include Ripple, Bitcoin Cash, and NEO.

Crypto May Not Be Ready for Monetary Policy

Other experts who feel that while useful, cryptocurrency cannot replace fiat, turn to monetary policy. This specifically deals with the deflationary nature of money, meaning keeping the quantity constant, and its inflationary nature, which lets the quantity to increase.

Those who feel that this obstacle is impossible to overcome feel that inflation is necessary for stability and that stability is essential for crypto to replace fiat. Even Vitalik Buterin, the creator of Ethereum, has concerns about its stability after mining gets phased out. He and others feel that security is more important than this security, especially given that Ethereum was created to pay for gas instead of being a medium of exchange.

The ability to have a simple monetary policy is also important for decentralization. By limiting the number of coins, no one has to make decisions about increasing or decreasing the quantity, decisions which would require some level of centralization.

The experts who bring up this point make it clear that some inflation is good while acknowledging that hyperinflation, like that in Venezuela, is very bad. To see an example of good inflation, look back to how banks operated before the government took over with a central bank. Banks could issue their own money, provided they had assets in reserve, whether government bonds or gold. The bank would manage inflation by timing the release of additional banknotes to consider safety as well as profits.

The Deflationary Model and Crypto

On a related note, other experts believe that people may not be willing to spend their crypto until they feel there is a fair exchange of value. Bitcoin and most other cryptos have a deflationary model since they have an upper cap on the number of coins that can exist. This model does not include any built-in mechanism that will inflate the currency supply or create debt. That leads to the high fiat exchange rate because of the rules of supply and demand.

Even BitMex, one of the major crypto exchanges, previously expressed that Bitcoin cannot become the main currency even with those deflationary properties. The key here is that for a currency to prosper, it must be circulated and the deflationary model encourages holding.

Unique Inflation Disadvantages With Bitcoin

BitMex also outlines a few key inflationary disadvantages that are unique to Bitcoin and may hold back its ability to replace fiat. One of these is the fact that Bitcoin mining is incredibly energy-intensive, which leads to high costs as well as environmental damage. These combined factors make it impractical for Bitcoin to replace fiat fully. Of course, some other cryptos have overcome this issue by using other consensus mechanisms that are less energy-intensive.

BitMex also argues that Bitcoin cannot generate coin value thanks to the supply cap. This is a strong point for investors since demand should eventually outweigh supply, boosting Bitcoin’s value. Bitcoin also has to determine how to coordinate between the interests of users and miners. The current method of incentivizing miners via block rewards instead of transaction fees may be an issue. One potential issue, for example, would be miners excluding transactions from the blocks. BitMex thinks this type of action would be less likely if the incentives came from transaction fees. That, in turn, would encourage adoption of crypto.

Crypto Would Require More Infrastructure

Because cryptocurrency is still in its early years, it does not yet have the necessary infrastructure to replace fiat currency. That infrastructure is being actively developed around the world, but it is still not there yet. Furthermore, multiple organizations and governments are creating their own infrastructure, which may not necessarily work with the other infrastructure built by other organizations.