What Really Backs Both Fiat Money and Cryptocurrencies?
By Stephan Cummings on ALTCOIN MAGAZINE
Some fiat money advocates don’t know the basics
When talking/reading about cryptocurrencies I’ve found that many people (those who don’t trust crypto) do not know the basic things about fiat money. They think that (let’s say) the U.S. dollar is backed by some tangible value such as gold, silver, etc. This false assumption makes people feel safe about using fiat money. Ignorance is the reason why they think that fiat money is relatively stable.
A little bit Captain Obvious-ish chapter about the fiat money
More than a century ago (before 1913 when Congress passed the Federal Reserve Act) there was the only institution in the US that had a right to print money — US Congress. The gold and silver kept in Fort Knox were backing each and every freshly baked dollar. Before the spreading of fiat money, there were “commodity money” (for example, golden coins) and “representative money” (paper money backed by precious metals or some other valuable matter) and that’s something different from the modern US dollar. This dollar is not backed by anything besides the trust (which is mostly fueled by the state support of fiat money).
What makes fiat currency stable?
This question isn’t even correct enough because fiat money is only relatively stable. In different countries, at different times the price of any of these currencies can change drastically. I can’t forget how sharp the drop of the US dollar against some other currencies was after the 9/11 tragedy although it was a short-term effect. In the 1990s the residents of many countries including UK, Brazil, Mexico, the former members of the Soviet Union, numerous East Asian countries, and many others, were dealing the dramatical drop of their national currencies due to the economic crisis. In the 2000s there were troubles in Greece. The most recent example of lousy stability of the fiat money is the Venezuelan bolivar.
OK, fiat money isn’t stable. BUT! Let’s not pretend that the cryptocurrencies have less volatility than the national currencies. What makes fiat money more stable?
In fact, the stability of the fiat currencies depends on factors similar to ones that are relevant for cryptocurrencies, and the key factor is trust. As long as you together with millions of people believe that $10 provides the ability to buy the $10-worth commodities, it works. When you change a book for a pack of cigarettes, you rely on the same feeling — you feel that this exchange is worth it.
The principal difference between the trust you feel about the cryptocurrencies and the trust you feel about fiat money is that fiat money is backed by the government. The government says: THESE and ONLY THESE papers can be used as the legal payment mean (let’s put exceptions and nuances aside). You can hate the government and the banking system, but probably you think that these people are not going to ruin your national currency, they will work to maintain it so you hope for better. You presume that the $10 you keep in your pocket today won’t lose its value tomorrow and there are some professionals who work hard to make your little dream come true.
As we have learned before, history shows that the banks and governments are not always good at their work on sustaining the value of the national currencies, so the trust keeps on being nothing more than a subjective feeling. The same feeling that we express towards cryptocurrencies which are yet to be regulated in many countries.
Will people trust cryptocurrencies?
So we can see that distrust in cryptocurrencies is fed with ignorance and the lack of regulation which is a question of time and space — I mean the governments that support cryptocurrencies and blockchain-based projects already exist, and without doubt there will be more of them in the nearest future. Estonia is the country that provides the strongest support to blockchain technology aiming to transit the healthcare, voting, and some other state systems to the blockchain. Scandinavian countries are working on termination of the physical money, and the experimentation with the cryptocurrencies is the part of local life. The regulations should follow. The Netherlands has a famous Bitcoin City, and it’s not the only place in the world where people can pay in crypto in most of the shops/markets.
Another factor that can make people trust cryptocurrencies and blockchain more is the support from (or researches made by) the giant tech companies such as IBM, Amazon, Microsoft, Facebook (although the company is too shy to confirm it), Oracle, Baidu, etc. Visa and Mastercard are working on an implementation of the blockchain solutions, too. Such huge figures as Alexis Ohanian, Steve Wozniak, Gary Cohn, Pavel Durov, and many others are also working with the new technology.
These people are not complete idiots to dump their money on research of something useless just because of media hype. The fact that they pay attention to blockchain and even try to contribute to the new technology blockchain and create their own projects associated with cryptocurrencies means that cryptocurrency haters/skeptics are missing an elephant in the room. When these projects will start working and the use cases will flood all over the place, people will finally trust crypto. I’m sure that the governments will recognize cryptocurrencies even earlier.
Think of plastic cards
When I have cash money I usually add this money to my plastic card and easily use it everywhere. I don’t hold much cash in the wallet, sometimes I don’t even have a dime. I guess I’m not that special in doing so. Modern people in many countries are not using physical money that much. Cryptocurrencies are backed by the Proof-of-Work or other consensus algorithms while fiat money is not backed by anything, but the law. I guess that soon cryptocurrencies will be backed by the law, too. Will affect the way people trust fiat money and trust to cryptocurrencies? I think, it will.
Probably the stablecoins experiment will appear to be successful, then the volatility stigma will go away. The scalability issues will definitely be fixed in the nearest future. I can’t believe the opposite. There are some super-fast cryptocurrencies already here. The bigger problem is the cumbersomeness of private keys. People are supposed to remember or bear anywhere these 64-character keys (holding it in specialized apps is depriving cryptocurrencies of their private nature). Yet, I can’t see that this problem is seriously discussed.
The ending
This article was not supposed to repeat all the well-known differences between fiat money and cryptocurrencies. The goal was to focus on similarities and show that fiat money have something in common with cryptocurrencies and probably the transition from one to another can seem not so dramatic.
In my opinion, there is a lot of work to do if we want cryptocurrencies to change the world. Currently, this innovation is not the best option in many situations when you need to pay, but I’m optimistic because I see how many clever and successful people are working on it seriously. They are not inventing an eternal engine or not trying to create an elixir-stone. The goal is quite realistic everyday life thing that will finally save humanity from burdens of intermediary.
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