Why Does the World Economy Still Depend on Fiat Currencies When We Have Crypto?
As the world’s nations continue to become enmeshed in an increasingly global economy, our reliance on fiat currencies makes less and less sense. Bitcoin, the first digital peer-to-peer electronic cash system, introduced the concept of borderlessness that is now expressed in the over 3,000 cryptocurrencies currently on the market. Transacting in cryptocurrency is generally more affordable, because there are no banks mediating the transactions and there are no costly exchange rates.
The problem with cryptocurrencies is that they are incredibly volatile and so have not been adopted in mass as a predictable store of value and means of payment day-to-day. Cryptocurrencies have seen widespread adoption in countries whose citizens have lost faith in their home currency, as is the case in Venezuela where hyperinflation has ravaged the nation’s fiat-driven economy, but we have yet to see crypto used ubiquitously for payments and as a store of value.
That said, given increasing economic uncertainty around the world and an impending global recession, the time for adoption of a universal global payment system is now. The borderlessness, low fees, and ease of exchange make cryptocurrencies well-suited as a solution, but the digital currency that ultimately becomes pervasive as a store of value and means of payment also must address the current issues of usability and volatility.
Need for a Global Currency
World financial markets depend on the efficient exchange of value between individuals and entities. Stock trades are now mostly completed via algorithms that are set to automatically buy or sell when certain market factors are present. When it comes to international trade, the currencies of the world’s leading global economies are used most pervasively. The US Dollar, Euro, Japanese Yen, British Pound, and Swiss Franc are the top most tradeable fiat currencies at the time of this writing. However, the strength of these currencies is dynamic, constantly changing based on the strength of its respective economy. As China’s global influence builds, the Chinese yuan could overtake the US dollar as the world’s default currency. Some economists argue that China’s economy could surpass that of the US as soon as 2030.
Given our current financial system revolves around whichever currency is strongest at the time, governments, businesses, and individuals don’t really know what currency will be most prominent in the future. Such unpredictability is a hardship for investors seeking to make sound financial decisions. A global currency that is universally accepted, easy to exchange, and a trusted store of value would advantage all participants in the world’s financial system, from an unbanked merchant to a government treasury.
What Cryptocurrency Needs to Become Universal
Despite the obvious benefits inherent to cryptocurrencies, such as borderlessness and low transaction fees, cryptocurrency payments have yet to replace cash, credit card, wire transfers, and mobile app payments. The reasons for this are multifold, but ease of use may well be the primary culprit. Before an individual can transact in cryptocurrencies, he/she must possess a device with internet access and set up a secure wallet, a process that entails understanding the value of safeguarding private keys. This is a foreign process to even internet-savvy users.
Mass adoption of cryptocurrencies will depend on education and improvements to user experience. Even as cryptocurrency wallets and exchanges become more intuitive, education on the value of decentralization is important; if the general public does not understand the value of transparency, privacy, and user empowerment, it will be harder to incentivize them to switch from PayPal and Venmo.
The second issue with cryptocurrencies is that the majority remain incredibly volatile. Bitcoin as first-to-market is the most well-known and retains the highest market cap, but the price of bitcoin can change by hundreds of dollars in a single day. That level of instability is incredibly unattractive to institutional investors such as endowments and pension funds whose primary concern is to reduce risk. Volatility isn’t ideal for retail investors either. Imagine if a dollar you earned today was worth 20% less a day later? Both institutional and retail investors would benefit from a currency that can be trusted to retain and appreciate in value over time.
The cryptocurrency that ultimately replaces government-issued fiat currencies as the global standard for payments and as a store of value needs to be easy to use and retain value over time. The jury is still out as to what form this currency will take, but stablecoins and index coins each have the potential to fill the void.
