Since their introduction to the mainstream in 2009, cryptocurrencies have experienced rapid growth in value, utility, and popularity. Several are accepted by many retailers and merchants, and investors are eyeing them as a possible way to earn returns and store value. Governments are trying to figure out how to tax and regulate them.
Ethereum, the blockchain ecosystem, introduced not only a cryptocurrency but numerous use cases with its programmability and versatility; businesses and entrepreneurs are using it to create new technology, products, and services. The decentralization of finance is based primarily on the Ethereum blockchain and ecosystem, as is the emerging “metaverse” that could fuse our digital and physical lives.
With all the focus on digital assets, cryptocurrency, and the merging of realities, one of the many discussions that have substance is the one of cryptocurrency replacing fiat currency. Find out what is fueling these discussions, and learn how this change might affect the economies in which it occurs.
- Fiat currency is tried and tested as a reliable means of exchange, with tools developed by central banks and governments that assist in its regulation and how it affects an economy.
- The roles cryptocurrency will play are still being explored and researched by academics, policy-makers, investors, and consumers.
- It is unknown what would happen to global or geographic financial stability if cryptocurrency replaced fiat currencies.
Fiat Currency Issues That Crypto Addresses
Many agencies and regulators define money as anything that is a widely accepted means of exchange, a store of value, and a unit of account. Fiat currency, sometimes referred to as real or physical money, has met all three requirements for more than a millennia.
However, advancements have already begun to reduce the need for physical currency in most developed countries. Debit cards and electronic transfers are replacing physical money, leading to a system where governments, banks, businesses, and people transfer funds by having a third party change numbers on the equivalent of an electronic ledger. Third parties are necessary to ensure transactions are valid, and the costs of maintaining these financial systems are high.
These third parties bring the necessity of trusting someone else with your money. This trust has been violated on many occasions—unethical practices by third parties have even contributed to global financial crises.
Cryptocurrency reduces the need to involve another person to verify transactions and ensure accuracy. Each party is credited or debited correctly because blockchain technology and automated consensus mechanisms verify transactions and store the information in an unalterable way.
What Would Happen If Cryptocurrency Replaces Fiat?
Cryptocurrencies in their current form transcend borders and regulations, which has both positive and negative effects. They are not controlled or influenced by central banks the way that fiat currencies are in developed countries. Central banks use monetary policy tools to influence inflation and employment through interest rates and open market operations. Decentralization, one of the fundamental principles behind cryptocurrency, removes these tools.
Consumers may also not have financial recourse or protections if cryptocurrency, in its current state, replaces fiat currency.
The effects a complete replacement of fiat currency would have are still being explored and evaluated. There could be significant adverse impacts on economic and financial stability, or the change could usher in an era of complete global stability.
The International Monetary Fund (IMF) recommends against adopting cryptocurrency as a main national currency in its current state due to price volatility. Additionally, the organization feels that the risks of macro-financial stability and lack of consumer protections should be addressed.
However, the IMF does acknowledge that adoption is most likely to occur more rapidly in countries where cryptocurrency risks are an improvement on the financial system in place.
Cryptocurrency has unlimited potential and is clearly beneficial as a currency. For example, many Ukrainians turned to cryptocurrency after fleeing the Russian invasion in 2022. Without cryptocurrency, many might not have had the money to survive.
It is also being used by many in countries with severe fiat devaluation to preserve their savings, send remittances, and conduct business.
What Does the Future of Currency Look Like?
You can already exchange cryptocurrency for fiat through exchanges or trades with other cryptocurrency users. Cryptocurrency and blockchain use cases, popularity, understanding, and acceptance continue to grow. The more it is understood and used, the more value it could have as a means of exchange.
As seen from cryptocurrency’s use, research, and development, it is very likely that cryptocurrency use worldwide will continue to grow.
If these trends continue, several currency scenarios could emerge. First, a society and economy could embrace cryptocurrency to the point that the country’s fiat currency would be replaced. Its government would be forced to recognize it as legal tender, and fiat currency would cease to be used.
A second scenario might be a hybrid of digital assets and fiat currency. Governments could recognize both and be able to collect tax revenues and fund their programs and militaries. Consumers and businesses could choose whichever they wanted.
Third, a society could reject cryptocurrency entirely and decide to keep using its established fiat currency. However, this seems unlikely because advancements in the blockchain are guiding society towards a system where financial information cannot be altered or faked.
Whichever scenario plays out, what is clear is that cryptocurrency can benefit people worldwide and the economies that surround them. However, what remains to be seen is the fate of fiat and cryptocurrency—they have both proven to be a useful means of exchange, unit of account, and store of value.
Is Cryptocurrency Better Than Fiat Currency?
Fiat currency prices and value are generally more stable than cryptocurrency. Cryptocurrency is still new, so it may turn out to be as stable as fiat in the future. Each has its advantages and disadvantages, but cryptocurrency use continues to grow.
Will Cryptocurrency Replace Cash?
Cash is the physical form of fiat money, and cash transactions have been on the decline for some time—it’s possible that cash use will continue to drop, and something will replace it. Currently, debit and credit cards have replaced most cash transactions.
How Is Crypto Not Fiat?
Fiat currency is money backed and guaranteed by a government or authority. Cryptocurrency is currently not backed by a government, so by definition, is it not fiat.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.