The digital currency was introduced to the tech and financial space in 2007 when Satoshi Nakamoto, the unknown creator behind Bitcoin, came out with a whitepaper. The original intent for creating this new technology based on the blockchain was the global financial recession.
Bitcoin was proposed as an alternative to traditional currency, with fiat crypto trading pairs like BTCUSD envisioned to be established. Since 2008, the year of Bitcoin’s launch, cryptocurrencies have grown in monetary value and popularity. Numerous merchants accept digital currency as a form of payment, and traditional investors are divesting their assets into crypto to land big profits.
Governments in different nations are also attempting to tax crypto, thereby cementing its place as a financial instrument. The digital currency market has proven to go past financial use cases into other industries. For one, Ethereum provides a platform that allows businesses to build new technology like decentralized applications and NFTs.
The booming De-Fi or decentralized finance sector is also an offshoot of Ethereum’s tech. The second-ranked cryptocurrency after Bitcoin also pushes the metaverse poised to be the future of gaming and virtual reality.
It’s no surprise that several crypto enthusiasts are hailing crypto as the natural successor to fiat money. Although virtual currency is not likely to immediately overthrow a form of currency that humans have used for centuries, the possibilities are meant to be explored.
Cryptocurrency Solving Fiat Currency’s Existing Problems
Before anything can be called money, it needs to satisfy three conditions. First, it has to be accepted as a means of exchange. It needs to store value and act as a unit of account. Paper money had existed for centuries starting from the ancient Medici family in Italy when it was used as an I.O.U.
Nonetheless, technological development upset paper money as the reigning form of currency when debit and credit cards came onto the scene. In developed countries like Denmark, less than 10% of the population carries cash around. Financial transactions are mainly electronic, and banks act as intermediaries.
The intermediary’s job is for both sides to trust a neutral party in a transaction. The 2008 global financial recession eroded public trust in banks since they were the origin of the crisis.
The way digital currency is built, commercial banks can be eliminated as intermediaries. This is because the blockchain ensures that all computers on its network verify transactions correctly.
The Effect of Digital Currency Replacing Fiat Money
Already, virtual currencies aren’t bound by borders. In other words, if you’re in a country and you transfer crypto to someone in another nation, it would be no different than transferring to someone in your country. Digital currencies know no borders, which has positive and negative effects.
Crypto isn’t controlled by a central authority like Central Banks or the Federal Reserve. The economic tools used to control the rate of inflation are interest rates and open market operations. Since one of the fundamentals of virtual currency is decentralization, which means it becomes controlled by all individuals, these tools are rendered redundant.
The consequences of shifting to the digital currency from fiat money are still uncharted. Experts have opined that there’s no middle ground when it comes to a total replacement. It’s either crypto changes our world for good or ruins the economy.
Crypto’s Positive Influence on Global Finance
Cryptocurrency has been evaluated to influence certain regions positively and has gained acceptance. The biggest single acceptance of digital currency is in El Salvador, where the President, Nayib Bukele, declared Bitcoin as legal tender in the country in 2021. A custom crypto wallet was created because of this inclusion in the nation’s financial industry.
Cryptocurrency has also served as a store of value in countries wrought with a high level of inflation like Venezuela and Zimbabwe. This has led to countries creating digital currencies based on the blockchain, like Venezuela creating the Petro.
Other countries like Nigeria and the Bahamas have also released their custom digital currencies. China has announced that its central bank should release a national digital currency.
In the US, New York’s mayor, Eric Adams, accepted his first three salaries in cryptocurrency. In 2021, his January salary was paid in Bitcoin and Ethereum, with the mayor reiterating support for digital currency.
The Most Probable Situations in the Currency Debate
On several digital currency exchanges, crypto can be exchanged for fiat money. This is believed to be one of the reasons virtual currencies have achieved mass popularity. The more people use this form of currency, the more they’ll understand and accept it.
The cryptocurrency usage trend presents three possible situations regarding the currency debate. The first is that if crypto gains even more exponential popularity, most of the economy could accept it as a means of exchange. In this case, the government would be pressured to name that particular currency as legal tender, with a complete economic shift to cryptocurrency.
The second most probable situation and possibly the most likely one is that crypto gets infused with fiat money. In most countries, some people are opposed to digital currency, especially stakeholders in the traditional financial sector.
In this case, governments would move to tax crypto capital gains and incorporate them into their economy, just like in El Salvador. Entities would have the freedom to choose whichever currency they feel most comfortable with.
The third most probable situation is the ban of cryptocurrency by governments or non-acceptance by society. The probability of this situation occurring is low since blockchain transactions are practically foolproof.
Conclusion
Many people have wondered whether the world economy will permanently shift towards accepting cryptocurrencies as a means of exchange. After all, crypto imbibes all of the characteristics of money and betters currency in the macro-economic aspect.
Cryptocurrency taking over fiat money can bring about a totally positive or negative change in the economy. In countries like El Salvador, Bitcoin has been legalized, with countries like Venezuela, Nigeria, the Bahamas, and China releasing their national digital currencies.
The two most possible situations that’ll occur are the mix of cryptos with fiat currencies in the economy or a total shift. There’s also the possibility of society rejecting crypto.
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