Introduction
Since the inception of organized societies, money has remained the most essential tool for exchange and regulation. Money has taken different forms, from trade by barter to the use of rocks and seashells, metals, and currently Fiat. Almost everywhere in the world, FIAT is widely used, even though it has no intrinsic value.
WHAT IS FIAT?
Fiat means “let it be”. It means an order or decree. This implies that the notes and its digital equivalents issued by the banks are only worth something because the government says so. Though after its first issuance, the purchasing power will be driven by market forces.
Major Flaws of the current Fiat System
Supply
The government and the banks can increase the supply of FIAT at any time, reducing the purchasing power of the people. Almost every country is guilty of this, and this practice has resulted in continued inflation and devaluation of currencies all over the world. Even though you can readily exchange major currencies like the US dollar and Euro, you can’t still spend it at the local stores
Limited by Territory
Apart from major currencies like the US dollar and the Euro, most fiat currencies don’t have value beyond the borders of the country that issued them. This is a great limitation, as you must look for ways to convert your fiat to whatever the new territory uses, and this sometimes comes at a very high cost.
Control
FIAT money gives the government and Bankers absolute control over your finances. The government or the bank can decide to confiscate your funds for whatever reasons they deem necessary.
Counterfeit
Paper notes, a major component of FIAT currency, are susceptible to counterfeiting. These counterfeits are very difficult to completely eradicate from the financial system and have been used to steal from a lot of people.
High Cost of International Settlement
Foreign exchange is the biggest aspect of FIAT currency. The cost of international settlement can be huge, and this poses a lot of problems to businesses that depend on imports and exports.
These and many more problems associated with FIAT currencies led to the invention of cryptocurrencies.
CRYPTOCURRENCIES
Bitcoin, the first and currently the biggest cryptocurrency by market capitalization was created on January 3, 2009. Being primarily designed to give people absolute control over their funds, it has gained massive adoption all around the world. This breakthrough innovation has led to the creation of more than 20,000 cryptocurrencies and several advancements in Blockchain technology. Years after Bitcoin’s creation, the entire crypto market has surpassed $1 TRILLION in valuation.
KEY ADVANTAGES OF CRYPTOCURRENCY OVER FIAT CURRENCY
Decentralization
Fiat currencies are controlled by the government and the banks. They can devalue it, mismanage it, punish you with it, freeze your account, etc. while cryptocurrencies provide you with complete autonomy over your funds.
Security
Cryptocurrency transactions are verifiable on the chain, and transactions are encrypted. This makes it very secure and trustless. Nothing like failed transactions and bank errors. You can tell the status of every transaction at any given time.
Borderless
You can send value to anyone in any part of the world without paying additional charges. It will take just about the same time to send value to someone who is in the room with you and someone who is far away in another country.
Uniformity
The value of cryptocurrency remains the same everywhere, no need for foreign exchange price quotes. You can spend it directly in your region or just convert it to your local currency, as the case may be.
No Intermediaries
Unlike banks, it doesn’t require any particular third party to specifically facilitate the transactions. However, the transactions are checked for authenticity and broadcast on the blockchain. This is actually what makes the transactions cheaper and faster.
Some Critical Challenges of Cryptocurrency
For cryptocurrency to replace fiat currencies completely as money keeps evolving, it will need to overcome some of these critical challenges
1. Regulation
Cryptocurrency is still widely unregulated, and governments are keeping it in check. Most governments thrive when they have absolute control, and cryptocurrencies will do just the opposite. Will governments all around the world finally accept cryptocurrency and introduce regulations? Only time will tell. What is sure is that without regulations, there will definitely be a limit to cryptocurrency adoption, as a lot of individuals will not venture into it for this reason
2. Scalability
This is a huge problem for cryptocurrencies. Due to the decentralized nature of transaction validation, when there is traffic on the network, it slows down the network, and gas fees go up.
For instance, Bitcoin, the most prominent cryptocurrency, has a TPS capacity of 7 transactions per second, while A centralized payment system, Visa, claims that it’s able to process 24,000 transactions per second. This goes to show that Bitcoin can’t handle a lot of traffic and has a long way to go.
Imagine if the whole world adopts Bitcoin. With its current capabilities, transaction fees will be extremely high, and it will take more than 2 days for one transaction to be processed due to network congestion.
Scalability is a prominent problem in blockchain, however, many developers are currently working on this. Until this is completely fixed, cryptocurrency will have a hard time replacing fiat currencies
3. Fraud
Due to the lack of regulation and technical know-how, a lot of people who use cryptocurrency have been victims of one scam or the other.
This raises a lot of trust issues, and many newbies have become skeptical about using cryptocurrencies. To combat Fraud, a lot of educational campaigns is required to sensitize cryptocurrency traders on the various schemes these bad actors use for their scam activities. The government also needs to introduce regulations that will put key stakeholders in check to ensure fund security of regular crypto traders
4. Ambiguous
Being an emerging technology, a lot of new products are rolled out regularly and thereby, most people have not fully understood the capabilities of cryptocurrencies and blockchain technology
With proper training and constant use, a lot of people will eventually become comfortable using cryptocurrency for transactions, thereby increasing its adoption. For now, a lot of effort is required in order to sensitize the public.
5. Risk
This is one of the most critical factors that has scared a lot of people. There are a lot of people who have bad experiences about how they lost their fortune to cryptocurrency
Being a new type of asset, cryptocurrencies are very volatile, which is not a surprise because of their low market capitalization compared to other currencies or investment instruments. This volatility can sometimes be very detrimental, depending on when the individual entered the market
Another major reason why a lot of people lose money while investing in cryptocurrency is the lack of technical know-how when it comes to investing. Cryptocurrency has no regulation and therefore attracts a lot of unsophisticated investors who don’t understand how investing works.
Conclusion
Will money evolve into cryptocurrency, leaving Fiat as history? Time will tell. What we do know is that Fiat has a lot of shortcomings that cryptocurrency provides solutions for. However, cryptocurrency is not without its own limitations, as we have carefully discussed in this text. These challenges need to be fixed if cryptocurrency is to replace fiat currencies in the future. For now, both are useful and can work hand in hand to enable us to transact both locally and internationally.
