As cryptocurrency continues to make waves across the financial industry, some wonder what is to become of traditional or fiat currency.
Cryptocurrency adoption continues to grow on a worldwide scale, as more investors, entrepreneurs, consumers, and even regulators begin to accept it and use it as payment.
There have been some challenges with fiat currency when it comes to global payments and foreign exchanges. It is claimed that crypto will be the answer to these problems.
One thing is certain, there are some stark differences between crypto and fiat currencies and this article aims to address them and how they play out in our current financial system. Let’s dive in.
Fiat Currency Defined
Fiat currency, also known as traditional currency, is a type of money that is supported by, managed, and “centralized” by a recognized government organization. In the case of the U.S. dollar, that entity would be the U.S. Federal Reserve. Back in 1971, the U.S. government ceased the “convertibility” of the U.S. dollar into gold.
The Advantages Of Fiat
Fiat would not continue to be in use if it didn’t provide any benefits for the user. Let’s explore the advantages that fiat currency offers:
- Fiat currency is stable – It is stable because it is supported by economically robust governments.
- Policy changes are immediate – Because of its centralization, all policy changes tend to reach an agreement quickly
- Protection – There are governments that offer “asset protection.” In the U.S. we have government protection via the FDIC and SIPC insurance.
- Ease of use – When we use our fiat currency, it is easy to use. This is true, regardless of whether it is used physically or digitally.
- Consumer protection laws – Thanks to many countries creating laws, consumers are protected from digital fiat fraud and even theft. This facilitates the recovery of any lost funds.
The Disadvantages Of Fiat
No currency is without fault. And fiat is proof of that. Let’s explore the shortcoming of fiat currency:
- No control or privacy – The unfortunate aspect of using fiat, which has given rise to cryptocurrencies, is that users must relinquish some control over their privacy and their personal finances. They need to be willing to share this control with their bank.
- Fees – Since there are intermediaries are involved, users must pay fees.
- Fiat is vulnerable – Fiat currency is susceptible to both “value erosion” and inflation.
- Physical fiat is unprotected – When it comes to physical fiat, it is more prone to getting destroyed, lost to theft, or just lost. Once these incidents occur it’s almost impossible to recover.
- Used for crime – Unfortunately, fiat is still the prevailing currency of choice for money launderers and other criminals around the world.
Now that we have thoroughly discussed fiat currency, let’s explore its digital counterpart, cryptocurrency. Cryptocurrency is often referred to as a “digital representation of value” that is constructed on a blockchain and uses cryptography for secure communication. Crypto can be used as a “medium of exchange”, “store of value”, and a “unit of account.”
The main difference between crypto and fiat currency is that crypto is completely decentralized. Meaning that the decision-making and control from an individual or organization (centralized body) have been transferred to a “distributed network.”
As a result, there is no intermediary and it operates on a peer-to-peer basis. In general, cryptocurrencies are supported by “the faith of their users.”
The Advantages Of Cryptocurrencies
There are many reasons that crypto is shaking up the financial industry, with many consumers and businesses adopting crypto use. Here are a few:
- Privacy – One of the greatest advantages of using cryptocurrencies is having more privacy and greater control over their finances.
- Lower fees – With crypto fees are lower and transactions overall are more cost-efficient
- Security – Certain blockchains offer security, privacy, and 24/7 access to any crypto user.
- Transparency – Bitcoin is completely transparent, and therefore facilitates the ability to track any potential criminal activity by the FBI or IRS.
- Versatility – Users have the ability to invent, invest, earn, fund, and pay using crypto.
- Innovative – Crypto is spearheading efforts toward a global, more open “digital economy.”
The Disadvantages Of Cryptocurrencies
Crypto has faced criticism from government bodies, and financial and investment experts alike. Let’s dive into some of the most common drawbacks of crypto:
- It’s complex – Just the fact that crypto is not user-friendly makes it all the more difficult to buy, sell, or even hold crypto.
- Volatile – Another major roadblock to widespread crypto adoption is its extreme volatility. This negatively affects purchasing power, diminishing its use.
- Prone to attack – Crypto has the propensity to draw money launderers and other criminals. It can also attract fraud and cyber attacks.
- Vulnerable – Digital assets are still vulnerable to forgotten passwords, loss, and online theft. Also, the fact that there are no intermediaries makes it more difficult to recover.
- Unstable – The value of crypto is heavily dependent on the market’s willingness and continued interest in exchanging fiat into crypto currency. If the market were to disappear, so will crypto’s value.
- No guarantees – There is no guarantee that those companies who currently accept cryptocurrency as payment will continue to do so in the future.
A Look Into The Future
In spite of the rapid advancement and adoption of crypto, fiat continues to be the tender of choice. It will be the primary currency used for both spending and saving. For the time being, it continues to be the safest option. It is also the easiest to use when it comes to making a purchase as it is still easily accepted worldwide.
Even so, crypto does have its place. It has become wildly popular as an investment. It can also be useful when it comes to making money transfers. Regardless of where you stand on the fiat vs. crypto conversation, it would be of great benefit to learn more about digital currency.