NewsDoes Crypto threaten Fiat? The Pros and the Cons.

Aisha Hillary-Morgan Aisha Hillary-MorganFebruary 27, 2019
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The big question is, do cryptocurrencies have the potential to disrupt current currencies and banking systems?

Many think Bitcoin is a speculative investment (one with potentially very high returns), however others do really believe cryptocurrencies represents a viable alternative to national fiat currencies.

Do cryptocurrencies threaten national currencies? 

Cryptocurrencies are built on a decentralized technology called blockchain. The blockchain is a permanent secure ledger of records, transactions, and other data. In the traditional use case, the blockchain’s credibility is constantly maintained and verified by the network of users on the blockchain. This peer-to-peer network allows the system to function and thrive outside of a central point of control.

So when this technology is applied to create a token, it can represent a unit of value and thus a currency.

National currencies have gone through trends over the decades. In the 1900s, currencies like the U.S. Dollar were backed by actual gold and had real value behind them. Today, national currencies are primarily fiat paper currencies backed by the trustworthiness of the government.

Banking systems are set up to maintain national currencies by creating a safe place to store money, a reliable place to borrow money, and a liquidity provider for the currency markets. However, banking systems have become so centralized, that many people are desperate for an alternative.

The cryptocurrency market has gained massive adoption due to the decentralized nature and market equality it brings. There is still a lot of support for fiat currencies, but cryptocurrencies provide a secure digital way for people to store and trade money.

The proponents view on cryptocurrency

Advocates of cryptocurrencies note that they won’t be like traditional currencies. Where the US Dollar is tied to the economic activities of the United States, Bitcoin is independent of any government or jurisdiction (and thus, there is little cryptocurrency regulation). The cryptocurrency price is not tied to traditional economic activity. They also have the ability to limit the token or money supply to prevent governments from tampering with the currency by creating inflation.

Cryptocurrency influencers and traders also believe the values and prices will continue to be volatile. Especially after the recent large downturn in January and February 2019, long-time cryptocurrency traders pointed to the consistent trends of downturns along the way the past few years. Traditional investments like stocks and bonds go through cycles, cryptocurrencies are doing the same and will likely see more volatility.

Cryptocurrency also has the potential to change commerce as the use of digital currency makes sense for most people using Bitcoin and other cryptocurrencies to buy and sell products and services online.

The Government view on cryptocurrencies

One key issue with cryptocurrencies at the moment is that government agencies, especially in the U.S., can’t come to a consensus and agree on what cryptocurrency is and how to define it. Each agency is defining cryptocurrencies to fit under their jurisdiction so they have the authority to regulate it.

The U.S. Securities and Exchange Commission (SEC), which regulates the nation’s securities and stocks, classifies cryptocurrencies as a security. They view each coin as a security representing ownership interest in the blockchain company. It’s true that some tokens are ownership shares, but most cryptocurrencies are not intended to replace stocks or shares of a company.

The Internal Revenue Service (IRS), which is the federal tax authority in the US, defines cryptocurrency as a property, rather than being an actual currency. This means that in the eyes of the IRS, any time a cryptocurrency is traded it represents a taxable event. Traders are obligated to pay taxes on any gains from any cryptocurrency trades. This raised eyes when people were expecting to use cryptocurrencies to pay for their cup of coffee. No one pays taxes on their currency gains in the US Dollar when they make a purchase, why would it apply to a digital currency?

The IRS recently responded by saying that cryptocurrency transactions under $600 are not taxable. However, investors and traders are still up in arms over having to track each transaction for tax purposes. Many are purporting that cryptocurrencies are then similar to real estate property when traded and should be exempt for like-kind purchases under a 1031 exchange.

The US Commodity Futures Trading Commission (CFTC) sees it a little differently and classifies cryptocurrency as a commodity, placing it under their authority. In response, two large platforms allowing futures trading have created and marketed Bitcoin futures. Cboe and CME both released Bitcoin futures trading in December 2017 when Bitcoin was spiking. People started trading Bitcoin like a commodity and betting on future prices of the cryptocurrency, pushing the coin’s price up towards an all-time high of $20,000 at its peak.

Pros and cons of crypto as currency

Advantages

One of the main advantagea of using digital currencies like Bitcoin as a store of value and medium of exchange is that they cannot be manipulated the same way fiat currencies can, as in printing paper money and diluting and inflating nations’ money supply.

After Venezuela’s news headlines like the following, “Death Spiral: 4000% Inflation in Venezuela”,  the president is issuing a national cryptocurrency called the Petro that will be maintained on the blockchain and backed by the country’s chief export, oil. The government expects to leverage the cryptocurrency as a way to get around US sanctions and access international financing. This approach is interesting because it represents a move back toward physically-backed currency. Where paper money used to be commonly backed by gold, cryptocurrency is proving that you can back the currency with certain items of value.

Disadvantages

Whilst cryptocurrencies present potential benefits, there are also areas of concern when considering cryptocurrencies as actual currency. As cryptocurrencies start to gain adoption, traditional currencies will naturally lose value and people holding would essentially have worthless paper in their hands.

There is also an infrastructure gap for widespread use of cryptocurrency. Existing financial institutions are scrambling to get their arms around the idea of cryptocurrencies and build their own networks and exchanges in order to keep up with the pace. E-commerce retailers were starting to line up to accept crypto payments like Bitcoin. But with the recent volatility, many have realized the possible dangers in accepting crypto payments at the moment.

Final thoughts

Whether cryptocurrencies will be adopted as main currency is unknown. However, it’s valid, especially for investors and traders, to keep abreast on the changing dynamic landscape. Governments, businesses, and individuals all have their own views on the cryptocurrency market, but the technology and advantages of crypto may present a shift in the way people treat money.

 

Article originally published at MintDice, Can Crypto Replace National Currencies?

 

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Aisha Hillary-Morgan

Aisha Hillary-Morgan

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