Is It Possible for Bitcoin to Replace Government-backed Fiat Currencies?

We are currently witnessing an age of unusual things and revolutions, where people talk to computers and software more than they do with humans, where skyscrapers are becoming more common than green patches, and where fights against government suppression have reached new heights. In such times one thing which has become equally popular to others, if not more, is Bitcoin and the revolution it created.

Bitcoin was created in January 2009 by Satoshi Nakamoto, an unknown person who still remains to be in the dark, more than a decade after the launch. The apex cryptocurrency has single-handedly changed the lives of hundreds of thousands of individuals across the globe. It penetrated almost every industry and is currently among the topmost ranking financial investment assets.

Following the rising tensions between the United States and its rivals like Russia, Venezuela, Turkey, and China, the demand for crypto increased significantly. In fact, Venezuelans have been using Bitcoin to dodge sanctions by Washington, which has triggered a sense of worry for the US. Since the US Dollar is the most important factor, after the US Armed Forces, that allows the country to dominate world politics and economy, Bitcoin has become a serious threat for the Americans.

Therefore, due to all of the happenings mentioned above, a debate has sprung into life, “can Bitcoin replace fiat currencies?”

Some say it definitely will, some that it might, while others think it cannot. To understand this first, let’s understand a brief difference between the two.

What is a fiat currency? How does it work?

Initially, fiat currency was a currency backed by gold as monetary value, which means that a currency note had a certain amount of promised value, and not intrinsic one. After the Second World War, every reserve bank had a certain amount of gold, which they purchased from the United States. However, in today’s world, each fiat currency, be it the Japanese Yen, the Indian Rupee, the Chinese Yuan, or the Russian Ruble, is backed only by the US Dollar internationally. The US Dollar has a monetary value based on the trust that it is the most widely accepted fiat currency in the world.

What is a cryptocurrency? How does it work?

Unlike fiat, crypto is backed by nothing but a self-governing digital mathematical chain, which decides the value of the currency. This chain is known as a blockchain, and it is owned and controlled by none. It is like open ledger-based transactions, which are stored in a large number of computers, which prevents anyone from defaulting, as they would be caught immediately. If the US Dollar is valuable because people trust it, Bitcoin is because it doesn’t need trust.

Benefits & drawbacks of fiat currencies

The biggest benefit of any traditional currency is the ease of use. Fiat currencies are available in varying denominations, each with a certain value, which makes buying micro things, like candy or an éclair, possible. Also, having value in a physical form helps you in spending without much effort. Moreover, at the moment, fiat currencies are more widely accepted than crypto and will continue to be so in the foreseeable future.

However, traditional money has some serious drawbacks, which in fact, compelled Nakamoto to create Bitcoin. First of all, fiat is totally controlled, and hence, can be easily manipulated by the government. It requires a lot of trust and breaches at any level can cause serious losses. Unlike crypto, fiat currency fraud cannot be detected without investigation due to a lack of decentralization of transactions. For instance, the likes of Vijay Mallya, Nirav Modi, Mehul Chokshi, who were once business tycoons, duped the banks for hundreds of millions and fled the country, and till date, nothing could have been recovered.

Benefits & drawbacks of cryptocurrencies

When launched in 2009, Bitcoin promised a lot of things, and thankfully, has lived up to most of them. To begin with, the distributed ledger or blockchain, the underlying tech, is a decentralized system. This prevents corruption, and even if something fishy, it will get detected within a few hours. Secondly, transactions completed on crypto take substantially lesser time and fees than any traditional bank transaction. For instance, Binance DEX was able to transfer $1.2 billion worth crypto within 1.1 seconds, just for $0.015 in fees.

In spite of several major efforts by the industry, crypto continues to have several nagging drawbacks, which indicate that there is a big room for improvement. Take the recurring incidents of cyber attacks by hackers, for instance, which take away millions, and sometimes billions of dollars worth crypto. If it had to replace fiat, this could not be the case, as a loss of billions of dollars can severely dent an economy. Similarly, there have been numerous occasions when Bitcoin was used on the darknet, and that continues to be the case. Therefore, the possibility of terror funding cannot be ruled out.

Is crypto capable enough to replace fiat?

Now after analyzing all the points, we must conclude whether Bitcoin is capable of substituting fiat or not. The answer is yes, because it emphasizes privacy, boasts an anti-corruption model, less time consumption, lower transactional fees, and an open, decentralized system. Plus, there’s a growing consensus on the fact that Bitcoin is the only and most capable crypto for storing monetary value.

However, there are also concerns like vulnerability to cyber-attacks, which indicate that BTC is lagging behind. Similarly, the fact that no one controls Bitcoin makes it a tad dangerous, as anti-social elements like drug peddlers, mafia, can move money without any interference from the administration. Nonetheless, if careful policies, in consultation with traditional economists, cybersecurity experts, and crypto experts, are laid down, such things can be prevented from happening.

After that, there’s another major problem that hinders Bitcoin’s chances, and that’s high volatility. Bitcoin was valued at about $20,000 in December 2017, then it suffered a nosedive, dropping to nearly $3,500 apiece in January 2019. Since then, it improved to reach $13,500 in early August and again fell to the current price, $8,500. Volatility can kill wealth fairly quickly, and therefore, taking such a risk in something as crucial as a country’s currency can prove to be devastating. Fortunately, this too can be controlled and prevented if sufficient measures are taken.

Can it really happen, or is this just an illusion?

Whether Bitcoin is capable or not, we must first evaluate the chance of it actually replacing fiat. Even if it has all the bells and whistles, will the governments adopt Bitcoin, a currency which they can merely regulate? Well, that’s the main problem.

Yes, in countries like Venezuela and a few from Africa have utilized Bitcoin to overcome hyperinflation, but that was due to the public rather than the governments. Even though countries like Russia, Turkey, Japan, etc. are working on government-backed crypto, it would certainly not be Bitcoin, and the ones they introduce will more certainly be stablecoins, which are somewhat fiat-ish. Stablecoins, as purists argue, aren’t true cryptocurrencies, as it is pegged to the US Dollar. The government can control stablecoin, which will never give the true benefits of a decentralized monetary system.

Conclusion

No matter what, Bitcoin is potent enough to take over the traditional monetary system; however, there are still a lot of areas to work one before it can actually do it. On the other side, governments all over the world need to agree on Bitcoin as the standard currency, which seems not to be happening, even in a distant future.

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