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Fiat Money vs. Cryptocurrency

Manoj Nair



Fiat Money vs. Cryptocurrency

Money or currency has evolved down the ages but its properties have remained the same-It must act as a medium of exchange, it must have a value and a unit of account. Fiat currency is issued by the central government and has a value like the US Dollar. However cryptocurrency derives its value from its native Blockchain. The issue and the value of the fiat currency is controlled by the government. On the other hand cryptocurrency is governed by Blockchain protocols, code, and communities. The distribution of fiat currency is effected through intermediaries like banks whereas cryptocurrency is distributed through and decentralized networks to enable “trustless” transactions.

Money to effect any financial transaction is an essential and it must have a collective and acceptable representation across the globe. In ancient times when barter was the mode of transaction in livestock like cows, goats, and camels fulfilled the need of currency. Later cowry shells and finally the more familiar form of precious metal coinage fulfilled the need of currency. Today fiat currency which is issues by government controlled central banks became the currency. It became the most prominent form of iteration of money though it had no intrinsic values.

History shows that money like every other entity evolves with time and the emergence of Blockchain technology and cryptocurrency in the last couple of years is revolutionizing and changing the contours of financial regimens.

Cryptocurrency is built upon decentralized blockchain networks, digital currencies like bitcoin (BTC) and ether (ETH) which are not controlled by any government or agency and offers  a whole new world of opportunities.

So how does crypto currencies fare against fiat currencies and replace it? Well it depends upon three factors which it must fulfill

  • Act as a store of value
  • Act as a medium of exchange
  • Act as a unit of account

Store of value: Any currency must act as a store of value. The goods which $100 can buy must remain same 30 days hence for the customer. Stability of value is very important for any currency to become prominent.

Though most of the cryptocurrency values remain stable it cannot be said to be true entirely and effective on every cryptocurrency. The early stages when cryptocurrency was in its infancy it face a lot of volatility. However the emergence of Stable coin whose values are pegged with the value a fiat currency like Dollar has brought some degree of stability to the values of crypto currencies.

Medium Of Exchange– The currency must be widely accepted and most fiat currencies fulfill this requirement. However crypto currencies have not been fully integrated with the present financial regimen and there are teething problems which is hindering its widespread acceptance. However in 2020 PayPal started offering US account holders to start trading with some cryptocurrencies like Bitcoin, Ethereum, Bitcoin Cash, and Litecoin and plans to widen its services

Unit of account: Any currency must be divisible and fiat currency fulfills this requirement. Cryptocurrency is particularly well suited towards divisibility because it is digital in nature. For example, BTC is divisible into units as small as one satoshi, which is one hundred millionth of a single bitcoin.

 Cryptocurrency is still in a gestation and evolving stage and only time will reveal how it fares against fiat currencies.

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