Fiat cash and payments losing ground to cryptos

Cash has been and remains a key driver of commerce globally and this happens despite the clear difficulties associated with it such that we’ve become so accustomed and inured to such problems.  

In fact, many cannot even entertain the idea that there are, and there should be alternatives to money

It is quite obvious by now, that fiat money/currency represents the highest point of money since its beginning. 

Starting with a barter exchange system, money would be represented by metal coins for sometime before monetary authorities settled for a gold standard. Real evolution of money seems to have ended when the gold standard was dropped in favour of fiat cash in 1971.

Of course, the debit and credit cards would later emerge along with payments platforms like PayPal, Visa, MasterCard and of late mobile money to mention just a few. However, all these forms of payment are premised on the central bank fiat currency system, where one authority is legally entrusted with task of issuing currency.

Even the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the renowned global cross border payments facilitation platform is also based on this fiat cash system.

The fact that the world embraces fiat currencies shows that this form of money is not entirely a bad thing, after all, it has proven its utility for almost five decades now.

Main problems of fiat cash

Granted, fiat money has always had its fair share of problems or weaknesses, but the debate about such weaknesses has remained relatively muted, as no viable alternative has existed until recently.

However, events of the last two decades have amplified some of the inherent problems of fiat cash and payment systems. The financial crisis of 2009 brought to the fore such problems culminating in the emergence of alternative forms of currency like Bitcoin initially, and later Ethereum, Dash, XRP among others.

To begin with, fiat cash is susceptible to inflation and depreciation shocks. A host of countries have been forced to rebase or issue new currencies as inflation left previous ones worthless.

Inflation, which is continuous increase in prices of goods and services, erodes value of a currency and ultimately leading to its collapse. Inflation has become such a routine for some countries, as they seem to suffer regular bouts if this phenomenon more than others. Often corruption and mismanagement of state finances are the main triggers of inflation especially in developing economies.

So while individuals and businesses are by and large, subjected to rules and regulations of commerce, something which maintains order in markets, the same cannot be said of government or central bank officials. State or central bank officials are able to destroy savings and value with little or no punishment coming their way.

To illustrate, fiat currency is issued at a central point—the central bank—and everyone else must trust and believe that those assigned this task (currency issuing) will adhere to stipulated guidelines for such.

Sadly, that only happens in an idealistic society, in real life, abuse of this trust is commonplace across many central banks. Political considerations, which are often used to justify the abuses, take precedence over everything else. Time and again this has proven to have serious implications on people’s lives.

How this affects commerce

When a currency loses value as a result of breach of trust at (trusted) institutions like central banks, commerce is heavily affected. Currency depreciation or devaluation usually suggests a corresponding a round of price increases will follow.

However, since abuse of central banks’ currency issuing privilege is riskless undertaking, officials are obliged continue running the printing press—currency printing—to finance runaway government budget deficits or any other unplanned state expenditures.

The resulting flood of money, which does not correspond with the level of aggregate output, naturally leads to pressure on a currency. Subsequently, another round of devaluation or depreciation will occur, triggering a fresh round of price increases. This cycle continues and each time the deprecation or devaluation of currency is more profound than before.

Herein lies the problem, employees or those receiving a fixed income are hit really hard as their earnings lag behind either inflation or the rate of currency depreciation. Such stagnant incomes in turn result in reduced demand for goods and services.

Faced with reduced demand companies will cut jobs, hire less workers or close shop thus compounding the unemployment challenge. Higher unemployment rates lead to toxic civil relations often with deadly results.

A cursory look at countries facing internal strife like Venezuela and Zimbabwe, reveals that it all began with the abuse of national resources including the currency.

Currency instability causes uncertainty in business. What you agree to be paid today, may be substantially lower tomorrow in real terms, therefore abstaining from conducting the transaction in the first place may seem logical. This lack of confidence also lowers an economy’s growth.

Constrained economic growth means governments will be forced to commit significant resources towards welfare programs instead of building infrastructure or supporting small businesses.

Governments will see reduced revenues and taxes in real terms as a consequence of currency depreciation. In nutshell, the actions of the few at central banks will start a chain reaction that will hurt everyone. This sad state of affairs naturally motivates enterprising individuals to proffer solutions.

First alternative to money

Consequently, the shadowy Satoshi Nakamoto, proposed an alternative currency, the Bitcoin, whose core selling point is pre-emption of individuals, whether government bureaucrats or private players, from over-issuing currencies, something now well known to destroy livelihoods.

This digital currency has a predetermined number of ‘coins’ that will be created and supported by public ledger, the Blockchain hence it will not be feasible for anyone to issue extra coins.

It has been ten years since the launch of Bitcoin, and this so-called internet of money has made strides in not only offering a resilient alternative to fiat money but in also making apparent the possibilities offered by such a temper proof system.

Since then a number of other privately issued crypto-currencies have emerged to give users an array of currency options.

Traditional banking institutions, which have hitherto attempted to stifle growth of this currency, are now joining the club, having seen some of the advantages of decentralized currencies.

JP Morgan’s announcement that it will launch its own privately issued currency is the latest testament to Bitcoin’s enduring success. Indeed, stablecoins like JPM Coin are being touted as the next big thing in payments because they satisfy the competing interests of regulators and private currency issuers.

This growing range of crypto options makes it possible for ordinary people to insulate themselves from the ravages of inflation and economic mismanagement. However, all cryptos still have a formidable opponent in the form of central banks. Central banks have pretty much littered cryptos’ path with obstacles, some legal and others not so legal.

In addition, mass adoptions of cryptos remain relatively slow, in spite of the promise of Bitcoin, Ethereum, Dash etc. Apparently, there are only a few merchants accepting payments in the form of cryptos, therefore a potential client, who is also a holder of cryptos, must content with an intermediary in the form of an exchange, before dealing with the merchant.

In the interim, this makes cryptos a less appealing option when compared with fiat cash. When there are a few places that accept your currency, it is only logical to dumb it in favour of one that is widely accepted.  

Central banks and regulators are all too aware of this and have been adept in exploiting this challenge. Central banks and regulators have repeatedly issued warnings and outright bans on any form integration of fiat currencies with cryptos. Of course not everyone is taking heed but the warnings are having the desired effect, mass adoption remains slow.

Call to action

Nominally this means cryptos holders are trapped with the currency since it has not utility outside the small crypto community.

This situation demands a solution that at least satisfies crypto holders’ concerns while not deviating from the founding principles of crypto-currency—decentralization and transparency. 

At the same time, merchants ordinarily like to remain compliant with tax and national laws, so they too want to be able to transact in any currency as long as they are able to switch to legal tender without hassles.

So the challenge is on for crypto entrepreneurs to come up with solutions that meet these conditions. Already a number of start-ups have sprung up, and they are presenting different kinds of platforms or wallets that seek to address these longstanding concerns.

There is no doubt if any one such platform truly resolves these lingering challenges, such a platform will be widely embraced. Furthermore such intermediaries will hasten mass adoption of cryptos , a key challenge for the community.