Fiat Currency: Past, Present and Future. Major threats for Fiat as the World’s dominant Legal Tender
August 10, 2018
Fiat currencies are regulated by certain government authorities and have a major value which allows them to hold a distinct place for themselves in the whole global economy. The value these currencies hold have been fixed by the government authorities, and they have no other values of their own. This came as an alternative to the representative monetary system that was present until then.
Check out the past of fiat currencies
The issuance of the first fiat money occurred in China during the 1st Century, but it came into prominence only during the late 20th Century. After Richard Nixon decoupled the US dollar from gold in 1971, the system of fiat currencies became widespread on a global level. In the early stages, Bills of Credit came to the surface that was issued by the American government with the same value as money and alternative. This was done as a promise to pay taxes using the paper bills to the holders. These bills started circulating in places like Pennsylvania, Massachusetts and Virginia as well and became popular.
United State Notes were issued by the Federal Government during the American Civil War and were known as ‘greenbacks’. But as time passed the bills and notes became very controversial, and thus the use of these was discontinued and abolished. After the end of the 1st World War, the financial institutions and governments were finding it difficult to meet up to the demand of the notes in the economic crisis situation.
Barriers across the journey
First let us go through the main characteristics of bitcoin and cryptocurrencies in their ability to meet the main functions of money or fiat currency as:
- Store of value
- Medium of exchange
- Both fiat and cryptocurrencies have in common is that neither actually have any intrinsic value thereafter.
Fiat currency is legal tender backed by a central bank.
On the contrary, a cryptocurrency is not legal tender and it is not backed by a central authority. It is decentralized form of money and its value comes from the network effect and strength of its cryptographic algorithm.
The trust factors
The constant demand for any currency, whether crypto or fiat, is driven by its value created by the trust factors in the currency’s ability to preserve purchasing power for over a long term.
The hyperinflation crisis in Argentina was a good illustration of what happens when a currency no longer retain trust.
Cryptocurrencies are no exception and would need to prove their ability to preserve purchasing power over the long run in order to be considered as valid medium of exchange and store of value.
Bitcoin’s limited track record shows a history of high volatility.
Since its debut in 2010, the daily volatility (annualized) for bitcoin has been 15 times higher than the US dollar.
Representative money comes as a challenge to the fiat currencies
Representative money, the name only suggests and represents the common currencies in the market and can be used as a replacement for them and carrying out transactions in a more convenient way possible. Bank cheques are one form of representational money value. These come as a challenge to the prevalent fiat currencies in the world as these are easier to carry around when travelling or makes the payment process much more accessible for large-scale businesses. The governments, as well as the different financial institutions, have given the dire recognition to these officials which is a positive sign of its acceptance worldwide.
What does the future hold for fiat currencies?
According to Jim Reid, the Strategist at Deutsche Bank, “The dominance of the fiat currency system since Richard Nixon decoupled gold from the dollar in 1971 is inherently unstable and susceptible to elevated inflation and a counterbalancing disinflationary shock that kept it submerged since 1980 is now slowly retreating.”
The fiat currencies have been able to survive in the global economy after all the advanced developments in the global market. But there are many uncertainties about the existence of these in the near future. Fiat currencies have constant links with gold and it leads to its constant unpredictability. With the various advancements and evolved technologies in the field of digital currencies, it would be hard to say how long the fiat currencies will be able to survive in the widespread global economy.
Major threats for Fiat as the World’s dominant Legal Tender
Cryptocurrency comes as an Alternative to Fiat Money
Cryptocurrency makes it easier for most of the people to carry out their transactions using public and private keys that makes their transactions secured and digitally encrypted. They have the minimum processing fee, thus enabling savings for the individual user.
The best part of cryptocurrencies is it keeps a history of every single transactions made with absolute secrecy for future legal reference. This transaction hints can also be useful for personal need. It can also be maintained and stored. These are also free from any threats by cyber hackers. Cryptocurrency provides encouragement for a monetary system where the market manipulates financial processes. The unique concept of Blockchain underlying that of Cryptocurrency, it would be quite impressive to see the full-fledged use of these Digital Currencies in the near future. It will be more efficient and time saving and also labor conserving.
On a concluding note.
It would be interesting to see if these cryptocurrencies can replace the fiat currencies still in use to this day. The time is not yet ripe for the experts in this field to make any comments. Only time will be able to show whether fiat currency prevails in the long run or it will be entirely overtaken by the different forms of Digital Currencies, Cryptocurrencies to be more specific.