Can cryptocurrencies replace paper money?

Hold a minute!!! Can we believe cryptocurrency to replace fiat currency/paper money?

Cryptocurrency is not the future; it is the present and ruling already. Going back through history, we are aware traditionally anything can be considered money. During the world war, cigarettes, gasoline, or token currencies were money. Anything can serve as money if it works as a medium of exchange. That is simple terms is the barter system that we all heard and studied in our history classes.

In the 17th century, this traditional method witnessed changes. There was a shift in buying and selling of goods through a medium of exchange. Europe became the first to accept paper currency. Other countries followed suit. During the period, the money gained its value. There were also governing bodies, regulations put in place to control the movement of currency in an open market. With the rise of digital payments, the use of physical money has reduced. This could also mean paper currencies being extinct in the coming decade.

What are the three functions of money?

There is a complete evolution in the use of money and the way people handle the same these days. There are three major characteristics/functions of money –

  • Store of value
  • Unit of account and
  • Medium of exchange

In a nutshell, anything that serves the above three functionalities is money.

Is cryptocurrency the new future?

Let us be clear of the fact that, cryptos are not the future. Crypto is present and will rule. Technically, Bitcoins were the first form of crypto. It entered the global market in 2009. Following the global recession / financial crisis in 2008, it was easier for digital currency to enter the global market. An important attribute to their success is the decentralized mode of operations. There are no governing body, regulation, or agency monitoring bitcoins. The supply and demand of cryptocurrency in the digital market are completely free. Also, if you engage in lending your bitcoins you should know the bitcoin lending risks that you may encounter.

El Salvador, the first country to accept bitcoin. People could buy and sell goods and services in exchange for bitcoins. Government approvals for the same are available to the public in June. Followed by complete adoption by the end of September. According to a recent survey, central banks across the globe are carrying out studies about cryptocurrencies. These countries have been exploring the pros and cons of accepting cryptocurrency. The impact on the country’s economics is undertaken. A decision on accepting cryptos as a legal medium of exchange may be available soon.

Volatile world of crypto

Unstable – that’s what crypto is for you!!! There is a huge amount of volatility surrounding the cryptocurrency market. While users have increased in 2021, the year also saw people losing more than 15% of their savings. Yet another drawback is the losses you incur for simple mistakes. Your passwords, address, etc. play a major role in deciding your returns. Let us not forget the popular tweet of the NY times about Stefan Thomas.

Decentralized mode of transaction

Decentralized finance is another cautious path to tread. There is no control by a central bank, governing authority on the demand or supply of cryptos. This could lead to bitcoins and cryptocurrencies useful for money laundering, illegal activities including demand and supply of illegal drugs, and tax evasion. The country would lose a huge amount of taxes. The amount that could otherwise be used for development and research projects.

The practical solution of co-existence

If cryptos are here to rule, then the solution is coexistence. Cryptocurrencies may not entirely replace fiat currencies. However, with growing acceptance around the world, these types of currencies may get their acceptance as a legal exchange. Before that, governing bodies (central banks, government) must decide on the regulations. Every digital currency needs to adhere to these regulations. This will also help control its associated instability to a great extent.

Yet another factor that needs an important consideration is the type of cryptocurrency to legalize. There is 1500+ cryptocurrency currently available in the market. Yet all these cannot become legal exchanges. While the popular names like Bitcoin, Ethereum, etc. seem to be genuine and acceptable; there are other currencies like Shiba Inu, Polygon, DogeCoin as well in the market. These cryptos do not generate the same level of confidence as popular names above.

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Steve has been living in Saudi Arabia since 2013 and writing about Saudi rules, regulations, guides, and procedures since then.