Why Fiat Currency Is More Confusing Than Crypto

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Source: AdobeStock / BBbirdZ

A common refrain you hear about crypto, at least from laymen, is that it’s too complicated, hard to understand, opaque. Technically speaking, this view is understandable, but it ignores the fact that what cryptocurrencies aim to replace / supplement – fiat currencies – are also more than a little complicated, difficult to understand, and opaque.

Of course, everyone knows how to spend a dollar or a euro, but very few people understand how the monetary system behind the money in their wallet actually works. One of the clearest examples of this comes from a 2014 survey in the UK, which found that only 10% of MPs (i.e. those responsible for making laws) knew that most money is created by commercial banks when issuing loans or credits, with 71% believing that only the government or the central bank has the power to issue new cash.

This highlights that, compared to the fiat money system, crypto is not as difficult to understand as you might think (at least not economically). And according to a series of experts speaking with Cryptonews.com, fiat currency and crypto are comparable in at least one other way: fiat currency has no more fundamental value than bitcoin (BTC) or others. cryptocurrencies, with the value of both dependent on demand and trust in equal measure.

Different types of complexity

You’ve undoubtedly come across a variation of the overly complicated Bitcoin / crypto argument. Even seemingly sympathetic observers such as Mark Cuban and John McAfee have done so in recent years, arguing that such complexity would prevent widespread adoption of crypto.

However, most proponents of this view confuse two different aspects of Bitcoin and cryptocurrency. Namely, they look at the technical complexity (i.e. the cryptographic, blockchain-based aspect) of Bitcoin and other coins, and assume that such complexity shifts to its macroeconomics as well.

This view is wrong, however, as explained by Hanna Halaburda, associate professor of technology, operations and statistics at the NYU Stern School of Business.

Cryptocurrencies and fiat money are complex in different ways. Fiat Cash is simple to use (at least the modern type) because you see what you have and what you spend, she tells Cryptonews.com.

On the other hand, crypto-currencies are for the most part very simple in their monetary policy (issuance of new coins). But they are more complex to use – for example, you have to remember the passwords for your wallets; if you copy the recipient’s address incorrectly, the money can go missing and there is no one to call to fix it, she adds.

Indeed, the Bitcoin currency system is extraordinarily easy to understand: a new BTC is issued with each new block (at a decreasing rate) until it reaches its maximum supply cap of 21 million mined bitcoins. That’s all, as monetary policy in the United States or any other country or region is not only constantly changing, but made up of many layers of complexity (e.g. M0, M1, M2 and other types of currency ).

At the same time, most industry participants believe that the seemingly complex user interfaces and experiences of cryptos will be made less complex over time.

Just as technology has evolved to make the internet so easy to use that it has become widespread, crypto technology is evolving, poised for adoption, said Lou Kerner, partner at Blockchain Coinvestors and chief analyst at the cryptography at Quantum Economics.

Kerner also points out that due to the openness and immutability of blockchain technology, cryptocurrency is extraordinarily transparent, in that we know exactly how many bitcoins have been minted so far. We have no idea how much money was printed yesterday, he adds.

Philip Gradwell, the chief economic officer of Chainalysis, agrees on this point.

It is a common misconception that cryptocurrency is opaque. In fact, it runs on public blockchain ledgers and is one of the most transparent forms of value transfer, he told Cryptonews.com, while adding that it is the very transparency of crypto. -currency that allows research companies like Chainalysis to exist in the first place.

It’s also worth pointing out that just because something is difficult to understand (at least technically) it doesn’t mean people can’t or won’t want to use it.

The old monetary system is incredibly difficult to understand. Most people have no idea how it works. But you don’t have to understand how a Toyota works to drive it, and the same goes with a dollar bill or a yen bank note or a sterling deposit, explains crypto-economist JP. Koning.

Core value?

Another common complaint about cryptocurrencies is that they lack fundamental value. This may be true, but the same is true of fiat currencies.

Fiat money, by its very name, has no underlying fundamental value. It is supported by the policies of the issuing government. And this has been a successful strategy for many fiat currencies, explains Hanna Halaburda.

Halaburda adds that fiat currencies are considered to have fundamental value because they are needed to pay taxes in a given country, so there will always be a demand for it, at least around the time of tax payment. But other than that, fiat currency is only valuable because people believe other people will believe it has value in the near future, she adds.

Halaburda calls bitcoin the ultimate fiat currency (literally), but she disagrees with people who claim it has no fundamental value.

Bitcoin and other cryptocurrencies provide a service that was not available before them – virtually anonymous online transactions. In my opinion, this is the core value of Bitcoin, she says.

Lou Kerner also suggests that cryptocurrencies have at least as much fundamental value as fiat currencies, which he believes is precisely none.

The value of fiat and bitcoin is decided based on supply and demand. There is nothing either, he said.

However, in the case of fiat currencies, the lack of a fundamental value base is what will cause at least some of them to lose value.

Because they create more fiat until people decide it is no longer of value. That’s what bitcoin solves, says Kerner.

For Domenico Lombardia, director of the global economy department at the Center for International Governance Innovation in Canada, fiat currencies have no intrinsic value as they depend entirely on trust in the central bank and / or the government that issues them. .

Different central banks generate different degrees of confidence. The latter is highest in systems where the rule of law and the broader institutional framework in which a central bank operates meet the highest standards, he told Cryptonews.com.

Lombardia argues that in order for a cryptocurrency to compete with a fiat, it must develop a framework capable of generating the trust of the ordinary user. Without some form of regulation and supervision, this cannot be achieved, he says.

But not everyone in crypto agrees that fiat currencies lack fundamental value, with JP Koning pointing out that the typical central bank typically buys assets when it issues new currency.

He can use these assets to redeem every unit of currency he has issued, thereby enhancing the value of the currency. And if it requires additional help, the central bank can ask the national government for an injection of tax revenue to increase the central bank’s coffers, he says.

Of course, this only concerns base currency (M0, or currency held and issued by central banks), with the Bank of England noting in 2014 that bank deposits represent 97% of currency in circulation. He also noted that bank deposits are mainly created by commercial banks themselves in the form of loans, which implies that the only guarantee of this money is the repayment obligation.

User interfaces

The fact that very few people are aware of this – that commercial banks create most of a country’s money supply – should hopefully heighten awareness that the fiat money system is at least as mysterious and as opaque as crypto.

Sure, cryptocurrencies are technically complicated, but so are the back-end systems that underpin ATMs, mobile banking apps, and more. Such complexity does not preclude the use of fiat currencies, nor will it preclude the use of cryptocurrencies in turn, at least once their user interfaces are easier to navigate.

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Read more: Solving These 7 Challenges Would Speed ​​Up Bitcoin Adoption – People Tell Cryptoverse To Solve These Problems To Achieve Massive Bitcoin Adoption

– Bitcoin is more public money than Fiat currencies issued by the central bank – Prepare for an “uncertain future of money” US Intelligence Center

– Fiat Money Printer ‘Goes BRRR’, is it time to sell all the money for Bitcoin?

– Knowledge of crypto on the rise, encouraging investment – Survey – Honesty and education will help Bitcoin build trust

– IMF says higher rates could reduce risk appetite. What about Bitcoin? – How the Fiat International Fund hurts cash-strapped countries (FYI, El Salvador)

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