Are Cryptocurrencies the New Fiduciary Money?

There is no denying the irresistible hype surrounding cryptocurrencies. The digital currency has captured the imagination of investors, journalists and the general public alike, to the point that some even consider it a worthy pretender to the throne currently held by fiat money. So, what are the chances that the cryptographers will overthrow the fiduciary money and become the dominant currency system?

Almost 50 years have passed since the world economy shifted from the commodity-backed currencies to the fiduciary monetary system. Concerned about the diminishing economic influence of the United States and the rising costs of the Vietnam War, then-President Richard Nixon decoupled the dollar from the US gold reserves and ended the Bretton Woods Agreement. Crypto-enthusiasts make us believe that the stratospheric ascent of assets like Bitcoin, Ethereum and Ripple sounds like a resounding coup de grace for fiat money.

They argue that, after half a century of strict financial regulation by governments and central banks, it is time for individuals to regain full control of their money, a noble goal that can be achieved if the digital currency becomes the status economic quo.

So, what advantages do cryptocurrencies like Bitcoin offer over fiat currencies?

To begin with, they are convenient. Cryptocurrencies have the potential to save companies and financial services companies a significant amount of time and money by eliminating the transactions intermediaries; commissions for these transactions also tend to be significantly lower. And that’s not all: an important criticism of the fiat system is the way in which the value of a country’s currency can change beyond national borders. The Nigerian Naira is a good example of this: its value drops by 30% as soon as it is taken out of Nigeria. Digital currencies, for the most part, are not issued by any country or state and, therefore, are not subject to the same geographical fluctuations.

Then, there is the infallible record keeping and the anonymity that blockchain provides. The mysterious Satoshi Nakamoto developed blockchain technology together with Bitcoin, a continuously growing and cryptographically protected transaction log. Blockchain is a valuable defense against fraud, since records can not be altered once processed – it also allows for complete decentralization, a feature of cryptocurrencies that is valued more than any other. Decentralization means that cryptocurrencies are not regulated by any government or financial authority and, therefore, are not subject to the policies and agendas of central banks. Instead, cryptocurrencies self-regulate through their own peer-to-peer networks.

So far, so good. Unfortunately for the legion of cryptographic devotees, there are plenty of compelling reasons not to replace fiat money with digital currency. The main one is the current speculative frenzy driven by renowned currencies such as Bitcoin and Ripple. It is too early to see if the dizzying peaks reached by Bitcoin at the end of 2017 are a real financial bubble, but there is no way to avoid the fact that BTC – and the cryptocurrencies in general – are enjoying an unprecedented level of publicity. And why not? The cryptocurrencies are innovative, driven by technology and undeniably futuristic; qualities that make them irresistible for both the media and the general public. The problem with such exaggeration is that it often leads to “overlooking” practical and fundamental concerns, including:

Money laundering and decentralization

Anti-money laundering initiatives (AMLs) are a major concern of the financial services industry, as banks and companies spend large amounts of money to ensure compliance with regulations. If digital currencies replace fiat, the anonymity allowed by technology such as the blockchain would make the fight against money laundering extremely difficult, expensive and slow. Many banks and other financial organizations would be reluctant to adopt crypts for this reason. A similar problem arises from the “decentralized” nature of digital currencies. It is very unlikely that governments and financial authorities will sanction any currency over which they do not exert influence or control.


While the blockchain guarantees that cryptographic transactions are recorded securely, the same security seldom applies to the same “currencies”. Digital assets are vulnerable to hacking, power supply problems, software problems and old-fashioned human errors. Something as innocuous as a split coffee cup or a hard drive crash could result in the loss of millions of dollars of Bitcoin. For example, we have the case of an investor who accidentally threw away a laptop containing 7,500 bitcoin and now spends his days cleaning landfills (real story); losing your credit card does not make the funds in your account permanently inaccessible.


The market capitalization for the different fiduciary currencies of the world is approximately 81 trillion dollars. You could collect all the cryptocurrencies in the world and the combined market capitalization would not exceed $127.5 billion. Digital currencies have a long way to go before the fiat system starts looking over their shoulder. The cost, time and effort required to revise the fiat system and replace it with a purely digital one is astronomical: national economies, companies, financial institutions and consumers would have to abandon the system they have used for almost half a century.

Ultimately, digital currencies are likely to have to become much more like fiat money if they want to achieve widespread acceptance. Financial institutions and governments are becoming aware of the proliferation of cryptocurrencies, and some, such as Sweden and Russia, are already on the way to developing their own national alternative currencies. They try to take advantage of the efficient application of the interests, the ease of imposition and the cost savings that the digital currency offers, without the security problems, the facilities of money laundering and the lack of central supervision. This means that the cryptocurrencies of the future will almost certainly exist in the terms of central banks, financial institutions and government agencies.


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