Fiat Currencies Are Here to Stay - Here's Why
As an FX trader, your entire professional existence is reliant upon the premise that there are multiple currencies in the world, all with floating exchange rates. A fixed system or one structured around a single currency doesn’t leave room for this, making the entire system of FX markets redundant.
The prospect of cryptocurrencies completely replacing traditional fiat currencies has the potential to turn the entire FX industry on its head too. You don’t have to look too hard to find people willing to prophesize about such an event, shouting about the revolution that the blockchain will bring about.
But while it’s certainly likely that cryptocurrencies are here to stay, at least in some form, they’re unlikely to do away with their fiat equivalents, The monetary system that exists around them is too big and important to truly be challenged by the blockchain. Here are the main reasons that will ensure the dominance of fiat currencies.
Fiat Currencies Are Used for Everything
Unless you’re in a very small minority of people who choose to be paid in crypto, you will be remunerated by your employer in dollars, euros, pounds, or the local equivalent. You’ll pay your bills, buy your groceries, and make your investments in this currency.
It’s not just in-person payments either; the internet has been built around fiat currencies. Payment wallets like PayPal, although designed for 21st century needs, still rely almost entirely on the traditional banking system.
Most ecommerce stores and entertainment services have built systems that are designed for fiat currencies. If you shop at Amazon in the UK, you’ll see that the company has partnered with a series of payment providers, including Visa, Mastercard, and American Express to let you purchase its goods. This list varies depending on the region; for example, in Germany, customers can also use direct debits, iDEAL, Przelwy 24, and Bancontact. Meanwhile, its US customers can also pay with Discover, Diner’s Club, JCB, NYCE, and STAR.
We can see the same with iGaming companies. The online poker room, PokerStars, has a long list of partners for processing payments including MuchBetter, paysafecard, Mastercard, Visa, and ecoPayz. Like Amazon, the availability of some options varies depending on the region you’re in.
However, while all of these companies may have implemented many different ways for their customers to make payments, they’re all firmly centered around fiat currencies.
Whether you like it or not, taxes are a fact of life. No matter what you do, whether you work in a job, run a business, live off investment income, own property, or simply buy things, you will likely be hit with a tax bill.
Governments make the rules about taxes and one of them is which currency you must pay in. This allows them to create demand for their fiat currency since their populations are legally required to hold some to pay their bills.
This factor alone means that, even if cryptocurrencies do become more commonplace, fiat money will always be a necessity.
Deflationary Forces Don’t Promote Economic Growth
Most central banks aim to have a small but controlled amount of inflation, usually set at around 2%. The common consensus is that this is the sweet spot between promoting growth in the economy and not squeezing people too hard with rising prices.
Currencies with a fixed supply of money, whether they be cryptocurrencies or something else, are deflationary. This is generally believed to be bad for the economy as it discourages spending since people can save money by delaying purchases.
Despite what the proponents of a return to the gold standard may tell you, the system would have severely constrained the economic development of the entire globe. According to Iowa State University, GWP would be 96.6% less today if currencies were still pegged to the price of gold.
Bitcoin and most other cryptocurrencies are designed to have similar properties to gold. Many of the cheerleaders for them often bemoan the loss of the gold standard and compare digital tokens to being a modern equivalent.
And they are right, it’s just that they forget that it would mean foregoing progress for businesses and countries.
With that in mind, even if cryptocurrencies do become much more mainstream than they already are, they’re unlikely to replace traditional fiat currencies.