As the battle of the future of global finance intensifies between legacy finance world represented by fiat & the new world of decentralized finance in crypto, we compare these starkly different assets
As the world is moving toward a cashless society at an increasingly rapid rate, the global financial system around is transforming right before our eyes. This latest movement away from cash kick-started with development of the world's first digital and decentralized cryptocurrency, Bitcoin, launched in 2009.
Since then, people are speculating what inherent value crypto has, especially compared to national fiat currencies.
But in order to comprehend this, we must first understand the difference between Fiat vs Crypto.
Fiat currencies are the money issued by central banks or governments across the globe. These include the Indian Rupee, US Dollar, Euro, UK Pound, Japanese Yen, and many others centralized national fiat currencies.
Whereas, cryptocurrencies, also known as digital currencies, digital cash, virtual currency or digital assets are digitally encrypted, decentralized currencies and not linked to or regulated by any government or central bank.
Fiat currencies are backed by governments and require intermediaries to sell or buy, whereas cryptocurrency don't need any intermediaries to buy, sell or conduct a transaction. They are handled by peer-to-peer networks based on blockchain technology, network that confirms transactions as a whole, instead of through a centralized entity.
Fiat are backed by governments as a legal tender, even though they do not have any intrinsic value in and of themselves. They are money because the central bank and government says so.
As we now know the basic differences between fiat and crypto, let us find out how both works.
Fiat currency has a physical form and can be touched and deposited in the bank or can be represented electronically through bank credit route.
On the other hand, cryptocurrency is in pure digital form, it cannot be touched or sensed or passed along physically. It is based on blockchain technology, which is a distributed ledger framework powered by two main and quite old computer technologies: encryption and distributed computing.
Fiat transactions can be easily monitored and recognized by the issuer and recipient, whereas, tracking of cryptocurrency is quite difficult. One can exchange fiat person to person, through banks, cash or via other financial institutions. To move cryptos, digital exchange is the only medium available.
When you buy with fiat, it is issued by a central bank, which acts as an intermediary supporting the value, but during times of inflation or deflation, the value of fiat can increase or decrease. In contrast, the world’s largest cryptocurrency, Bitcoin, is a deflationary asset with a finite supply of 21 million BTC.
The most revolutionary aspect of cryptocurrencies is that it can be spent and received by anyone, anywhere, at any time throughout the world and without the need for a bank, third party or a government. Crypto is borderless, permissionless and inclusive finance, only decentralized.
On the supply side, central banks can decide the supply of fiat depending on the financial requirement of the nation, but many cryptocurrencies have a limited supply. This is one of the major advantages crypto has against fiat, since relentless money printing by central banks are debasing their fiat currencies at the expense of their citizens.
Transferring fiat can take days to change hands, while it takes seconds or minutes to transfer crypto, depending on which blockchain the coin or token is running on, saving both time and money.
Crypto are inherently private and operate independently without any government intervention. They function and run on decentralized platforms. The transactions on the blockchain are immutable and cannot be changed in retrospect, making them safer, more reliable and more secure than transactions done through fiat medium.
As the adoption of cryptocurrencies is increasing globally, central banks are working on launching their own central bank digital currencies (CBDCs). India is also working to launch its own digital currency, known as the Rupee Coin. The main concerns for the government are that crypto should not be used for money laundering, money-laundering or activities that go against national interest.
To solve this problem, many crypto exchanges have employed their own know your customer (KYC) process. High volatility is also a cause of concern for governments, when nations look deeper into understanding the crypto sector, and the awesome power behind blockchain technology.
Both fiat and cryptocurrency are a valuable method for financial transactions, provided that they have enough liquidity for buying and selling those assets. Users can save their fiat in bank accounts, while digital currencies are stored in digital wallets, either in self-custody, or custodial ones.
As there are billions still unbanked around the world, cryptocurrencies are here to stay and thrive as trust in central banks and fiat currencies are reaching new lows. Crypto offers many advantages over today’s fiat currencies. As the technology continues to evolve, digital currencies is likely proving to be the future of money.
With Reserve Bank of India working on its own digital currency, while being more open to Bitcoin and other digital assets, India could potentially become a hub for crypto adoption and blockchain development. Only time will tell if their execution will be successful.