de | cn | ru

Market News

Out with the old, in with the new: Could digital currencies replace fiat money?

Feb 21 2018
By
Forexbrokerz.com

 

In 1971, US President Richard Nixon suspended the convertibility of the dollar into gold and pitched a stone into the relatively calm waters of the global economy. When the ripples subsided, the commodity-backed currencies established by 1944’s Bretton Woods agreement were no more, and the world’s major economic powers had to adjust to a new system – fiat money. 

 

Fast-forward nearly 50 years, and the stratospheric proliferation of digital currencies has fiat looking warily over its shoulder. Cryptocurrency supporters, owners and promotors insist that it is only a matter of time before their system overhauls the status quo, but is this merely wishful thinking? FXTM Senior Writer Ben Lovell-Viggers examines the tea leaves and asks: could digital currencies really replace fiat money?

 

 

A brave new world 

 

The nascent cryptocurrency coup began sometime in 2009 when ‘Satoshi Nakamoto’ developed bitcoin. Although programmers and cryptographers had posited digital currencies as far back as 1983, bitcoin represented the world’s first fully-decentralised cryptocurrency. Since then, hundreds of competing cryptocurrencies have sprung up. Some are genuine attempts to improve the concept, others merely gimmicks; the worst are outright scams. Numerous retailers, financial organisations and banks around the world now accept bitcoin and other cryptos as legitimate means of payment, and by the middle of December 2017, bitcoin price reached $17,900 on the markets. This irrepressible ascent is a key reason that some casual advocates consider bitcoin and its peers worthy successors to the fiat system. 

 

For serious investors, the real appeal of cryptocurrencies has nothing to do with column inches, hyped-up ICOs (Initial Coin Offerings) and wild speculation. These investors cite the following as some of the real reasons why digital currencies have an edge over the current system:

 

  • Decentralisation. There is no central body or regulator that governs cryptocurrencies like bitcoin; most are regulated by their own peer-to-peer networks. This means that people’s money isn’t subject to the oversight and economic agendas of governments and financial organisations.

 

  • Infallibility. Blockchain technology, which has developed concurrently alongside the cryptocurrencies it facilitates, is a constantly-growing, cryptographically-secured list of records. Simply put, this means that the information held within cannot be altered without the consensus of the entire network. It also allows for a much greater degree of anonymity when making transactions.

 

  • Convenience. Digital currencies are undeniably convenient. The value of a digital coin isn’t altered by geography, unlike fiat currencies – a commonly-used example is that of the Nigerian Naira, which loses 30% of its value as soon as it crosses the border. Cryptos do not require a third party to process transactions, saving consumers and businesses both time and money. Finally, transaction fees are invariably lower than the fiat equivalent.

 

 

The other side of the coin

 

The first argument against replacing fiat with crypto concerns a uniquely human issue: hope. To many, Bitcoin, Ethereum, Ripple and the like represent a potential path to an economic utopia where each individual enjoys fiscal sovereignty. Some take things further, seeing the proliferation of decentralised, digital currencies as the first, fragile shoots of a world free from institutional and governmental interference - there’s a reason many cryptocurrency enthusiasts associate with libertarian, anarchist and individualist movements. Unfortunately, this kind of idealistic evangelism can cause people to ignore basic, practical concerns about the universal acceptance of digital currencies – in the same way that futurists frequently push for the development of flying cars without taking into consideration the practical, logistical and safety implications of operating private airborne vehicles in urban areas.

 

If digital currencies do replace fiat money as the dominant financial system, a gargantuan overhaul of the existing economic infrastructure is required. Bitcoin et al. might hold an inordinate amount of sway over newspaper headlines and internet forums at the moment, but digital currencies are yet to achieve mainstream acceptance. Consider this: in September 2017, every cryptocurrency combined had a total market cap of around $127.5 billion. This is dwarfed by the market cap of fiat currencies, which total at least $81 trillion. The expense and effort needed to transition national economies, governments, banks, businesses and consumers from fiat to digital currency is mind-boggling.

 

Then there’s the question of security. A simply staggering amount of digital currency has been stolen over the last nine years. One notable raid in 2011 saw as many as $3.7 billion’s worth of bitcoin lifted in one kleptomaniacal frenzy, while the popular cryptocurrency exchange, Mt. Gox, was forced to declare bankruptcy after hackers misappropriated 850,000 bitcoin – equivalent to $450 million. Despite the obvious freedoms they provide, cryptocurrencies are as vulnerable as anything stored digitally. They can be hacked and stolen, deleted by human and software error alike or wiped out by power supply issues. The digital currency juggernaut also poses unique challenges in regards to anti-money laundering (AML) initiatives, and not just because of user anonymity. Financial services companies, banks and the like already spend a considerable amount of money on complying with regulatory demands. Applying the same processes to cryptocurrencies would prove even more expensive and time-consuming. Additionally, if governments and regulatory bodies aren’t able to monitor and control the movement of digital currency effectively, they’re likely to push back against their implementation.

 

Finally, how different are cryptocurrencies from the fiat system that they are purported to replace? Both lack the backing of a physical commodity like gold or silver. Both have their supply artificially constrained; by governments in the case of fiat currency, by design in the case of digital currencies. Perhaps, in all the excitement of bitcoin ATMs, flashy ICOs and dramatic market movements, people forgot just how similar the two are.

 

 

The penny drops

 

Many researchers have drawn parallels between the current algal bloom of cryptocurrencies and the infamous dot com bubble of the late 90s / early 2000s. At the time of writing, there are well over 1000 distinct digital currencies in circulation. And, like newly-hatched turtles dashing across a tropical beach to the sanctuary of the sea, most of them won’t make it. “The ones that do will inevitably have to compromise on core principles like anonymity and decentralisation if they are to continue to exist”, says FXTM Research Analyst Lukman Otunuga. “Governments and regulatory bodies are unlikely to tolerate a currency system that doesn’t conform with AML and GDPR (General Data Protection Regulation) initiatives.” The same organisations will be reluctant to relinquish the control they currently wield over the world’s fiat currencies – control that, they argue, allows them to adjust interest rates, boost struggling economies, deduct tax accordingly and respond effectively to financial crises when they occur.

 

The future of digital currencies is likely to be one that appalls crypto-maniacs of a libertarian or anarchist bent. Many countries and their central banks are exploring – if not actively developing – their own cryptocurrencies. They value the efficiency, ease of taxation, efficient implementation of interest rates and cost reductions that come with the digitisation of currencies. As it stands, the future of cryptocurrencies is looking increasingly, irrevocably institutional.

 

 

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

 

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

 

NOTES TO EDITORS

The FXTM brand provides international brokerage services and gives access to the global currency markets, offering trading in forex, precious metals, Share CFDs, ETF CFDs and CFDs on Commodity Futures. Trading is available via the MT4 and MT5 platforms with spreads starting from just 1.3 on Standard trading accounts and from 0.1 on ECN trading accounts. Bespoke trading support and services are provided based on each client’s needs and ambitions - from novices, to experienced traders and institutional investors. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), with license number 185/12, licensed by the SA FSB with FSP number 46614, and registered with the UK FCA under reference number 600475. FT Global Limited is regulated by the International Financial Services Commission (IFSC) with license numbers IFSC/60/345/TS and IFSC/60/345/APM.

 

TAGS: digital currencies  fiat 
Broker Country Regulation Platform Min Deposit Review
US CFTC, NFA MT4, Web,
in-house
$50 Review Website
US NFA, CFTC MT4 $250 Review Website
Cyprus, UK, Mauritius CySec, FCA, FSC MT4, MT5, Web $10 Review Website
Australia ASIC MT4, MT5,
IRESSTrader
$100 Review Website
Cyprus, Australia CySec, ASIC MT4, MT5 $5 Review Website
UK, Australia, South Africa FCA, ASIC, FSCA MT4, Trading
Station,
NinjaTrader
$50 Review Website
UK, Cyprus, UAE, South Africa FCA, CySEC, DFSA, FSB MT4, MT5, FxPro
Markets,
cTrader
$100 Review Website
Cyprus CySEC MT4, MT5, Web $1 Review Website
Belize IFSC MT4, MT5 $100 Review Website
Cyprus, UK, South Africa, UAE CySec, FCA, FSCA, DFSA MT4, MT5, Web $5 Review Website
Cyprus, UK CySEC, FCA MT4, MT5 $1 Review Website
UK FCA MT4, Web, MT4
for Mac
$100 Review Website
Australia, UK ASIC, FCA MT4, MT5,
cTrader
$200 Review Website

More Forex Market News

Australia to cap leverage at 1:20 and ban binary options

Aug 22 2019 12:18:25

  The latest major forex hub which allowed retail clients to use higher leverage, Australia, is about to cap leverage at 1:20, and ban binary options altogether. Read more

New Zealand’s FMA blacklists Profitix and Dang Kang

Aug 21 2019 12:33:57

    Unregulated Forex brokerages Profitix and Dang Kang International Group have been blacklisted by the New Zealand’s Financial Markets Authority (FMA) on Wednesday   The official warning against the first entity – Profitix - reads that individuals from the bro... Read more

Malta restricts CFD sale to retail clients permanently

Aug 20 2019 16:28:19

The Malta Financial Services Authority (MFSA) adopted permanent rules restricting the marketing, distribution or sale of CFDs to retail clients. Read more

$3,5 bln Bitcoin Ponzi scheme Plus Token pressures the markets

Aug 15 2019 17:42:11

The fraudsters behind the China based Ponzi scheme Plus Token are dumping bitcoins worth over 3.5 billion USD on exchanges around the globe, and that is creating a selling pressure on the markets, venture capitalist Dovey Wan warns. Read more

Spain’s CNMV blacklists EurTrades, Trade100, and Key Markets

Aug 14 2019 13:54:57

  The Comision Nacional del Mercado de Valores (CNMV) updated its warning list on Wednesday with several offshore brokers - EurTrades, Trade100, and Key Markets. These entities are not authorized to provide investment services or investment advice in Spain, the CNMV said. Read more

Former binary options broker iTrader to be indicted in Israel

Aug 13 2019 14:07:37

  Israel’s state prosecutor announced that it intends to indict the company behind former binary options broker iTrader, its owner and senior officials, on charges of aggravated fraud and providing investment advice without a license. The company Gal Media Trade Ltd. Read more

CySEC warns of fake recovery agents claiming to be its employees

Aug 12 2019 20:32:52

  The Cyprus Securities and Exchange Commission warned against fraudsters impersonating its officers who are running a recovery room scam. Read more

Aussie crypto scam worth A$2.7 million busted, five arrested

Aug 08 2019 15:46:37

  A criminal group in Gold Coast, Australia were arrested for allegedly scamming over 100 Australians with A$2.7 million in cryptocurrency investment. Read more

EtherDelta investigated for exit scam

Aug 07 2019 12:01:50

  Chinese police are reportedly taking legal action against cryptocurrency exchange EtherDelta in connection with an alleged exit scam.    The news was actually reported in a series of tweets by the ex-owner and founding partner of the exchange Dovey Wan. Read more

BaFin warns against 4xincome, orders it to cease operations

Aug 06 2019 15:44:28

  The German Federal Financial Supervisory Authority (BaFin) blacklisted unregulated forex broker 4xincome and ordered it to cease operation in the country. The regulator said that this broker offers German clients trading in forex and various CFDs thorough its website 4xincome. Read more

de | cn | ru