The last piece from our essay competition list – the article by Maria Cherenkova.
The creation of bitcoin on 3 January 2009 is a significant event in the financial world, thanks to which a new separate concept of “cryptocurrency” appeared subsequently. The technology of blockchain implemented for the first time in bitcoin is revolutionary because of its unique opportunities.
There are plenty of cryptocurrencies nowadays, but bitcoin is the most valuable and prevalent one. For that reason, it is the most suitable to be considered an alternative to fiat among existing non-governmental cryptos. Presently, every day about 300,000 transactions of bitcoin are committed. Though this figure is relatively not very high, the public’s interest in crypto grows with time, and an increasing number of various experts and individuals who are just into technologies express controversial views on the prospects of bitcoin in relation to the substitution of fiat money by it.
It is worth mentioning that on May 19, 2020, analytical service The TIE stated that bitcoin’s sentiment (30-day average) is the highest that they have recorded since 2017. Moreover, despite the fact that the long-awaited halving took place recently, this word is not one of the most frequently mentioned in these posts with bitcoin. For instance, on May 20, the second by mentions with bitcoin was gold, and 70% of such posts were positive.
Why do people write about gold along with the first cryptocurrency in history? One of the features of bitcoin due to the decentralised technology of the blockchain is that, unlike fiat currency, it is largely (but, as it will be described further, not in all) do not depend on the government (in a way that, for example, allows one to avoid the control over money transactions, and makes it independent from the state of the financial system).
Before bitcoin, the only store of value more or less independent from the state was only gold but it is much harder to move around and transact, unlike cryptocurrencies. It is, in fact, one of the advantages of bitcoin over fiat: if one lives in a state with a weak, unstable national currency and Central Bank policies, for that person it is particularly advantageous to keep their savings in an asset which is to some extent independent from the government.
Despite the fact that bitcoin is quite volatile, for some countries it is more stable rather than changeable local currency. For instance, in such a situation, the inhabitants of Zimbabwe, Venezuela, Argentina, and other countries are. In these states, bitcoin is successfully gaining popularity due to the enormous inflation of local currencies. In the majority of these countries, there are crypto mates on the streets, and the trading volume of the cryptocurrency hits records. According to Cointelegraph, on one of the weeks in November 2019, Venezuela’s inhabitants traded 142.9 billion sovereign bolivars (VES), while people in Argentina managed 19.4 million pesos (ARS). Both were firm records over previous levels.
But, even in countries with a strong economy, there are sometimes severe financial crises (that has shown, for example, the year of 2008). In such situations, even if all the banks go bankrupt, people will be able to keep their money in bitcoin until it is procurable.
But why can bitcoin not be easily available? The cause of the possibility of inaccessibility of bitcoin is that it is not fully independent from the state, because the government can just ban it, as it may present a future threat to the national currency and due to its anonymity provides the conditions for illegal trade and for bypassing government restrictions.
A vivid example is such countries as Morocco, Bolivia, and others where bitcoin was gaining popularity due to its decentralization or volatility of the local fiat currency. Even in countries listed earlier (Zimbabwe, Venezuela, Argentina), the government has repeatedly imposed various restrictions to complicated transactions of bitcoin.
In some countries, there is no complete prohibition, but there is a partial ban which, for instance, in China is expressed in a ban on initial coin offering, restrictions on bitcoin trading platforms, special requirements for financial institutions, and various policies discouraging bitcoin mining. Of course, some people continue the bitcoin turnover illegally or just switched to foreign exchanges, but the governments, by all means, try to prevent this, prohibiting totally or partially any action with bitcoin.
Precisely because the popularisation of bitcoin or similar cryptos and especially the replacement of fiat money by it is not beneficial for the governments of the countries, it is unlikely to be able to replace local currencies.
So, fiat money will continue to dominate as long as there are nation-states and governments which are powerful enough to enforce their laws. But, in addition to the decentralization feature, bitcoin has other superiorities over fiat, such as the speed of transfer, absence of additional fees, high reliability, and others. That is why cryptocurrencies similar to bitcoin issued by the states have a chance to replace fiat.
They can contain all the above-listed benefits of bitcoin, but to be controlled by the state in order to avoid using it for illegal purposes, and possibly address other shortcomings of bitcoin such as the absence of buyer protection, high probability of user error (because a lot of data need to be inputted very accurately), the user interface is quite complicated for an unprepared person and some other ones.
Right now, not a few countries are already developing their national currencies: China, South Korea, UK, India, etc., are among them; at the same time, the authorities in many of these countries are opposing the use of bitcoin for the reasons already mentioned. Moreover, the Bank of England, in one of its reports, stated that ‘… CBDC (central bank-issued digital currencies) issuance of 30% of GDP, against government bonds, could permanently raise GDP by as much as 3%, due to reductions in real interest rates, distortionary taxes, and monetary transaction costs’, which once again confirms the interest of governments in national cryptocurrencies.
Because of the possible future gradual transition from fiat to national cryptos, new business models may appear. For instance, separate banks will deal with these currencies and provide loans in them.
Furthermore, with blockchain, there is a wide range of possibilities for optimizing financial work, for example, accounting – the technology can make the records more transparent and publicly accessible. Also, business models that exclude third parties from the agreement processes in a secure and immutable way with the help of the bitcoin blockchain can appear.
In the future, it can possibly cut all the paperwork and speed the contract conclusion process by transferring a currency into a program that automatically validates and enforces contract conditions. And obviously, there will be advancements and expansions in exchange, wallet, and mining services, and more and more companies may start not just to accept crypto but take payments only in it.
To sum up, to my judgment, bitcoin or any other non-state-backed crypto cannot replace fiat money because it is not beneficial for the governments, and when the popularity of it becomes quite high, authorities often limit its use. However, national cryptocurrencies similar to bitcoin have great perspectives, and, in the future, we will likely use them in our daily life instead of fiat. Moreover, this transition enables the appearance of a variety of new businesses.