As our world evolves, so does the way we spend money. With only 8 percent of the world’s money being represented in physical notes, we seem to be progressing toward a cashless economy. The remaining 22% of our money is being transacted in digital form through credit cards and payment apps. So, what’s in line to replace our current cash culture? The answer is one that has triggered much discussion in recent years: digital currency.
What is the big debate on cryptocurrency vs. fiat money? Many say that digital currency is the way forward and will soon wipe out fiat money (traditional bank notes) completely. Others say that cryptocurrency is essentially fiat money in digital form. What is true is that both cryptocurrency and fiat money have advantages and disadvantages to be taken into consideration.
Let’s start by comparing the two types of money. Fiat money is currency printed in paper form that backed by the government. While paper money was traditionally valued by a physical commodity such as gold or silver, nowadays, fiat money is supported by a faith-based system that depends on supply and demand. Cryptocurrency is a digital form of currency that is not backed by the government, and is based on a crypto-algorithm. Due to lack of government backing, it is impossible to use cryptocurrency for tax paying purposes.
Advocates of cryptocurrency argue that Bitcoin is more trustworthy than paper money because it immune to the possibility of the stark inflation that has been known to plague fiat currency. Due to a 21-million-dollar spending cap placed on Bitcoin, there is only a limited supply of how much of this currency can be produced, making inflation impossible. This contrasts to Fiat money, which can be limitlessly printed at the user’s expense, leading to inflated rates and an overdose of production of paper bills that have little value.
The advantages of engaging with crypto currency have many people in favor of abolishing traditional fiat money in order to be replaced by Bitcoin. It is important to note, however, that although many people view cryptocurrency as a safe stride forward, this is far from the truth. Many cryptocurrencies have failed in recent years, and the future remains unpredictable as well.
Downsides (or upsides) of Bitcoin, depending on how you view it, is that there is immense user freedom due to lack of a third-party authority approving all transactions. This means that digital currency can be used to engage in illegal activity such as buying drugs or pornography. Furthermore, due to lack of regulation, Bitcoin users are also able to avoid paying taxes. Because of this permission-less system, governments are now trying to crack down by getting involved and regulating Bitcoin to avoid fraudulent and illegal activity.
Cryptocurrency is often linked to crime because user identification is often anonymous, making it is difficult if not impossible to trace a fraudulent trail of activity. Since use of fiat money requires engagement with government institutions such as social security when opening a bank account, it is much easier to track the source of criminal behavior. Anti-Money Laundering and Terrorist Financing institutions are now cracking down on cryptocurrency companies, and there is a recent demand for heavier regulation and user-identification in this industry.
This is not to say that money-laundering and non-compliance only occurs in the world of digital currency. For years, companies and banks have been installing stronger regulations to deal with the underworld of fiat currency exchange that leads to criminal activity and fraud. Although it is absolutely more difficult to track the source of the fraudulent behavior of cryptocurrency, this is not to say that fiat money is necessarily safer than digital currency.
While believers in cryptocurrency believe that we should abolish fiat money completely in favor of digital currency, it is obvious that there is a clear call for safety measures to be set in place in order to make this type of money exchange safer and more secure.