Back when cryptocurrencies were booming, some argued that they could replace or at least provide an alternative to fiat currencies in the future. Fiat currencies are government-issued currencies that have the backing of the sovereign; Cryptocurrencies, on the other hand, are coins or decentralized digital assets that are held together using blockchain technology.
The debate erupted when El Salvador adopted Bitcoin as legal tender. “Most finance professionals expect digital assets to replace government-issued currencies within a decade, or at least provide a solid alternative to them,” said a Business Insider report published in August. 2021, citing a Deloitte survey.
This debate may now go in another direction, with cryptocurrency prices falling and trust in cryptocurrencies rapidly eroding. By June 10, El Salvador had lost around $38.1 million on its bitcoin investment, so this experience also appears to be on shaky ground. So what do the experts think of the matter now?
Crypto vs. Fiat
As the US Federal Reserve shifts from quantitative tightening (QT) to quantitative easing (QE), the availability of money will not be so easy. Major central banks have in the past resorted to printing money to inject liquidity into the crisis-hit system, the latest being the Covid shock.
“This means that the credibility of major fiat currencies is restored and they will continue to strengthen as the money supply is drastically reduced and the demand for safe haven currencies has increased,” says Sudin Baraokar, an expert at the crypto industry.
But some experts have opined that cryptos can act as a cushion against inflation, which is never possible in the case of fiat currency. “This is where crypto can really stand out against fiat,” says Edul Patel, CEO and co-founder of Mudrex, an algorithm-based global crypto investment platform.
Is it really a comparison?
Some experts strongly believe that it is wrong to compare cryptocurrencies with fiat currencies. “Those are two different things. It’s like comparing apples and oranges,” says Sidharth Sogani, CEO of CREBACO Global, a crypto and blockchain market research firm.
For Oriol Caudevilla, board director of the Global Impact FinTech Forum (GIFT) and financial technology advisor, the rise of DeFi has never implied that fiat currencies will lose it to cryptocurrencies because they serve for different purposes. “While fiat currencies are central bank money, cryptos are issued by decentralized entities, and while they can be used as a means of payment in certain circumstances, they are primarily an investment asset class, to the point that it would be more correct to call them crypto assets rather than cryptocurrencies,” he says.
The rise of DeFi does not mean the end of fiat currencies, just as the current turmoil in crypto markets does not necessarily mean a victory for the world of traditional finance, since the two worlds are increasingly intertwined, explains Caudevilla. “This means that cryptocurrencies need to be more comprehensively regulated to ensure a level playing field and to ensure that investors are properly protected,” he adds.