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History of Fiat Money with Regards to Cryptocurrencies

History of Fiat Money with Regards to Cryptocurrencies image

Overview

Money as a form of exchange has over time taken different forms and undergone significant development. The first historical traces of the use of money included the use of commodity money as means of exchange. Items such as ivory, silver, and gold were used as means of exchange. These exchanges were solely based on the intrinsic value of the commodity being traded.

 

Historical Developments

Later developments brought the gold-standard money and it was widely perceived as the best currency for exchange. However, new challenges cropped up. Gold was bulk and posed problems with its transportation. The democracies and the different governments of the world started developing gold-backed currencies. This was the beginning of the fiat money.

 

 For every value of currency issued by such governments, there was a corresponding value of gold stored by the central banks of such countries. However, as time went by different countries stopped backing their paper money with precious metals such as gold. For instance, in 1972, the US stopped backing its fiat currency with equivalent gold storage. The result was the development of paper money which had no intrinsic value. The value of such money was derived from its perceived value and backed by the government through laws and various constitutional decrees. Currently, most countries have developed their own government-backed currencies and their value is basically derived from the typical supply and demand principles.

 

Since fiat currency is government controlled, there arose a need to create another form of currency which cannot be manipulated by the government of any country. The initial research on creating a digital currency which would not be able to be controlled by a single government in the world began in 1983 through the work of David Chaum, a renowned American cryptographer. In 1995, Mr. Chaum came up with Digicash which used cryptocurrency protocols making it untraceable and considerably secure. After the bankruptcy of the Digicash in 1998, the company was sold to eCash technologies.

 

These initial works by these pioneers of digital money laid the foundation stone for the development of bitcoin in 2009. The developer or rather the developers of this decentralized cryptocurrency went by the name Satoshi Nakamoto. This was a pseudonymous name designed to hide the true identities of the bitcoin developers. This cryptocurrency used Secure Hash Algorithm-2 (SHA-2) to authenticate transactions. To achieve high security, these complex algorithms are able to develop a set of private and public keys which individuals can check against a specific data to validate its integrity. The decentralized system makes it difficult for the hackers to bring down the whole system since it will require quite high processing power to destabilize the whole decentralized system.

 

After the advent of bitcoin in 2009, a wide array of cryptocurrencies were developed. Currently, there are over 1000 different kinds of cryptocurrencies designed for various purposes. Most world governments are still at the observation stages and very few have adopted cryptocurrencies as their legal tender.

 

Key Elements of Sustainable Currency

There are certain elements of fiat money and cryptocurrency which will determine the success of one currency of the other. These principle elements are discussed below:

 

Backing: The history of fiat money in regards to cryptocurrencies has been and will be shaped by how such a currency is backed. For the case of the US dollar, it had been backed with gold up to 1972 when such gold equivalent status was revoked. Currently, no world fiat currency is backed by any commodity with an intrinsic value. Thus a collapse of democracy will make that country’s fiat money value lose most of its value. At the same time, having no gold-standard backing implies that the central banks and the major banks of the world can control and manipulate the value of different fiat currencies to achieve certain ends.For the case of cryptocurrencies, there are certain types of cryptocurrencies which are backed by precious commodities such as gold, silver, and diamond. Some of the gold-backed cryptocurrencies include one gram and the gold vein. Cryptocurrencies which are backed by physical gold appeal more to buyers than those which are not. A gold-backed cryptocurrency is also much more stable than that which is not backed by any gold standard. Cryptocurrencies can as well be backed with other precious elements such as silver and diamond.

 

Volatility: Comparing the history of fiat money with regards to cryptocurrencies, one will note that both have undergone significance fluctuations. For instance, the oldest existing fiat currency, the sterling pound which was initially gold-backed lost its initial gold value over time but it still performs better than most other world currencies. One of the biggest challenges with fiat currencies is that the figure of such fiat currencies in the economy can be manipulated by the government backing such currencies. Extra minting of such a currency leads to the loss of value of such currency and vice-versa.

 

Cryptocurrencies are also prone to volatility challenges. But since their mining is done gradually, their oversupply in the market is quite limited. Taking the example of bitcoin, the developers programmed the bitcoin mining system in such a way that the mining will at some point come to an end. This is after the bitcoin has reached its final bitcoin figure. This is a foolproof safeguard against the oversupply of such a cryptocurrency in the market. As a result of such measures, most cryptocurrencies appreciate in value over time as compared to fiat currencies which have been shown to depreciate in value over the years. However, much cannot be said about cryptocurrencies since they are yet to stand the test of time which fiat currencies have been subjected to.

 

Security: Fiat currencies are stored in the bank. Thus for this kind of money to be lost, physical destruction of the vaults needs to take place. Hacking of personal accounts can as well lead to loss of personal money deposited in these banks. For cryptocurrencies, the security is enhanced by the high encryption levels used in the Blockchain technology. However hacking instances have occurred and some have even led to the collapse of some of the cryptocurrencies. Losing the private keys which will authenticate you can as well make you lose your entire cryptocurrency investment.

 

Ease of transactions: Fiat money can be exchanged on the go. This is not the case with most of the cryptocurrencies. Some of these, like bitcoin, may take up to 10 minutes before a transaction is completed. Thus they present difficult when buying simple products. However, with the improvement of technology, the transaction time may decrease leading to increased uptake of cryptocurrencies as a preferred means of exchange.

 

Regulations: One main reason for the success of the fiat money is because it is engraved in the individual country’s laws and regulations. Thus the success of cryptocurrencies will highly be determined by the regulations which will be set by the different democracies regarding its use, taxation, and its legality.

 

Conclusion

The history of fiat money with regards to cryptocurrencies is still young. Whether cryptocurrencies will replace the fiat money or whether these two currencies will merge and be run concurrently by the different economies of the world is a matter of speculation. However, there has been increasing evidence that cryptocurrencies present a better solution as a form of money than the fiat currency. The fact that cryptocurrencies are more secure, cannot be manipulated by specific national central banks, and their mining is gradual makes a convincing proof that as time goes by they will likely be embraced by different governments of the world and favorable regulations enacted to control their use within such countries.

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