Why Crypto Cannot Replace Fiat Currency
Government issued currency is always going to be accepted as means of exchange, whereas bitcoin and other cryptocurrencies have no such secure foundation. Why?
There are two ways to influence someone’s behavior: (1) carrot, or (2) stick. People do something because it benefits them, or because it would be painful to not do it. In the case of fiat currencies the mechanism that allows me to be certain that someone will exchange their goods or services for my money is tax, which is enforced by physical threat. You know that people and businesses in the US will accept the US Dollar, if only because they need US Dollars to pay their taxes.
Each country only accepts taxes in its own currency. This is no accident. It creates demand for that currency. If you don’t pay your taxes, which can only be paid in that currency, then you can be physically detained and locked away. It is this threat of physical violence that creates the stable foundation for fiat currency; people are forced to use it.
It doesn’t matter if someone accepts US Dollars or Russian Rubles, or gold or bitcoin or ham sandwiches, they still have to pay the sales tax and income tax in the local currency. If they accept another currency they still have to pay taxes on it in the local currency at an exchange rate dictated by the tax authority.
Obviously then, cryptocurrencies can never replace fiat currency as long as there is tax. Businesses will always have to accept fiat currency with an adoption rate of 100%, that is to say: every shop in a country will accept that country’s currency. Even if they were to accept crypto, they’d just be converting it immediately into the local currency so they can pay the tax.
In fact, Modern Monetary Theory (MMT) goes as far as to claim that creating demand for the currency is the primary purpose of taxation. Without taxation there would be nothing that forces all the shops to accept the same currency and this is what tax is for. Tax is not primarily for raising funds, since governments can raise funds by printing money. Tax is for creating demand for currency, for controlling its inflation and for disincentivizing certain actions and industries (e.g. high import taxes help domestic manufacturing, and high taxes on cigarettes dissuade people from smoking.)
Demand is one half of the equation of value: supply & demand. Supply for imaginary things like fiat currency and like bitcoin is a simple matter: it can be created since it is virtual. Demand is not so simple, people have to choose to accept it. Taxation creates a consistent and controllable demand for fiat currency, but the only thing that is creating the demand for bitcoin is some combination of greed, fear and hype with no safety net and no foundation.
What about as an investment? Well, then it’s not a currency as much as it’s a collectable and we enter into different terrain. Sure, people pay a lot of money for rare things, such as: really bad paintings, wine so old that you can’t drink it, and gold Pokémon cards… but in these cases the emotional-collectors hold up the market for the investment-collectors. Even gold is the same: it began and is held up by its use as jewelry, which like really bad paintings is both an emotional collectable and also a status symbol. Real estate is held up by people who actually want to live in that house, and the stock market by those stocks that pay dividends (or the promise thereof.) Cryptocurrency is neither emotional nor is it a status symbol to hang around your neck or on your wall. It’s not collectable, you can’t live in it, you can’t drink it, and it doesn’t pay dividends.
Finally the crypto-bulls claim it gives power back to the people and away from the banks! And why is that good? As far as I can tell the banks do an amazingly good job of keeping my money safe, letting me send and receive it instantly, and they do all this for free! They even insure it so if they get robbed, I don’t lose anything. It’s an amazingly good deal, and like I said it’s free so I’m not sure what I have to complain about other than how long it takes to get them on the phone (bitcoin doesn’t even have customer support.)
Not everything is better decentralized and democracized. Cash is decentralized and it has a bunch of problems. Virtual money, like your bank account, is centralized and that centralization gives you instant transfers and is next to impossible to steal. Crypto is like cash in the sense that it’s harder to track, but likewise it cannot be rolled back (transactions can’t be undone) making it easy to steal. None of these things are advantages for you unless you are up to no good. The one decent use case would be in countries where you expect the government to steal your money, but in that case buying US Dollars, or gold, would also work.
In conclusion, the system of fiat money that already exists cannot be overthrown by cryptocurrency without an overhaul of the entire governmental, monetary and tax systems. And even then I’d argue that the current system of centralized fiat currency is just plain better than decentralized currency, which we should be running away from and not towards. Or to put it another way: crypto is like cash, but on a computer — we already did that, why are we going backwards?
