‘The King is dead, Long live the King?’ Fiat money and Cryptocurrency
Cryptocurrencies like Bitcoin, Etherium and Dogecoin are here to stay argues Patrícia Akester founder of Lisbon-based Intellectual Property Office, but invest with care.
The importance of Fintech (as technology applied to financial services is called) has grown at a galloping rate since the global financial crisis of 2008 which weakened the traditional financial system and its entities (credit institutions and financial companies) and which paved the way for alternative solutions.
It was precisely against this backdrop of crisis that Satoshi Nakamoto published an article in 2008 called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ and in 2009 under the same nom-de-plume launched the first cryptocurrency called Bitcoin.
But what is a cryptocurrency? This is a virtual currency that unlike fiduciary or ‘Fiat’ currency which is issued by a central bank and whose value rests on the confidence that people place in the entity that issues it (i.e., The European Central Bank) and does not require a central authority in the way it was designed by Satoshi Nakamoto. Instead its value is assured by blockchain technology.
Blockchain technology is the cornerstone of this system, requiring the cryptographic validation of all and any transaction on the register without which the transaction cannot be approved. The register is updated once the transaction has been checked by consensus.
This means the majority of computers on the network must agree the transaction is valid. Therefore, a decentralised global list is managed, one that is shared, common to all, synchronised, identical and requires the transactions to be verified while the people who own the computers in the network are given rewards to check them.
Fans of cryptocurrencies strongly advocate the various promising characteristics that cryptocurrencies have:
(I) Its value is not tied to the desires and strategies of the central banks and international operations are based on a value that has arisen in a decentralised way which is the same worldwide;
(ii) The security of the transactions made is controlled by blockchain technology and a respective cryptographic checking protocol;
(iii) The cost of storage and transfer is 0 or negligible;
(iv) The increasing institutional interest seen, according to Forbes, from important investment players like BlackRock Inc (a major international investments management company), Bank of New York MellonCorp, (one of the oldest and most prestigious banks in the world) and recently Tesla (which famously recently invested US$1.5Bn in Bitcoin), is viewed as an inevitable driver for its continued growth;
(v) It could soon become a single currency, one that is digital and international.
Recent signs, such as partnerships with and investments in cryptocurrencies, show that it has already acquired such a huge value (its international value on 30 March 2021 according to CoinMarketCap was US$1,860,202,397,460) that it can no longer be ignored by the large commercial and financial institutions which with some caution are already strategically jostling for position in the market.
However, the magical currency is a long way off from replacing the Fiat currency for day-to-day transactions. Perhaps one day it will happen and there will be some overture in this direction. For example:
– Visa Inc., whose global network covers around 60 million traders, authorised the issue of a Bitcoin Visa Card by Wirex, thanks to an agreement with Wirex Ltd, an on-line financial platform which provides access to a virtual and physical debit/credit card and the possibility of sending, receiving and withdrawing money and its conversion from fiduciary money into digital and from digital into fiduciary; and
– PayPal Holdings, Inc. which permits the acquisition of cryptocurrency for its 325 million users via its digital payments platform (Forbes).
For the time being there has not been either the complete victory of cryptocurrency over Fiat foreseen by its ardent proponents or the complete disappearance of digital money which was equally announced by its detractors. We are in a phase of coexistence. Cryptocurrency is for now being compared by some to gold, a digital gold and is seen as a target of potential investments – although in Portugal cryptocurrencies do not have legal tender and therefore do not qualify as fiat currency and are not treated as money (physical, scriptural or electronic), and are not backed by the Government or Bank of Portugal. However, investment is not illegal and there is a ‘buyer beware’ attitude.
“To the moon!”, says Elon Musk, the famous entrepreneur and philanthropist when he dreams and encourages collective dreaming. And cryptocurrencies are something that Elon is a great fan of, including Dogecoin, the meme-based cryptocurrency which Musk has been supporting of late. It was this ability to imagine and aspire to more, to go beyond the possible which led him to invest early on in digital payments (PayPal), electric cars (Tesla), in aerospace technology and colonising Mars (SpaceX), in low-pressure tubes with transport pods that travel at 1,200km/hour (Hyperloop), among many other innovative projects. “To the moon!” says Elon. And why not? But let’s not forget that investments like the cryptocurrencies trumpeted by the visionary should be handled with prudence. It is a game-changer, so cautiously expect the unexpected.