Fiat Currency is Broken, can Cryptocurrency fix it?
Critics of cryptocurrency refuse to admit it but much of cryptocurrency’s popularity is driven by the growing limitations of fiat currencies. The sorry truth is that our present-day monetary system has failed hundreds of millions of people around the globe.
The greatest failure is the two billion unbanked people in the world counted by the World Bank. Entire communities, regions, and countries lack access to banking of any sort.
The limitations of paper cash become readily apparent to those without banking. Their savings can be wiped out in a few minutes by a fire, a burglar, a thug with a gun, or an accident. There is no deposit insurance for the mattress or the tin can buried in the yard.
To make matters worse such people often have no means of paying bills, transferring, money, taking out a loan, or converting cash into another currency. The lack of a bank account effectively serves as a wall that separates such people from the financial system.
The Nightmare of the Unbanked
To add insult to injury, such people often have to pay a steep toll, often several dollars to use the financial system.
Many players make big money by erecting a toll booth in front of the doors in the wall that separates the unbanked from the financial system. Instead of merely writing a check or sending an electric payment, a person without a bank account might have to spend several dollars for a wire transfer, a prepaid card, phone minutes, or a money order.
That person might have to make a special trip to a money transfer or wire service office to send the money. It goes without saying that an unbanked person often puts his or her life at risk by carrying cash around. Criminals know that people walking into Western Union have cash so they wait outside.
The catastrophe of the unbanked is greatest in the developing world, where tens of millions are doomed to permanent poverty because they lack access to even basic financial services. Yet it is also a problem in developing nations such as the USA, where 19.9% or 24.5 million were underbanked in 2015, according to the FDIC.
An American without a bank account might have to take a few hours out every week for simple chores like paying bills or cashing a paycheck. An underbanked person might have an account but still have to rely on expensive services like payday loans or check cashing.
The problems of the unbanked go far beyond reliance on cash. They often have no way of getting credit, buying a car, starting a business, taking out a loan, accessing the internet, or receiving government benefits. Or they might have to pay steep interest rates sometimes up to 100% simply to get a few hundred dollars in credit.
What happens when Fiat Currency is Unreliable?
A greater dilemma is all the people in the world who have a fiat currency that is untrustworthy or unreliable.
This includes the residents of Venezuela who are dealing with hyperinflation of up to 440,000%. News stories indicate that eggs have become the currency of choice for many Venezuelans who are now relying on barter to survive.
It also includes the people of China, whose currency the Yuan does not trade in global exchanges. Not coincidently, they have become the world’s biggest buyers of cryptocurrency. Then there are the people of India who saw 86% of their cash declared worthless instantly on November 8, 2016, by Prime Minister Narendra Modi.
What happens to those who live in a country where the fiat currency is unreliable or worthless? They often have no alternative beyond barter or means of accessing funds elsewhere.
The Growing Disconnect between Fiat Currency and the Financial System
The limitations of fiat currency are magnified by the growing disconnect between the financial system and fiat currency.
An example of this occurs in a nation like Venezuela, a wealthy government official can avoid hyperinflation by simply keeping his money outside the country in another currency in an overseas bank account. If he needs to buy something the official can use his gold card.
An average resident of the country who is forced to use the national currency; the Bolivar has no such choice. He or she has to accept the currency he or she is paid in. The average person might try to convert the Bolivars to dollars on the black market and receive a few pennies for a month’s wages.
Under this disconnect, the officials have little or no incentive to stabilize the currency or fix the nation’s economic problems. Disturbingly, they have a strong incentive to make inflation worse because it magnifies the buying power of their foreign holdings.
The Disconnect is Spreading
Contrary to popular belief, such disconnects are not confined to countries like Venezuela.
In countries like the United States and the United Kingdom, the wealthy have access to a variety of financial instruments that can give them unlimited buying power. Examples of these include high-limit credit cards, low-interest mortgages, brokerage accounts, hedge funds, and bank loans.
A related problem occurred during the Greek Financial Crisis of 2009-2016, where a large segment of the population was effectively cut off from the monetary system. Formerly middle-class citizens found themselves in breadlines because there was no money. The currency was still available but only to a select segment of the population.
The situation in Greece was bad but it would have been far worse had the monetary prescription offered by some economists – restoring the national currency or drachma been adopted. That would have flooded the country with worthless paper, and probably led to hyperinflation turning partial economic collapse into total economic devastation. That is what occurred in Venezuela where the government was able to force citizens to lend it money by destroying the value of the currency.
The disconnect between the financial system and fiat currency is driving income inequality; because access to the financial system is unequal. Those without access find themselves trapped in poverty, while those with access can borrow their way to wealth.
An example of this disconnect is an American who cannot borrow money because he or she has a low credit rating. That person is shut out from business opportunities, credit card use, the ability to buy a home, and sometimes even the ability to rent a home. Meanwhile, wealthy individuals like Donald J. Trump Jr. can borrow tens of millions of dollars, without having to think about paying it back.
Is Cryptocurrency the Answer?
Cryptocurrency promises to overcome part of the disconnect by equalizing access to the financial system.
For example, residents of Venezuela can generate income they can instantly send out of the country by mining cryptocurrency. An average Venezuelan that mines Bitcoin can even use it to buy items from the United States online and bypass his nation’s broken economy entirely. Chinese were able to get around their country’s currency controls by buying cryptocurrencies until recently.
More advanced solutions such as banking on the blockchain, blockchain loans, blockchain money transfers, and platforms that convert prepaid minutes into cryptocurrency are on the horizon. The solutions offer the potential to give the masses access to the kind of financial tools once reserved for the wealthy.
For example, a Nigerian working in the UK might be able to send money to his mother back home at the push of a button at little or no cost. That would enable massive transfers of wealth between developed and developing nations.
This would be tremendously disruptive and unprecedented in history because it would allow massive transfers of wealth between average people. One side effect would be to greatly increase the buying power of average people in some countries. Another is that recipients of such transfers might live like kings in some countries.
Increases in consumer spending and the appearance of a middle-class lifestyle will be the result. Something to remember is that was the massive extension of financial services and consumer credit; in countries like the United States, France, and the UK, between the 1920s and the 1970s that gave rise to the middle-class lifestyle that most residents of those nations now enjoy.
The recent growth of income inequality in those nations was largely the result of decreasing economic opportunities for some members of the middle class. That inequality is growing because of the growing difficulty many people have in accessing the financial system.
Cryptocurrency as Populist Revolt
Beyond that cryptocurrency, itself can be viewed as a populist revolt against the present monetary and financial systems. Average people are abandoning the monetary system and adopting a digital alternative they see as more reliable and flexible.
Many of cryptocurrency’s users are libertarians or anarchists who talk of a decentralized system with equal access to all. Most others are simply looking for an alternative to a broken monetary system. It is no mistake that cryptocurrency’s popularity has grown as distrust in the financial system rises.
If cryptocurrency critics are serious about halting the rise of the altcoin economy they need to start addressing and fixing the problems with fiat currency. In particular, they need to address the disconnect between the financial system and fiat currency. Unless that occurs cryptocurrency’s popularity will keep growing and it might overwhelm fiat currency at some point.