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Blog posts, Thought leadership | 05/19/2020

When Fiat Currency Fails Us: Bridging the Gap with Crypto

fiat currency fail vs crypto

Once again, the global financial system faces an uncertain future. This time, the vast majority of developed economies have shut down in response to a worldwide pandemic. And while the full economic impact of our collective lockdown has yet to materialize, the forecasts are dire. Despite hopes of a V-shaped recovery, all we know for sure is that we’re wading into the unknown. However, the global economy has weathered many storms before.

We’ve seen government debt skyrocket and retirement savings shrink as recently as the 2008 global recession. And whenever these conditions prevail, many begin to question the soundness of the current financial system and its inner workings. But is there a better way to do finance? That’s the question countless cryptocurrency projects have sought to answer since bitcoin hit the scene in 2009.

Cryptocurrency provides an opportunity to decentralise finance – removing intermediaries and putting consumers in control of their financial destiny. For these reasons and many others, the use of cryptocurrency continues to accelerate.

The Rise of Cryptocurrency

According to recent data, the number of crypto wallet users hit 44.7 million in Q4 of 2019 – up from 6.2 million in Q1 of 2016. Crypto Fund Research also found that the total amount of assets managed by crypto funds increased in 2019, despite falling market prices. Reflecting on this growth, it’s apparent that a significant shift in public perception is underway. Crypto is no longer obscure and it’s helping people take control of their financial future.

But what exactly does this mean for you? In general, it highlights a growing trend towards consumer empowerment and financial independence from longstanding banks and financial service providers. How so? Let’s delve a bit deeper into how crypto is driving this financial renaissance.

In using crypto, consumers naturally adopt blockchain technology, a distributed ledger operating in the absence of a central authority. That’s right, a network where members validate transactions collectively and no sole authority calls the shots. This process is managed using cryptography – hence the crypto in cryptocurrency.

This dynamic represents a dramatic shift from the status quo. Cryptocurrency born on blockchain networks is not bound by national borders and circumvents financial intermediaries. Sounds complicated? In short, you retain ownership of your funds and you make the rules – or at least more of the rules. But there are many other practical reasons cryptocurrency is an improvement over your current cash – let’s take a closer look.

crypto assets evolution vs fiat
Source: Almost 70 Crypto Funds Close This Year, Twice as Many Launch

The Pitfalls of Fiat Currency

The money that you use every day, also known as fiat currency, has limitations. As a result, the typical methods of financial management are giving way to new, consumer-focused solutions. In exploring fiat currency pitfalls, it’s easier to identify the benefits of cryptocurrency.

Is Your Money, Yours?

As mentioned, fund custody is an important consideration. Do you own your money or does the bank? Although cash appears in your bank account on pay day, financial service providers decide how you access, invest, and borrow money. Want to take your money out at an ATM? You’ll pay the transaction fees. Want a loan? Only if you put up enough collateral. Want to apply for a credit card? Only if the bank loves your credit score. You get the point.

Moving Your Money

Then there’s operating hours to consider. What if you want to make a transfer to a friend at 2:00 AM on the 4th of July? Banks won’t be open. Even if online banking could get the job done in your own country – what if your friend lives in China and you’re in the US? When using traditional remittance networks, global money transfers can take up to 3 days or more. Even worse, a large chunk of that money will go towards transaction fees. But cryptocurrency can solve these problems.

Taking Your Money Global

Sending money around the world is a big business. According to market data, the total transaction value of digital remittances, cross-border transactions made over the internet, is now $95.96 billion – a 21% increase year over year. The number of users has also increased to 8.5 million, up 20.5% since 2019. With transactions expected to reach $143 billion across 13.2 million users by 2023, long term growth is certainly expected.

However, as mentioned, sending money around the world is also expensive. Existing options rely on conventional banks, each charging hefty transaction fees for their services. According to the World Bank, banks were the most costly remittance channel, charging 11% on average for every transaction.

In contrast, Deloitte suggests decentralised payment networks could bring fees below 3% on average. Because these decentralised payment networks operate in the absence of a middleman, the only fees you pay are to those who validate transactions on the blockchain network (miners). And because these networks are open 24/7, transactions can be processed at any time, anywhere – within seconds.

Several blockchain-based payment projects are already working towards a decentralised financial future. These solutions aim to build a new age of financial freedom, and people are taking notice. However, payment platforms are only one facet of cryptocurrency functionality. Stablecoins have also become a catalyst for change and a crucial bridge to traditional finance.

Stablecoins: Bridging the Gap

So, why are stablecoins so enticing? A stablecoin is a cryptocurrency that is pegged to a fiat currency, for example the US Dollar and backed by collateral to keep it at that price. In short, if a stablecoin is worth $1 USD today, it will be worth $1 USD tomorrow. 

For many, these asset-backed cryptocurrencies represent a safer way to partake in the digital asset class. Participating in this space is still a risky proposition, making it a tough sell for many newbies. However, stablecoins employ technology that eliminates the volatility often seen in cryptocurrency markets. Many cryptocurrency holders will choose to hold their wealth in stablecoins that hold their value in the real world and they can have full access to, no banks needed.

According to a report from Blockchain, stablecoins accounted for 2.7% of the total crypto-asset market at the end of 2019, up from 1.5% in September 2018. The same report also pegs the total value of stablecoins at $3 billion as of 2019, more than doubling from $1.4 billion in 2018. In 2020, the stablecoin market value has grown tremendously, currently standing at a value of over $10 billion.

Stablecoins combine the stability of fiat currency and the decentralised perks of cryptocurrency. As such, it’s not surprising that many see them as a bridge to traditional finance. Stablecoins are a crucial component of broadening the appeal of cryptocurrency, from newbies to savvy investors. However, they aren’t the only solution aiming to align conventional and decentralised financial systems.

Emulating the Current Financial System

As crypto use expands, decentralised projects continue to roll out solutions that emulate the traditional financial services. To overcome the intimidating nature of crypto, these platforms aim to establish a sense of familiarity with consumers. After all, you’re not likely to use a financial service that is more complex than the current alternative. In general, these services are part of the decentralised finance (DeFi) ecosystem, which is definitely a more advanced add-on to simply holding cryptocurrencies in a crypto wallet.

In the future however, DeFi might represent the easiest and fastest way to get a loan, mortgage, credit card, college tuition loan or car insurance.

Decentralised Finance (DeFi)

DeFi is a term often used to describe a broader range of digital assets, financial smart contracts, protocols, and decentralized applications (DApps) built using blockchain technology. Today, the DeFi ecosystem continues to grow, surpassing $896 million in locked-in value at the time of writing. As mentioned, these decentralised platforms aim to bypass the intermediaries found in traditional markets, putting you in control of your finances.

Decentralised Financed a new alternative to fiat
Source: DeFi Pulse

Using DeFi platforms, you can borrow, lend, stake, and invest with crypto. For instance, say you want to lend your crypto and earn a return, borrow crypto with interest, put up your crypto as collateral to obtain a loan, or directly invest in the crypto derivatives market. DeFi allows you to do all of that and more, on your own terms and with less restrictions.

However, because the DeFi space is less regulated than conventional markets, there are more risks. Despite this, the segment remains a fascinating indicator of future decentralised success.

This may all seem quite complicated, but it’s something worth knowing about and we hope to see this area expand over the coming years.

Crypto Credit Cards

There are also several products hitting the market that enable the use of crypto through conventional payment networks. For instance, crypto credit cards can instantly convert digital holdings to fiat currency when making purchases. These products provide the same level of convenience while putting consumers in charge of their funds via decentralised technology. 

To put it simply, this means you can hold all of your money in an account only you control and spend it easily with a credit card – sound familiar? These products are a prime example of how crypto projects are emulating conventional finance using decentralised technology.

Crypto Wallets: Taking Control of Your Money

Although cryptocurrency enables faster, cheaper transactions, it has its own challenges. For instance, where crypto is held determines who owns it, similar to traditional banks. This dynamic requires each user to carefully consider the type of crypto wallet they use. Some are easier to use, some are safer. Storing your net worth in something only guarded by a password is very risky. But if you have much greater access to your account then having a small amount of money for day to day expenses isn’t as big of a risk.

The historic vulnerability of crypto wallets on crypto exchanges provides a glimpse into the dangers of not holding your own crypto in your own wallet. According to the Chainalysis 2020 Crypto Crime Report, 2019 saw more cryptocurrency hacks than any other year. However, of the 11 that occurred, none were comparable to the value of past heists. Despite total losses dropping significantly in 2019 to $283 million, these losses remain startling to both investors and lawmakers.

By giving up crypto custody, you’re handing over control of your money – opening the door to malicious acts. For this reason, alternative, more independent wallet options remain crucial to bolstering cryptocurrency adoption. For instance, our Ledger hardware wallets represent emerging technology capable of providing superior security by prioritizing user ownership and useability.

Our hardware wallets hold your crypto on a physical device, offline so it remains inaccessible when you’re not using it. And because only you have the private keys, you own the crypto – no questions asked. Further, Ledger Live allows you to seamlessly manage your assets on the application, where you can check your portfolio, send, receive or stake your cryptocurrency, with no intermediary. Simultaneously, keeping your funds offline when not in use.

The simple user interface and robust crypto management functions will ensure you’re always in control. Because cryptocurrency remains an intimidating technology, we understand this level of integration is essential. If you can use a USB stick, you’re technical enough to use our Ledger hardware wallets.

The Future of Finance

In uncertain economic times, it’s not unusual to start questioning long standing financial institutions. These centralised power houses have long controlled the majority of economic activity around the world. However, with the advent of decentralised technology, this dynamic continues to shift.

Distributed networks themselves have immense potential to reinvent global payment networks. Further, the decentralised applications, protocols, digital assets, and financial smart contracts built on these networks continue to drive the DeFi ecosystem expansion. But crypto needs to be kept somewhere, and wallets are not created equal. Crypto users must exercise due diligence to ensure their chosen storage method offers complete user autonomy and security.

However, once crypto users have done their research and understood the risks, they’ll be on track to take back their financial freedom and become a little less dependent on the current financial system.

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