FIAT versus CRYPTO: is the race on?

Fiat vs crypto is the race on
This article is not about a competition between cars, but about the confrontation between two currency models, opposing legacy (fiat) to high tech (crypto).
From a financial perspective, 2017 has been the year of the popular breakthrough, not only of Bitcoin, but of the concept of cryptocurrency. The hype was boosted by the spectacular performance of this asset class.

Fiat vs Crypto Trends

At it’s to date peak , on December 17, one bitcoin would buy about 500 grammes of gold, and the US$ about 0,025 grammes. As I write, nearly four months later, bitcoin buys about 164 grammes of gold, and the US$ about 0,024. On January 7, 2018, the total market capitalization of cryptocurrency reached 834 billion $, or 19.655 tonnes of gold, today it stands at 6.000 tonnes.

To put things into perspective, the global stock market capitalization hovered around 100.000 billion $ at its peak in early 2018. So, has fiat vanquished crypto? Has hype been exposed?

Both fiats (such as €, $, ¥, £, …) and cryptocurrencies share the basic characteristics of money as media of exchange, units of accounting and storages of value. But, they are very different beasts altogether, and fairness requires that if a winner is to be declared, he should be competing in the same league. Although exchanges make fiat and cryptocurrencies convertible into one another, my contention here is that they do not fully share the same playing field.

Trust in fiat currencies is backed by the relative economic, administrative, cultural and military power of the states issuing them, whereas the relative value of a cryptocurrency finds its source in the relevance of its underlying process.

Each cryptocurrency is linked to a specific type of activity. Bitcoin is designed to facilitate payments, Augur to facilitate predictions, SLOGN to facilitate logistics… The more relevant they are to their universe of activity, the more valuable they are and will become.

Relevance here can be understood from two perspectives: effectiveness and efficiency. In order to be successful, cryptocurrencies need effectively facilitate an activity based on a technology (blockchain) that is as efficient as possible.

Don’t worry if this seems like gibberish to you. My point here is to illustrate that fiat and cryptocurrencies are not only very different in market size and functionality, but that they also thrive in very different environments.

Fiat currencies need a highly regulated ecology of national and international institutions to function. Cryptocurrencies are, in principle, auto regulated and not impeded by national boundaries.

However there is increasing pressure to regulate cryptocurrencies, emanating from both state authorities and the market players. And if there is a race ongoing in the field of currencies in general, it is a regulatory one.

Most states’ instinctive reflex is to turn to their traditional finance regulating bodies, such as the SEC and the CFTC in the USA, to come up with solutions. But, these institutions are ill equipped to handle activity-related currencies. First, because their DNA is to regulate securities and fiat currencies designed for “universal” purposes, and second, because their perspective has historically been national.

Crypto-entrepreneurs on the other hand, are understandably seeking to avoid a collision with state interests and justifiably expect the legal stability and institutional framework in which to develop their activities in a welcoming atmosphere.

As I see it, blockchain technology and cryptocurrencies bear the promise of unprecedented emancipation, but they are at once a huge challenge to nation states’ agility to adapt and to resist vested interests, and this not only in the financial sector. This transition will be fundamental to mankind, will affect all areas of activity, and will be the central global struggle for the coming decades.

I will not be there to see the outcome of this epic adventure, and I do envy the Millennial generation’s responsibility in it. I know from experience how hard it is not to budge before the unwilling inertia of an administration protecting the status quo, and I pledge to support them with whatever energy is in me. The race is on!

Copyright © 2018 by Christophe J. J. de Landtsheer. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the author.

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