comparing FIAT & Crypto — Stuart
The difference between cryptocurrency and FIAT money is found in the fact that the cryptocurrency does not depend on a central institution that controls it, unlike the national currency. That’s why the value of cryptocurrency can go up to infinity, while national currencies can only drop.
♾️ The Relationship of Cryptocurrency and FIAT
The relationship between cryptocurrency and FIAT money is illustrated in the following example. Imagine that you have 10,000 dollars in your bank account (FIAT money). There is a very big possibility that someday you will lose this money. It can be because of a bank failure, a regime change, or an army invasion. If you keep this money in the bank, you can lose it because of so many reasons. But let’s say you have 10,000 dollars in a website where you can earn interest with cryptocurrency. Your cryptocurrency is located in an exchange site, and you receive daily interest from it. This interest goes to your account and you can withdraw it as soon as you wish. This money belongs to you, no one can take it from you. No army can come to take it. No bank will collapse because of it. This is a huge benefit compared to FIAT money.
Cryptocurrency is not something that is issued and controlled by the government or by any central authority. It can not be readjusted by the government. No one can take it from your wallet.
💎Advantages of Cryptocurrency compared to FIAT money
The cryptocurrency belongs to the owner immediately, unlike the national currency. It may be transferred to another person in a few seconds. The government cannot stop it. If a person loses his bank card, he will not have access to his money. But if you lose your private key, you can access your cryptocurrency by using another private key. Cryptocurrencies are not issued by the authorities. They can not be adjusted. No one can stop it. Cryptocurrency works on the basis of strong mathematical algorithms that do not change in time. It exists without the support of a central institution. Cryptocurrency is safe and secure. If you lose your bank card, you may have to ask for a new one. But if you lose your private key, you will not lose your money. One of the biggest advantages of cryptocurrency is that it allows you to control your money. If you keep your money in the bank, the government can control it. However, while keeping cryptocurrency, you have access to it and no one can stop you.
The reason why FIAT money doesn’t have a supply cap is that it is not physically constrained in the same way as gold, BTC, or other fixed assets. In the short term, there is no way to know if the money supply is growing at an appropriate rate. In the long term, the government can always increase the supply of money making it not possible to know if the money supply is growing at an appropriate rate. A rate of growth that is too low will cause deflation, a rate that is too high will cause inflation. The growth rate of the money supply is called a monetary policy. A monetary policy that can keep the rate of inflation stable over time is called monetary stability.
☯️ Monetary Policy & Monetary Stability
A monetary policy seeks monetary stability. The caveat is that this can never be achieved in a consistent manner due to international capital flows and the resultant currency fluctuations. To achieve monetary stability, the monetary authority must be able to control capital flows. In the current scenario, monetary policy is in the hands of the CBR, a central bank with no reach outside its own country. A currency board does not have authority over international capital flows. Capital controls are not in line with today’s financial world and may not be implemented easily. In the last instance, it would be the responsibility of the government to decide on the extent of capital transfers across the border. A monetary policy is not without problems. Theoretically, it is an extension of the fiscal policy. Its effects are not always beneficial to the economy. The CBR is given authority to make payments with its own funds to commercial banks in the event of a run. The CBR is responsible for maintaining the parity of the national currency. Damages arising from its operations are funded by the government.
The benefits and issues of a currency board are as follows:
As opposed to a peg, a currency board fixes the exchange rate. Therefore, it can be said that a currency board is an extreme form of a fixed exchange rate. A peg fixes the exchange rate over a period. It does not necessarily require a reserve asset. A currency board fixes the exchange rate in the long term. It requires a reserve asset. Some economic theories compare a currency board with an independent central bank.
For example, a currency board is compared to an independent central bank which should keep the inflation rate at a certain level. A currency board, in theory, should be able to achieve the same result. The difference is that the CBR has to achieve a certain level of monetary expansion, usually above the inflation rate. This is necessary to allow the CBR to function as a lender of last resort.
Another example is that a peg compares with a currency board. A peg fixes the exchange rate. A currency board fixes the exchange rate in the long term. A peg is a short-term, emergency measure that allows the central bank to intervene in the forex market in order to maintain the exchange rate. A currency board does not require such intervention, as it fixes the exchange rate. Some may argue that a currency board is not a proper monetary policy. A currency board, in theory, should be able to achieve the same results as an independent monetary authority. But, in reality, a currency board is not able to change the monetary policy as it has no authority over international capital flows. In addition to that, it is also a form of price fixation and is not in line with today’s financial world.
🔚 Summing up
FIAT money is a terrible place to hold value, monetary systems are difficult to understand, especially when you start to factor in international capital flows and their effect on the value of a countries FIAT, and crypto just looks to have too many advantages. What do you think?
I hope this shed some light in some area! If you read all of this, then I just want to say you’re amazing and I hope your life goes well! Thanks for reading :)
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