Following on from my recent article in which I labelled El Salvador’s adoption of BitCoin as a “basket case,’ after seeing how it didn’t work and a comment made by another P0x member I have asked myself the question this morning as to whether crypto will ever replace fiat. You may recall that El Salvador’s experiment demonstrated that crypto can coexist with fiat to some extent, but at the same time it is unlikely to fully replace traditional currencies as legal tender worldwide. The volatility, institutional resistance, and uneven adoption make a complete replacement improbable, though hybrid systems may expand.
For a starter though, let me summarise, what I wrote previously and add a little more. The things that held back the El Salvador experiment included the fact that because it was the first mover (very often it is best to be second on the market IMHO) to do so (in September 2021) and this meant that it was charting uncertain waters. Added to this BitCoin wasn’t universally adopted despite many large businesses integrating it into the systems. This aside, most citizens and small firms remained cautious due to technical barriers and volatility. The government even introduced its own wallet (Chivas) with a free handout to push BitCoin adoption, but surveys showed that over 60% of early users stopped transacting after spending the free credit. Then when international organisations, like the IMF (International Monetary Fund) got involved the adoption was practically dead in the water even though the El Salvador government still continues to buy it. Thus far, this month (at time of writing) 1,090 BitCoin worth over $100m have been purchased, bringing El Salvador’s reserves up to 7,474 BTC (~$676M).
It seems that, at least at a state level, El Salvador still believes in its experiment, whatever its citizens are doing!
The fact is that crypto is frankly far too unpredictable (aside from StableCoins) to replace fiat. Just look at BitCoin over the last few weeks as its price has continued to fall. If I could have bought an average UK house for 2.5 BitCoin six weeks ago I would now have to pay 3.5 BitCoin. Of course in the long run given future projections (and not allowing for property inflation) I could potentially buy 6+ houses for a single BitCoin. The effect is even worse for smaller payments in which there is no equity - such as a cup of coffee in a coffee shop. This volatility just makes crypto unworkable as the foundation of any economy and this is assuming that there is widespread adoption of crypto as a payment system. El Salvador has shown that simply the populace are not that interested – and maybe this is in part (at least) - because the popular public perception is that crypto is ultimately a Ponzi or some kind of a scam. There is a lack of supporting infrastructure, i.e. reliable internet, user-friendly wallets, and merchant adoption, especially in developing economies.
As the commentator on my previous post said BCH came closest but still ultimately failed to cross the line and then of course – and I have a big issue with this, there is the ongoing problem with excessive gas fees that make Currency Exchanges (even at the airport) look reasonable.
What might happen in the future is the evolution of hybrid systems that work alongside rather than replace fiat. In this, crypto may serve as a parallel option and be useful for remittances, savings, or cross-border trade. Personally, and I blogged on this very early on in my P0x experience (when I thought BAT was a StableCoin!), what might happen is the adoption of StableCoin payment systems to challenge and outcompete such providers as PayPal.
Since Trump’s return to the White House there has been an increase in government interest and while his administration are making a big show and tell of it the truth is that other nations are quietly accumulating BitCoin reserves which has to mean that its significance will only grow in the future. One side effect of this is that state banks want to get in on the act and are already in the process of exploring state-backed digital currencies, which could integrate blockchain-like features without ceding control to decentralised assets. BLIK in Poland could be the first fruits of such a movement and in this post-Covid world that is almost cashless it only makes sense for National Banks to digitise their native fiat currencies for simply utilisation. These kinds of ecosystem will inevitably have to be built on existing technologies that have come about because of the evolution of the crypto landscape.
The biggest single step, still theoretical and especially after El-Salvador’s “failure” is for governmental adoption of crypto that trickles down to the masses. Currently, no major economy has adopted any crypto as legal tender and this is why, if anything and as I have already stated the global trend leans toward integration rather than replacement.
So, to sum up, crypto is highly unlikely to replace fiat entirely as legal tender, but it may increasingly complement fiat systems. El Salvador’s bold experiment highlights both the potential (financial inclusion, global attention) and the risks (volatility, institutional pushback) of taking such a step. The more realistic future is a dual-track economy where fiat remains dominant, but crypto plays a growing role in niches like remittances, savings, and sovereign reserves.
And remember – you read it here first, and especially if you go back to my early article – let’s not underestimate the role of StableCoins unless National Digitised currencies emerge first!
Wow, that ended up deeper than I expected when I set out to write in response to my previous post and in particular one comment that it prompted.
As always stay safe and well my friends.
