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December 13, 2022

The Difference Between Crypto & Fiat Money

The Difference Between Crypto & Fiat Money

The rise in popularity of cryptocurrencies has sparked a hugely important debate for the future of finance – what’s better, fiat or crypto? Fiat money is the system we all know and are used to, but it hasn’t always been that way. The model we used has changed before, and it can change again.

In this article, we explore the difference between crypto and fiat and assess the pros and cons of each. As with anything in life, there are pros and cons to each and elements that can be learned from each other.

What Is Fiat Money?

Fiat money is a government-backed currency that is considered to be legal tender for transactions such as buying products or borrowing money. It is a centralized model where supply is controlled by a central government bank.

Major currencies such as the US dollar, Euro, and Pound Sterling are all fiat currencies. With USD being the most widely accepted for international cross-border transactions.

A common misconception of fiat currencies is that they are backed by commodities, such as gold. This used to be the case. However, the value of these currencies now comes from the actions and stability of the government issuing them.

What Is Cryptocurrency?

Cryptocurrencies are digital currencies that use cryptography for transaction processing. Unlike fiat, crypto is decentralized, meaning it is not tied to or controlled by a single governing body. Rather, it is controlled by market sentiments, such as supply and demand.

Truly decentralized cryptocurrencies are controlled entirely by the people who hold the tokens. Therefore, much like the value of fiat money, it is not tied to any commodity or physical asset.

Pros & Cons of Cryptocurrency

Pros of Cryptocurrency

Global Access

A major pro of cryptocurrency is that it enables anyone across the globe to gain access to financial services. Currently, to open a bank account, you must provide a lot of personal information, including your address.

Billions of people worldwide don’t have an address, meaning they can’t access financial services in the traditional system. Anyone anywhere can use cryptocurrency – all they need is an internet-enabled device.

Improved Privacy

All cryptocurrency transactions are anonymous. While every transaction is a public record, no personal information is captured. The details anyone can see are the wallet addresses of the sender and recipient and the amount of the transaction.

Greater Security

Cryptocurrencies are built on blockchains that use distributed ledgers. This means once a transaction is verified, it cannot be altered or tampered with.

Furthermore, as there are multiple nodes verifying transactions, the blockchain becomes a single source of truth, making it near-impossible for hackers to infiltrate and redirect funds.

Cons of Cryptocurrency

Volatility in Markets

Cryptocurrency markets are known to be incredibly volatile. Bitcoin has dropped over 70% in price in the last 12 months. However, not all cryptocurrencies suffer from such volatility. Stablecoins such as USDC, EURC, USDT, and BUSD are all backed by fiat currency, enabling them to remain as close to 1:1 with their counterparts, bringing stability to crypto markets.

Little To No Regulation

As the crypto space is unregulated, those businesses that must comply with strict rules and regulations may find it difficult to enter the market legally. An example of this is online gambling companies.

Still In Infancy

Cryptocurrency is in the early adoption stage. For it to become the norm, it will have to be successfully adopted by billions of people around the world and accepted by governments. Until then, it is unlikely to become the go-to form of payment currency or legal tender.

Pros & Cons of Fiat Money

Pros of Fiat Money

Widely Accepted as Legal Tender

You can pay for anything, anywhere in the world, with fiat currency deemed legal tender in that location. Businesses, suppliers, and customers can freely transact with one another as they’re all using the same currency or have the facility to exchange one currency for another.

In-Depth Protective Regulations

Businesses and consumers benefit from regulations in place for fiat. Companies know they’re always compliant with the law, while bank account holders know their funds are protected. For example, if a hack or fraudulent scam takes place, the bank will reimburse the money stolen.

Stable Market Prices

In comparison to crypto, fiat markets are deemed to be stable. Unless there is drastic action by the government, causing inflation or hyperinflation, fiat currency tends to range and fluctuate between prices at a steady and controlled pace.

Cons of Fiat Money

Controlled by Government

You don’t retain complete control over the funds your earn because they’re controlled by the government. At any point, a bank or government body could decide to freeze your accounts, giving you no access to money.

Slow & Costly Processing

Bank transfers can take a great deal of time. For example, if you accept payments from customers via bank transfer or you’re trying to get a refund for a product you purchased, it can take several days to see the money in your account.

With cryptocurrency, this is near-instant.

No Global Access To Financial Services

No address, proximity to a bank, poor credit score, and many other factors are barriers to people accessing the fiat financial system and services.

Subject To Inflation

The value of fiat money is always decreasing due to inflation. If you hold fiat currency for a prolonged period of time, it will be worth less than when you first acquired it, as products and raw materials will have risen in price.

In Summary: The Difference Between Fiat & Crypto

Fiat money is the legal tender we currently use that is accepted across the globe. However, it’s a flawed system that has unsurpassable barriers to entry for billions of people. Cryptocurrency has much to learn from the fiat model, such as regulation and consumer protection. However, cryptocurrency has the power to become the new frontier in finance – it’s just a matter of time.

To be best prepared for the crypto evolution, follow our blog and get your Escrypto digital wallet.

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