Fiat (Traditional) Money vs. Cryptocurrency: Major Differences

Basic explanation of fiat money and cryptocurrency and their core differences, advantages and disadvantages of both types of assets

We continue the series of basic articles within the crypto industry. The previous article was dedicated to Bitcoin and its history, and in this one will provide the comparison between fiat money and cryptocurrency.

Before Bitcoin, people only used money backed by governments and central banks. We also call it fiat money. Cryptocurrencies, such as Bitcoin, do not fall under any authority. They are decentralized and community-driven.

Dollars, euros, pounds, roubles, and all other national currencies are fiat money. Fiat money is all the cash and digital money in bank accounts. We use fiat money every day to pay for goods and services. However, Bitcoin and other cryptocurrencies offer alternative money that has a number of important differences.

Centralized vs. decentralized

Fiat currencies are centralized. Only governments and central banks can print new money and the supply of this money is virtually limitless. This causes inflation. Goods become more expensive because money slowly loses its value. In Bitcoin, the community issues new money (coins) by way of mining. The amount of coins to ever exist has a limit or a cap. Bitcoin, for example, is capped at 21 million coins. This is why inflation in cryptocurrencies is a non-issue, and the value of a bitcoin is only expected to grow.

Opaque vs. pseudonymous

To offer their services, banks and credit companies usually need to verify their clients’ identities to make sure that they are law-abiding citizens. This process is called the KYC procedure (Know Your Customer). All this information allows governments and banks to withhold money, freeze accounts, and reject or revert transactions. Cryptocurrencies, on the other hand, do not need any identity verification from users. Bitcoin is a pseudonymous network; people use addresses that do not carry any personal data.

SWIFT vs. blockchain

Today most banks are connected to a network called the Society for Worldwide Interbank Financial Telecommunications, or SWIFT for short. This system allows banks from all over the world to transfer money between one another. It was created in 1973 and some people think that it is rather outdated. Money transfers via SWIFT can take up to five business days and have relatively high fees. Open-ledger technology, used in cryptocurrencies, offers a new way for banks to communicate with one another and to make transactions faster and more efficient.

Double-spending problem

Before cryptocurrencies, digital money had one big issue — the double-spend attack. This means that a fraudster could spend some money, copy it, and spend it again, and there was practically no fully reliable way of knowing that. Bitcoin solved this problem using digital signatures, timestamps, and an open distributed ledger.

Scalability problem

Though cryptocurrencies have many advantages over traditional digital payment systems, they are not without their flaws. Due to its core design principles, Bitcoin, as well as a number of other cryptocurrencies, has certain scalability issues.

Bitcoin is supposed to be run by a community of users. Bitcoin wants everyone to be able to fully participate in the network. This puts certain restrictions in terms of the size of its blockchain and, consequently, the transaction speed. Bitcoin, at the moment, can process at most 7 transactions per second (tps), while the speed of traditional fiat-based systems like Visa and PayPal averages at 1700 and 193 tps respectively.

Blockchains and open ledgers seem to have found answers to the problems centralized digital systems have been struggling with for a while. However, cryptocurrencies have a set of inherent drawbacks, which are now being addressed with varying degrees of success.

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Blockchain vs. PayPal: Understanding the Difference and Evolution

In today’s world, everyone wants everything in a hurry. The faster, the better. In the world of digital payments, a major competition is underway between the blockchain and PayPal. The blockchain is the relative newcomer, while PayPal has been around for about two decades. Here’s a look at some of the pros and cons of both money transfer systems to help you decide the long-term winner in the blockchain vs. PayPal debate. Blockchain Technology and Other World-Changers Blockchain technology is one of those digital revolutions that only comes around once or twice every generation. It’s as important an invention as the integrated circuit (1958), the microprocessor (1971), the personal computer (MITS Altair 8800, 1975), the internet (ARPANET, 1969), Windows (1985) and smartphones (2007). 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Peer-to-peer: Cross-border payments take less time with blockchain due to fewer checkpoints. Permissionless: Payments don’t need a bank’s approval before they can be sent. The payor and payee control the transaction process, not a third party. No limit on payment size: Need to send someone five million dollars worth of Bitcoin, pronto? You can do it on the blockchain. Just make sure you’re aware of any applicable fiat-to crypto (and vice-versa) costs. Blockchain technology is what makes peer-to-peer international payments happen quickly and efficiently. Photo by Craig Cooper on Unsplash Blockchain Payment Disadvantages Slower transaction speeds (transactions per second) compared to PayPal, Visa, and Mastercard. Costly mistakes: If you make a mistake and send funds (crypto) to the wrong address, don’t look for any government regulator to bail you out. Fiat-to-crypto conversion costs: Unless all of your payments occur within the crypto ecosystem, you’ll need to convert your USD, EUR or GBP, etc. to Bitcoin, Ether, etc. When you receive payments in crypto, you’ll also incur transaction costs to convert the funds back to fiat. Transparency: Blockchain ledgers are public knowledge, inasmuch as anyone with the correct access codes can view the details of each transaction within. Privacy-minded individuals and companies may not be cozy with that arrangement. PayPal Advantages Send money to anyone in up to 26 different (fiat) currencies with an email address. Well, as long as they have a bank account and have signed up for PayPal, that is. Regulation and oversight: PayPal users are protected by at least some of the rules and regs that govern traditional banks, such as Regulation E and the USA PATRIOT Act. 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Might PayPal payments be sent via DLT in the near future? No one knows, but it’s certainly a possibility worth contemplating as this decade rapidly draws to a close. For all anyone knows, blockchain vs. PayPal might morph into something like BlockPal or PayChain. The Wild Card in the Mix Bitcoin hash rates continue to climb, albeit slowly as of early 2019. More and more merchants are willing to accept cryptos as payment. With the possibility of a major US (worldwide?) recession looming in 2019-2020, it’s possible that revenue-hungry retailers will welcome any form of payment they can get, including major cryptos. However, what happens if 100 million Americans decide to use crypto every day to complete their personal and business transactions? Further, what if most of those consumers simply choose to keep their funds within the crypto ecosystem, never again converting their coins to fiat? Be Optimistic, yet Ever-Vigilant Overall, the future looks great for both blockchain and PayPal as world-class payment systems, worldwide. However, always be aware of the potential for government restrictions on crypto use (on consumer purchases, not on actual crypto trading). If crypto purchases are limited by government decree, then the blockchain will also be affected and its development could be slowed down. PayPal appears to be immune from such a hypothetical crackdown unless they begin offering cryptos as an additional currency. Regardless of future events, the blockchain vs. PayPal saga should prove to be an interesting competition in the 2020s and beyond. The post Blockchain vs. PayPal: Understanding the Difference and Evolution appeared first on CoinCentral.
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Europe’s Covesting Digital Asset Exchange Introduces Fiat Payments to Trade Cryptocurrencies

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