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 It was created in 1973 and some people think that it is rather outdated.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.

Related news

European Commission Turns Bullish on Blockchain

The Joint Research Center, the science and knowledge service for the European Commission, recently released a report which assessed the multidimensional impacts of blockchain and other distributed ledger technologies. The report, Blockchain Now And Tomorrow, is remarkably bullish on the technology’s transformative potential. The paper asserts that: “…blockchain is now one of the technologies which is anticipated to have a profound impact over the next 10-15 years, backed in the short term by upward forecasts for investment.”- Joint Research Centre of the EU Science Hub, European Commission, Blockchain Now And Tomorrow The Staggering Growth of Capital Inflows The report identifies a major influx of investment, rising from EUR 450 million in 2014, through EUR 3.9 billion in 2017 and finally reaching EUR 7.4 billion last year. The figures suggest an enormous expansion of venture capital into the space over the past twelve months.    Courtesy Joint Research Centre of the EU Science Hub, European Commission, Blockchain Now And Tomorrow   The world is on a blockchain spending binge, and the Commission’s researchers seem to  feel that those figures warrant taking the sector seriously. Many of the features and benefits listed in the report are already familiar to the blockchain industry: decentralization, tamper-resistance, transparency, security, and smart contracts that do away with the need for human intervention.  While the report seems guardedly optimistic about the role of cryptocurrencies, the researchers do argue that in its current state: “…the technology is either not sufficiently well developed to be broadly adopted or is still limited to small subsets of participants. Beside performance and scalability, other technical challenges remain regarding integration with legacy infrastructures or standardisation and interoperability between different systems.” European Commission Takes a Thorough Approach to DLT The report reiterates the EU’s stance in November 2016, when it enacted the European Parliament (EP)’s Resolution on virtual currencies. With cryptocurrencies like Bitcoin the primary focus of blockchain technology at the time, the Resolution emphasized the potential for DLT  in the financial services sector, in particular with regards to cross-border transfers.  However, in a forward-thinking maneuver, the EP also recognized the potential for blockchain technology to change the way any data-driven processes could be conducted. Wherever the transactions need to be recorded or reported, European leadership acknowledged the potential usefulness of distributed ledgers. The EU’s position on blockchain in supply chains, for example, suggests that the union sees enormous potential for its deployment: “Blockchain enables any type of digital or digitised asset and associated transaction to be recorded, certified and tracked between parties, no matter the physical distance. So, blockchain-based systems could facilitate ‘seamless’ and ‘frictionless’ interactions in global and distributed supply chains between distant and untrusting actors, including producers, retailers, distributors, transporters, suppliers and consumers.” This approach is in stark contrast to the shotgun approach of the U.S.’s SEC, whose  ambiguous enforcement makes it anyone’s guess what will or won’t be deemed a security.  Entrepreneurs tend to see business potential ahead of policymakers. But in Europe’s case,  regulators appear to be insightful agents – or at least permitters – of change. The post European Commission Turns Bullish on Blockchain appeared first on Crypto Briefing.

Survey: Nearly a Quarter of Brits Believe Cryptocurrency is the Future of Money

Cryptocurrency remains a curious subject for a majority of Britons as shown in a recent survey report released by ING — a Dutch-based banking group. Elsewhere in Europe, the survey reveals a significant crypto apathy as most respondents chose cash over digital currencies. Places like Turkey, however, show a massive level of interest in cryptocurrenciesRead MoreRead More. The post by Osato Avan-Nomayo appeared first on BTCManager, Bitcoin, Blockchain & Cryptocurrency News\
BTC Manager

North Korea Is Creating, Designing and Implementing Its Own Cryptocurrency

The North Korean government has set out to create its own cryptocurrency. As reported by Vice News, a government representative has recently affirmed that this new crypto would be used to avoid international sanctions and to help in the circumvention of the global financial system, which is currently controlled by the United States, one of […]
Bitcoin Exchange Guide

Hot news

By continuing to browse, you agree to the use of cookies. Read Privacy Policy to know more or withdraw your consent.