are you worried that crypto might replace the dollar?

Will crypto replace the dollar?

No, crypto will not replace the dollar.

The US dollar will stay the official currency of The United States of America. In this article we elaborate on the characteristics of crypto currencies and why they won´t replace the US dollar. We discuss some of the key variables and whether they speak towards or against replacing the dollar with a cryptocurrency. 

With the US dollar the United States has a currency, but by adopting a cryptocurrency they would also take on a uniform mechanism for handling transactions.

Decentralization of currencies

Decentralization is one of the main characteristics of crypto coins. For many people crypto currency’s ability to be decentralized is paramount. The argumentation often revolves around cutting away the big financial institutions that act as middlemen today. People rally behind this idea, as it is a clear and simple vision. However, if we take a look at the underlying implications of this vision, they have multiple facets.

For everyday storage of money, the idea is to cut away the banks. With cryptocurrencies anyone can hold their own money in a digital, manageable way, without having cash hidden in their homes. This is an extreme upgrade to convenience as there are multiple issues with carrying around cash. The digitalization lets people transfer funds easier than they could with cash, take the money with them when travelling, keep track of how much they have and actually store the it. Storing money might seem like an imaginary problem to normal people, but for some wealthy people having their asstets stored as cash would take up hundreds of containers.
This is an argument for adopting a cryptocurrency.

For some people safety is an important part of storing their own money as well. In most western countries it is arguably safer to have the money in a bank. The bank provides insurance and is more capable of protecting the money from theft, damage from fire or water leakages etc. However, in many developing countries the banks cannot be trusted in the same way. People face a risk of banks freezing their accounts for political reason. It could be that you are a woman in Afghanistan and with the new regime you are not allowed to own money, it could be that you are part of a population that is not recognized by its state like Kurdistan or Tibet.
This is considered a tie.

are you worried that crypto might replace the dollar?

For transaction of money, the idea is to cut away the financial institutions. With cryptocurrencies anyone can make direct peer to peer financial transactions. This can be used for simple transactions, payments, loans, interests, bets etc. The crypto currencies are designed in a way that cuts out subjective assessments and opinions. No one can stop you from transferring funds to whoever you want, whenever you want to. However, you still need to pay a small fee for someone to process the transaction for you. With the USD you pay that fee to the financial institutions involved. With crypto currencies you pay it to the miners or validators involved.
This is an argument for adopting a cryptocurrency.


For inflation and regulation, the idea is to cut away the state. By “the state” we are referring to political involvement, which also covers the central banks, including the Federal reserve in the United States. This is where it starts to get tricky. Controlling inflation is part of the United States’ monetary policy and not something the Federal Reserve or any US politician would want to give up. One of the reasons is, that inflation directly influences the purchasing power of the citizens. Through printing more or less USD, the Federal Reserve can give people incentive to save up money or buy more goods. Another reason is that inflation has an impact on the United States balance of payments (BOP), which directly influences the gross domestic product (GDP). Devaluation of the USD is an important tool for the United States to stay competitive on the global market. Some crypto currencies have a fixed inflation in their design. Other crypto currencies have a dynamic inflation, where the inflation depends on things like the number of coins staked. But an important point about decentralization for many people is that a central power like the Federal Reserve cannot control the inflation. However, as mentioned above the well functioning state would never accept adopting such a solution.
This is an argument against adopting a cryptocurrency.

For technical design, the idea is to cut away the state. This might be getting a bit abstract but hold on. The cryptocurrencies can be decentralized because they basically work as an engine. There is a predefined consensus model that defines if the crypto currency runs a proof of work protocol, a proof of stake protocol or something else. It is also predefined where data is stored e.g., on the main blockchain, in shards or something else. All these technical mechanisms are important. Just to give one example it is discussed if proof of work blockchains have a negative impact on climate change. These technical characteristics of the crypto currency are constantly developed. If the United States adopted a decentralized cryptocurrency they would not know, what future implications it could have. Developers could take design in a direction that would conflict with the interests or responsibilities of the state.
This is an argument against adopting a cryptocurrency.

Scalability of crypto currencies vs. the dollar

Scalability is a key element in cryptocurrencies. With the US dollar the United States has a currency, but by adopting a cryptocurrency they would also take on a uniform mechanism for handling transactions. Today the state doesn´t decide the underlaying technology of the banks. The state provides the currency, and the financial institutions figure out how they want to handle the technology. It is an open market where the institutions that manage to run transactions more efficiently has a competitive advantage towards less efficient institutions. This is positive for a state as it utilizes the market forces. If the United States adopts a cryptocurrency, they also inherit the concerns about scalability.
This is an argument against adopting a cryptocurrency.

Security in currencies

Security is of paramount importance in a cryptocurrency for the same reasons as mentioned under scalability – it´s not just a currency it´s also a system. The security of blockchain currencies work on an all-or-nothing premise. If a criminal has success in compromising just one part of the blockchain, the whole cryptocurrency loses its value. For this reason, the cryptocurrencies are made extremely resilient. The big, recognized cryptocurrencies as Bitcoin (BTC), Ethereum (ETH), Cardano (ADA) etc., are basically considered unhackable. However, as a state considering adopting a cryptocurrency the security aspect adds another layer of concerns that the state didn’t have so far. Today if a bank account gets hacked it is not the problem and the responsibility of the state.
This is an argument against adopting a cryptocurrency.

On the contrary, if done right, a state adopting a cryptocurrency can offer its citizens and a new level of security against theft. This could be seen as both a lucrative service and a step up the ladder of digital maturity.
This is an argument for adopting a cryptocurrency.

Privacy

Crypto coins can be designed to be either anonymous or transparent. Currently most of the big crypto coins like Bitcoin (BTC), Ethereum (ETH) and Cardano (ADA) are transparent, but many others like Monero (XMR), Dash (DASH) or Verge (XVG) are private. A transparent blockchain lets anyone read all transactions ever made, while a private blockchain anonymizes this information.

A private crypto coin would never be adopted in the United States, or any other western country. In order to fight money laundering and financing illegal activities, a citizen must be able to document their transactions. This is not possible with a private crypto coin.

A transparent crypto coin however makes it easier for authorities to gain access to information about transactions than it is for them today. A state would not be dependent on banks and other financial institutes to provide the needed documentation, they could just read it directly on the blockchain. This would bring all transactions out in the open and potentially make the tax authorities much more efficient. The problem as mentioned under decentralization is that a crypto currency can get a privacy update later, without the consent of the state.
Transparency is an argument for adopting a cryptocurrency.

Sum up – Will a crypto coin replace the US dollar?

The Unite States will most likely not replace the US dollar with a cryptocurrency. The main reasons, as seen above, are that it deprives the state of power, room for maneuver and introduces some issues that the state is without today.

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