We are living in a time where blockchain technology is on the verge of getting adopted. While many governments don’t believe in price speculation, many of them actually support the idea of blockchain. They understand the potential of using blockchain technology to support many different things, including supply chain, health insurance, and others. And one of the most discussed use cases is the creation of digital fiat currencies solely backed by blockchain.
The Chinese government has been experimenting and outlining its plan to release digital yuan. The banks in the US have been warming to the idea of the government releasing its own digital dollar. And then, we also have the ECB (European Central Bank), which is rumored to be trialing the digital euro in 2021. The Estonian Central Bank is also working on its own digital currency right now.
With all these major countries are working or thinking to work with their countries’ digital fiat, it looks like the world will eventually embrace the blockchain technology. But here’s the important question. Will digital fiat successfully or eventually replace the usual suspects in the crypto world, such as Bitcoin and Ethereum? Let’s see.
The Idea Of Embracing The Technology And Yet Remain In Control
So, where does the idea come from? Just a few years ago, most governments were against cryptocurrencies because they understood that it would be dangerous for them if the people used “internet money” to buy everything. They want to have the ability to directly control money supply from the central banks. At least, that’s what the major first world countries want. That’s why some experts often say “those who control the currency, they control the world”. Look at the USD.
The Fed can magically print trillions of dollars without any asset supporting them and still the USD hasn’t been going through hyperinflation. This kind of magic tool wouldn’t exist within any third world country, but the United States government can keep abusing its power with little consequence.
This is why the major countries like China and the United States refuse to adopt standard cryptocurrencies to replace their national currencies. The ability to print money is something that’s very powerful in the modern era even though eventually everybody has to pay for it through inflation when people have the money to spend again.
This is also why these countries believe in the technology of blockchain, but they refuse to “decentralize” the control of the currency. In other words, they want to adopt new technology without giving away their abusive power.
So, here comes the question. Digital fiat currencies like digital yuan, digital euro, or digital dollar are basically centralized currencies that adopt the blockchain technology. Will they increase user adoption to Bitcoin, Ethereum, and others? In my imagination, it can go both ways.
The Case For Positive Scenario
So, let’s start with the first “what if” scenario. What would digital fiat currencies need to have in order to positively affect public cryptocurrencies? Here’s the thing. Right now, most people are still brushing off Bitcoin and others. Even those who have invested in BTC or ETH would not really use these cryptocurrencies to buy anything because they are too inconvenient.
But, as time has proven over and over again, “locking” a user into one ecosystem would also benefit the other products inside the same ecosystem. For example, Mac OS X users would also be exposed to all the applications that are built for the same operating system, even if they are not made by Apple.
You can also say the same thing about cryptocurrencies. Most likely, these digital fiat currencies will utilize or would have a bridge to public blockchain ecosystems. If some of the digital fiat users use the blockchain to trade to standard cryptocurrencies like Bitcoin or ETH, this would definitely benefit the crypto space.
The Case For Negative Scenario
But how about the opposite scenario? Is it possible that the digital dollar or digital euro would actually put public cryptocurrencies at a disadvantage? Actually, yes. The ECB (European Central Bank) has publicly said that the need to research digital euro is simply because it wants users to adopt the digital euro instead of all these stablecoins and speculative crypto assets.
So, I can imagine that the mass adoption of the digital euro or digital yuan might actually come with the ban of public cryptocurrencies, so the users will only adopt certain digital fiat (and not the likes of BTC). While I am skeptical that this can happen, but the chance is not small for this kind of scenario, especially if the major countries become increasingly desperate to control the flow of money.
Whether it’s the positive scenario or the negative scenario that will play out, it’s always interesting to follow the further development of these blockchain-based digital fiat currencies and how they will affect or even reshape our global economy.