Why Fiat Currency Is More Confusing Than Crypto

Simon Chandler
Last updated: | 7 min read

One common refrain you hear about crypto, at least from laypeople, is that it’s too ‘complicated,’ ‘hard to understand,’ ‘opaque.’ On a technical level this view is understandable, yet it ignores the fact that what cryptocurrencies aim to replace/supplement – fiat currencies – are also more than a little complicated, hard to understand and opaque.

Source: AdobeStock / BBbirdZ

Sure, everyone knows how to spend a dollar or a euro, but very few people understand how the monetary system underlying the cash in their wallets actually works. One of the clearest examples of this comes from a 2014 survey conducted in the UK, which found that only 10% of MPs (i.e. the people responsible for making laws) knew that most money is created by commercial banks when issuing loans or credit, with 71% thinking that only the government or central bank has the power to issue new cash.

This highlights that, compared to the fiat monetary system, crypto isn’t as hard to understand as you might think (at least not on an economic level). And according to a range of experts speaking with Cryptonews.com, fiat currency and crypto are comparable in at least one other way: fiat has no more ‘fundamental’ value than bitcoin (BTC) or other cryptocurrencies, with the value of both depending on demand and trust in equal measure.

Different Kinds of Complexity

You’ve no doubt come across some variation of the ‘Bitcoin/crypto is too complicated’ argument. Even ostensibly sympathetic observers such as Mark Cuban and John McAfee have made it in recent years, arguing that such over-complexity would hold crypto back from widespread adoption.

However, most proponents of this view conflate two different aspects of Bitcoin and cryptocurrency. Namely, they look at the technical complexity (i.e. the cryptographic, blockchain-based aspect) of Bitcoin and other coins, and assume that such complexity also crosses over to its macroeconomics.

This view is wrong though, as explained by Hanna Halaburda, an Associate Professor of Technology, Operations and Statistics at the NYU Stern School of Business.

“Cryptocurrencies and fiat money are complex in different ways. Fiat cash is simple to use (at least the modern type) because you see what you have and what you spend,” she tells Cryptonews.com.

“In contrast, cryptocurrencies are mostly very straightforward in their monetary policy (issuing of new coins). But they are more complex to use – e.g., you need to remember passwords to your wallets; if you copy the address of the recipient wrong, the money can disappear, and there is nobody to call to fix it,” she adds.

Indeed, Bitcoin’s monetary system is extraordinarily easy to grasp: new BTC is issued with every new block (at a declining rate) until it reaches its maximum supply cap of 21 million mined bitcoins. That’s it, whereas monetary policy in the United States or any other country or region is not only constantly changing, but composed of multiple layers of complexity (e.g. M0, M1, M2 and other kinds of money).

At the same time, most industry participants are confident that crypto’s seemingly complex user interfaces and experiences will be made less complex over time.

“Just as technology evolved to make the Internet so easy to use that it went mainstream, crypto tech is evolving, on its way to mainstream adoption,” says Lou Kerner, a partner at Blockchain Coinvestors and Head Crypto Analyst at Quantum Economics.

Kerner also points out that because of the openness and immutability of blockchain technology, cryptocurrency is extraordinarily transparent, in that we know exactly how many bitcoins have been minted so far. “We have no idea how much money was printed yesterday,” he adds.

Philip Gradwell, the Chief Economics at Chainalysis, agrees on this point.

“It’s a common misconception that cryptocurrency is opaque. In fact, it operates on public blockchain ledgers and is one of the most transparent forms of value transfer,” he tells Cryptonews.com, while adding that it’s the very transparency of cryptocurrency that enables research firms such as Chainalysis to exist in the first place.

It’s also worth pointing out that, just because something is hard to understand (at least on a technical level), it doesn’t mean people can’t or won’t want to use it.

“The legacy monetary system is incredibly difficult to understand. Most people don’t have a clue how it works. But you don’t need to understand how a Toyota works to drive it, and the same goes with the dollar bill or a yen banknote or a pound deposit,” says crypto-economist JP Koning.

Fundamental Value?

Another common complaint about cryptocurrencies is that they lack fundamental value. This may be true, but much the same could be said for fiat currencies.

“Fiat money, by their very name, does not have any underlying, fundamental value. It is ‘backed’ by the policies of the government issuing it. And that has been an effective strategy for many fiat currencies,” says Hanna Halaburda.

Halaburda adds that fiat currencies are seen as having fundamental value because they’re necessary to pay taxes in a given country, so there will always be demand for it, at least around the tax paying period. But “aside from that, fiat money has value only because people believe that other people will believe in the near future that it has value,” she adds.

Halaburda refers to bitcoin as the “ultimate fiat money (in the literal meaning of the phrase),” yet she disagrees with people who claim it has no fundamental value.

“Bitcoin and other cryptocurrencies provide a service that was not available before them – near-anonymous transactions online. In my opinion this is the fundamental value of Bitcoin,” she says.

Lou Kerner also suggests that cryptocurrencies have at least as much fundamental value as fiat currencies, which in his view is precisely none.

“The value of fiat, and bitcoin, is decided based on supply and demand. There is nothing backing either,” he says.

However, in the case of fiat currencies, the absence of a fundamental base of value is what will cause at least some of them to lose all value.

“Because they create more fiat until people decide it no longer has value. That’s what bitcoin solves,” Kerner says.

For Domenico Lombardia, the Director of the Global Economy Department at the Centre for International Governance Innovation in Canada, fiat currencies lack intrinsic value because they depend entirely on trust in the central bank and/or government issuing them.

“Different central banks generate varying degrees of trust. The latter is the highest in those systems where the rule of the law and the broader institutional framework in which a central bank operates meet the tightest standards,” he tells Cryptonews.com.

Lombardia argues that, for any cryptocurrency to compete with a fiat, it has to develop a framework able to generate trust in the ordinary user. “Without some form of regulation and supervision, that cannot be achieved,” he says.

But not everyone in crypto agrees that fiat currencies lack fundamental value, with JP Koning pointing out that the typical central bank generally buys assets when issuing new money.

“It can use those assets to repurchase every single unit of currency that it has issued, thus reinforcing the value of the currency. And if it requires extra help, the central bank can ask the national government for a shot of tax revenue to boost central bank coffers,” he says.

Of course, this only covers base money (M0, or money held and issued by central banks), with the Bank of England noting in 2014 that bank deposits make up 97% of the money in circulation. It also noted that “bank deposits are mostly created by commercial banks themselves” in the form of loans, thereby implying that the only thing backing such money is the debt obligation to return it.

Users Interfaces

The fact that very few people are aware of this – that commercial banks create most of a nation’s money supply – should hopefully reinforce the realisation that the fiat monetary system is at least as mysterious and as opaque as crypto.

Sure, cryptocurrencies are complicated on a technical level, but then so are the backend systems that underpin ATMs, mobile banking apps and so on. Such complexity doesn’t stop fiat currencies from being used, and they also won’t stop cryptocurrencies from being used in their turn, at least as soon as their user interfaces become easier to navigate.


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