Introduction
Fiat money as a medium of exchange has existed for many years. In this regard, what began as bartering, the oldest means of trade, led to the development of hundreds of currencies and, consequently, to alternative currencies used by online communities today. Thus, conventional currencies have evolved throughout history to become the most accepted means of payment globally, with governments controlling their issuance. People can acquire products or services through these legal tenders or official money issued by a centralized bank.
However, the alternative currency is crypto money which can act as a substitute or a replacement for conventional currency. Unlike traditional legal tender, cryptocurrency can be created by any person or entity because banks or governments do not have monopoly power over their existence. In this case, cryptocurrencies, for example, Litecoins, Cardano, Ethereum, and Bitcoins, are some of the virtual currencies or virtual assets that depend on peer-to-peer networking. The alternative currencies’ innovative features, simplicity, and high value make them more popular than traditional legal tender.
Development of Alternative Currencies
A cryptocurrency is designed to function as a medium of exchange. The inception of digital money dates back to 2008. A group of individuals using the pseudonym Satoshi Nakamoto announced the Bitcoin concept and issued a white paper on the subject (Gómez & Demmler, 2018). Today, many forms of digital currencies exist, with new versions being developed regularly. The most popular cryptocurrencies, such as Bitcoins and Cardano, are based on blockchain technology that tracks, validates, records, and stores transaction data across a distributed ledger and decentralized network of personal computers (Gómez & Demmler, 2018).
The main benefit of these alternative currencies is that they permit digital transactions outside of traditional banking systems. Thus, unlike other financial assets, this digital money has no link with any authority or physical representation. In addition, these currencies are used by online communities made up of users in various countries. They allow for some measure of international exchange and conversions into major fiat currencies, such as the US dollar and Euro, at low cost (Sensoy, 2019). All these features make alternative currencies attractive for online communities.
Cryptocurrencies have continued to attract the attention of institutional investors, retailers, and buyers of various goods and services. In this case, its widespread is fueled by increased media coverage and investment experts publicizing the innovative features and value that Litecoins, Cardano, Ethereum, and Bitcoin have and are expected to accrue. These cryptocurrencies have also become popular in countries with devalued currencies and high inflation, such as Venezuela (Ellsworth, 2021). In addition, virtual currencies are widespread among traders who use them to transfer large amounts of money for illegal and illicit activities (Kethineni & Cao, 2020).
A study shows that between January 2016 and January 2018, the total market capitalization of the entire digital currency grew from $7.4 billion to more than $800 billion (Li et al., 2019). Therefore, these alternative currencies’ exponential growth is due to increased investor speculation and the introduction of various new cryptocurrencies, with their total number estimated to be over 21,844 different coins (Howarth, 2022). Despite these trends, Ethereum, Bitcoins, and others are not legal tenders and, thus, have limited acceptance among different populations.
Whether Alternative Currencies Can Replace International or Traditional Currencies
Since the introduction of cryptocurrencies, these alternative currencies have experienced an increase in utility, value, and popularity. As a result, several forms of cryptocurrencies have become acceptable to traders and investors who use them to earn returns and store value. The COVID-19 pandemic has not only fast-tracked the shift to contactless and digital payments but also increased the mainstream acceptance of cash alternatives, such as cryptocurrencies (Locke, 2021). Several factors make cryptocurrencies more appealing to a variety of traders. They include a decentralized financial system involving only two parties, which makes the transactions faster and more secure (Prasad, 2021). In addition, cryptocurrencies can be used as intermediate currencies to streamline money transfers across borders, and their investments generate massive profits for traders. The growing acceptance of these alternative currencies has led to a huge debate on whether or not they can replace the traditional fiat currency.
Cryptocurrencies are less likely to replace traditional currencies due to their limited acceptability. These virtual currencies are less popular and acceptable compared to traditional money. Most agencies and regulators perceive money as everything that is broadly accepted as a medium of exchange, a unit of account, and a store of value (Yuneline, 2019). The fiat currency has met these three criteria for several millenniums. Conversely, alternative currencies, such as Bitcoin, are only acceptable to a few users and organizations, limiting their use. This may be linked to the low level of trust among the public due to online theft and the lack of technical know-how for performing transactions using virtual currencies (Sagheer et al., 2022). For example, since Bitcoin’s inception, only a few organizations, including Newegg, Microsoft, and Overstock, have allowed payments in the currency (Tuwiner, 2022). In addition, many governments worldwide have either restricted or completely banned the use of cryptocurrencies in their countries, further limiting their usage. Therefore, cryptocurrencies are only acceptable to limited users, who mostly use them as speculative investments instead of a means of transaction.
The prices and value of alternative currencies are less stable than the fiat currency. The cryptocurrency market is renowned for its volatility due to the increased fluctuation in its valuation (Yuneline, 2019). For instance, in one day, Bitcoin’s value declined by 30% (Browne & Kharpal, 2021). The volatility of the virtual currency market is mainly propelled by the speculative nature of the trade since most investors are focused on creating wealth promptly. Similarly, factors such as demand and supply, media hype, and investor and user sentiments can destabilize cryptocurrencies (Yuneline, 2019).
In addition, many governments do not support cryptocurrencies as legal tender, making them less credible (Sagheer et al., 2022). Therefore, cryptocurrencies’ volatility limits their usefulness as mediums of transaction. On the other hand, due to government regulations, fiat money is more stable, making it a preferable means of exchange (Yuneline, 2019). This implies that many individuals, investors, and businesses are more likely to use traditional currencies due to their stable value. Hence, virtual currencies are less likely to replace fiat money due to their high volatility.
The replacement of traditional currencies with alternative currencies may lead to economic crises. Governments decide the number of currencies to be printed depending on internal and external pressures, thus controlling issues such as inflation (Dapp et al., 2021). Therefore, the lack of government control over cryptocurrencies may result in severe financial problems worldwide. Not to mention, some cryptocurrencies, especially Bitcoin, have a cap of 21 million, implying that even if the need arises, no more coins can be minted (Khalif, 2022).
Similarly, the decentralization of the financial system also presents a horde of challenges because such transactions could foster illegal activities such as money laundering and tax evasion (Arias-Oliva et al., 2019). Thus, alternative currencies pose unique challenges making them less preferable means of transaction than fiat money. Generally, it may be challenging for virtual currencies to entirely replace the traditional money system due to their volatility and other vulnerabilities. Therefore, these alternative currencies can only complement fiat money. Cryptocurrencies are still new and need vigorous improvements if they are to replace traditional currencies in the future.
How Alternative Currencies Will Evolve
There is a current debate on how alternative currencies will continue to evolve. However, the next 20 years may represent the beginning of a new phase of these technology-driven currencies that can potentially eliminate major conventional legal tenders (Pollock, 2020). In this case, mainstreaming cryptocurrencies as a payment mechanism will facilitate technological improvements in its ecosystem (Levis et al., 2021). This development is expected to scale operations by enabling Bitcoin, or Ethereum’s blockchain, to handle millions of transactions faster. In addition, the main challenge that alternative currencies are expected to overcome relates to security concerns. For example, over $ 477 million worth of virtual currencies has been stolen from exchanges by cyber attackers (Kharpal et al., 2022). Therefore, it is believed that the blockchain system will undergo significant growth, driven by innovations both in algorithmic and conceptual terms (Marzo et al., 2022). Thus, anonymous individuals and institutions are expected to create a more secure blockchain ecosystem to facilitate the widespread adoption of cryptocurrencies.
As regulations evolve to keep pace with the cryptocurrency market, the use of digital money will likely expand. A report shows that lawmakers in the United States and globally have shown interest in formulating laws and guidelines to make alternative currencies less appealing to cybercriminals and safer for investors. This follows the bankruptcy of crypto companies, such as Celsius and Arrows Capital, as well as the crash of some cryptocurrencies, for example, Terra Luna, which saw users lose their investments instantly (Gailey & Haar, 2022). Therefore, after these recent events witnessed in the crypto market, it is projected that stringent regulation to control cryptocurrency could arrive in the next few years. Increased government regulation is expected to provide recourse for investors negatively impacted by theft, fraud, or other security breaches (Smith, 2022). Thus, regulation will offer protection, improving their legitimacy and reputation in the future. That means bringing stability to the price and benefits to both consumers and merchants.
Conclusion
In conclusion, alternative currencies’ popularity has risen because of their well-known benefits, such as ease of storage, minimal transaction fees, speed, and relevance in this digital age. However, unlike fiat currency, which has existed for many years, all cryptocurrencies are not backed or controlled by governments globally. In addition, the blockchain ecosystem, which supports alternative currencies, is very susceptible to hacking. These factors derail them from replacing major conventional currencies, such as the US dollar and the Euro. In this case, the lack of a legal framework to offer recourse for users negatively affected by theft, fraud, or other security breaches makes these digital currencies very volatile.
However, looking ahead, more technological advancement is expected to facilitate transactions faster and protect the blockchain infrastructure against a breach. Similarly, as lawmakers try to enact laws to make alternative currencies less appealing to cybercriminals and safer for investors, it is projected that stringent regulation aimed at controlling cryptocurrencies could be introduced in the future. Thus, alternative currencies will need to overcome these key issues to replace conventional legal tenders.
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