“Crypto vs traditional economy” is one of the most divisive topics in the finance world. There are finance experts, bankers, entrepreneurs, and enthusiasts on both sides fiercely arguing that they are right, and that they’ll eventually emerge victorious.
So, who will eventually win? Of course, it’s impossible to know for sure, but here we’ll take a look at some of the forces and trends that have triggered the crypto economy, how they relate to the traditional economic infrastructure, and how those interactions might play out in the future.
Centralised vs decentralised infrastructure
The question ultimately comes down to centralized financial infrastructure vs decentralized infrastructure. The world of traditional finance is highly centralized. This means that it is under the control of a central authority such as a government.
The most obvious example is with centralized fiat currencies like the US Dollar, the Euro, or Japanese Yen. These currencies are issued by their respective governments, who have control over the supply of the currency as well as how it is used. The central banks can create new money when they need it and stop you from using it (e.g. by freezing your bank account) if you break the financial rules. For most of us born and raised in a centralized financial system, this is how we intuitively think about money.
On the other hand, cryptocurrencies like Bitcoin are decentralized. No one owns them, controls how many coins can be created, or manipulates the currency after it has been created without consent (called consensus) from the rest of the network.
What decentralisation brings to the table
People enjoy feeling like they really own their stuff. Centralized currencies work fine when the economy is running smoothly, but when they don’t, things can get ugly fast.
This became crystal clear to people around the world during and after the 2007-2008 financial crisis. The global financial infrastructure fell apart, and many people lost everything. People, companies, and entire countries felt helpless and abandoned by traditional finance. Events like inflation, quantitative easing, and bank runs all chipped away at the trust in central banks and governments that control the financial system.
In 2008, Bitcoin popped up just at the right time with a whole new way of thinking about finance. It offered a secure currency that was easily tradable over the internet, and completely free from the oversight of any government or authority.
People loved the idea, and it took off. The price of Bitcoin soared from nothing to thousands of dollars. Thought leaders and groups started to imagine a future where money was owned and operated in a decentralized way that gave them more freedom and sense of ownership.
This idea has even more impact in the developing world where government instability and corruption amplify these problems.
But so far, Bitcoin hasn’t taken over
Over a decade later and despite all the initial hype over how Bitcoin was going to take over the world, it hasn’t. Not even close. A quick look at the market cap of all cryptocurrencies shows it’s still tiny on a global economic scale. It’s made progress in many ways, but crypto is a long, long way from taking over the traditional financial world.
So why isn’t crypto winning the battle yet?
Media hype, excitement, and FOMO (fear of missing out) have been the main forces that have exploded cryptocurrency onto the world stage over the last decade. But those forces are starting to wear thin.
On the other hand, there are strong forces holding the crypto economy at bay. Technological weaknesses such as scalability bottlenecks are preventing decentralized networks like Bitcoin and Ethereum from growing much further. Networks with more scalable technology such as EOS, have issues with organization and governance. Also, crypto still lies in a legal grey area in many countries, which prevents many people and organizations from getting involved at all, even if they wanted to.
On top of all this, there is a huge vested interest in the status quo. Restructuring the global economy to a crypto-based one would require a ton of effort by governments and cost people a lot of money. Needless to say, there would be epic resistance.
Does this mean that traditional finance will inevitably win?
Not necessarily. In fact, there’s a third scenario where neither side wins over the other. Instead, traditional finance and the crypto economy begin to merge more and more as the technology, culture and legal status of crypto continue to improve and real-world use cases are developed.
Merging of the two
One of the reasons that the crypto economy and traditional finances are thought of so separately is because up until now, the two haven’t interfaced well with each other. Buying/selling between fiat currencies and cryptocurrencies still isn’t completely streamlined. There are all sorts of institutional and legal issues.
But if the crypto community can develop the technology, applications, exchanges and platforms so that they integrate nicely with traditional banks and currencies, and also gain a clearer legal standpoint in critical countries, the divide between the two economies will begin to blur.
This blurring can also occur from the other direction, when traditional financial organizations start to use crypto technology themselves. We’ve seen this recently when J.P. Morgan announced their own digital currency for payments. There is debate over whether J.P. Morgan’s new coin is a true cryptocurrency, but it’s a strong sign of interest and investment in crypto technology from one of the global financial elite.
What this means for the future
Decentralized cryptocurrencies have been one of the most important and unique technological breakthroughs since the internet. They allow networks of people to organize themselves in a trustless way like never before, and they aren’t going anywhere any time soon.
The most likely end to the crypto vs traditional economy battle is with no clear victor, but a whole new economy where centralized and decentralized platforms interface with each other seamlessly to create a more digital, global, and efficient economy than we’ve ever seen.
It’s still impossible to say exactly what this new economy will look like, but it’s certainly going to be a fun ride getting there.