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The Differences Between Cross Border Fiat and Cryptocurrency

It is a common misconception that cross border fiat and cryptocurrency are similar. Cross border fiat, or fiat money, is a country’s legal tender by decree and is often backed by faith in the government(s). On the other hand, cryptocurrency is a digital asset that acts as a medium of exchange but is not issued or backed by a government or authority. This fundamental point of divergence leads to several differences between the two systems:

i. Supply
ii. Legality
iii.Borders
iv.Corporality
v. Portability
vi.Storage

i.Supply

In theory, cross border fiat does not have a limited supply. This is because the state produces and disseminates fiat money in line with its changing fiscal policies. Therefore, the state can always produce more fiat money if it deems necessary.

The supply of many cryptocurrencies, such as Bitcoin, is limited. These cryptocurrencies have set their own maximum limits: for example, the maximum number of bitcoin that you can mine is 21 million. The supply curve for bitcoins is set to increase as seen in the graph below.

ii.Legality

The legality of cross border fiat differs from that of a cryptocurrency. Fiat money is issued by a government or authority in official currencies such as those below:

a) Shillings
b) Euros
c) Rupees
d) Dollars

In contrast, the government does not issue cryptocurrencies. In fact, there are countries where cryptocurrencies such as Bitcoin are being banned for use as a tender or storage of value (India, Pakistan and South Korea to name a few). Examples of cryptocurrencies include:

a) Ethereum
b) Bitcoin
c) Litecoin
d) Dogecoin
e) Zcash
f) IOTA

This does not mean, however, that all countries are aloof to the potential use of cryptocurrencies. The market cap of cryptocurrencies is set to reach 1 trillion dollars by the end of this year and countries such as Venezuela and Russia are actively exploring the notion of launching official cryptocurrencies.

iii.Borders

Most cross border fiat currencies can only be used as a legal tender within the issuing country’s border. International payments present a serious challenge: sending or receiving money across borders often requires conversions as per fluctuating exchange rates and is usually accompanied by a string of fees and taxes.

For instance, to receive $5000 from U.S.A to Kenya through Western Union, you will be charged 1%-2% of the amount you receive, although this may vary depending on the actual amount.

For cryptocurrency, there are no such limitations. It is possible to receive or send crypto coins to any part of the world without institutionalised charges: the cryptoverse exists without any notion of international borders.

iv.Corporality

In terms of tangibility, cross border fiat is both tangible and intangible. In essence, fiat money exists in the form of paper notes and coins: it is possible to physically exchange the actual currency with other users at the time of financial transaction. However, convenient transactional methods such as SWIFT and the Visa payment system exist to transfer large sums conveniently from one account to another without the physical transfer of fiat notes.

Cryptocurrency on the other hand is strictly intangible. It has no physical existence and can only be exchanged amongst users in a public ledger through the blockchain. Since cryptocurrency is decentralized, the process of confirming a transaction and including it to the blockchain, called mining, is significantly different. Mining involves using computer hardware to solve complicated math problems on the block in order to include them on a public blockchain.

v.Portability

Considering fiat money is tangible, it is not easy to carry the money around if you wish to avoid banks or other centralized institutions. It requires physical space, such as a pocket or wallet, to store this money.

On the contrary, cryptocurrency is stored in an online wallet, which can be accessed through a smartphone or a computer. The cryptocurrency wallet promotes safety over traditional fiat money since the chances of your coins being stolen or lost become minimal due to the complex security features surrounding blockchains.

vi.Storage

As stated above, cryptocurrencies can only be stored in a digital wallet. The software program powering these wallets does this by interacting with blockchain technology to allow users to transact and send digital currency. The open accessibility of the information contained and moving to/from these wallets helps ensure transparency throughout the ledger.

Cross border fiat can be stored in financial organizations such as banks. If stored in current accounts, the process of accessing these funds can be as simple as going to an ATM or mobile banking application. While the information stored in bank accounts is not available to the public, these accounts are tightly monitored and regulated by fiscal institutions and the prevailing laws of the land. This makes them susceptible to monitoring by taxation and fiscal authorities.

At the end of the day, cross border fiat differs significantly from cryptocurrency. Interestingly, as most cryptocurrency spaces are still in the development stage, the best judgment of value of any cryptocurrency still comes in comparison to a traditional fiat money such as a dollar or euro. This stems from the relative stability of fiat currencies and their wide acceptance: something that will continue well into the distant future.

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About the author

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Suumit Shah

With over three years of experience in the field of cryptocurrencies, Suumit decided to put his knowledge and experience in front of thousands of people though CoinLogitic. You can connect with Suumit on LinkedIn, Facebook and Twitter.