The whole fiat system will collapse by 2030 due to uncontrolled inflation, unsecured money and government debt. As soon as one of the tech giants, such as Facebook, will be able to overcome regulatory hurdles, cryptocurrencies will gradually gain popularity until they almost completely replace traditional money. These are the conclusions reached by the authors of the "Imagine 2030" report from Deutsche Bank analysts. Let's find out what risks of fiat system are described by the experts, what are the chances of cryptocurrencies to take the place of traditional money, and why the authors of the report are too optimistic.
What future for fiat system analysts of Deutsche Bank predict
The "Imagine 2030" report by Deutsche Bank analysts is not only about cryptocurrencies. It predicts changes in 24 spheres of life in the next decade, including grocery orders, drone delivery, personalized medicine, the fight against the national debt, the technological lag of Europe, the growth of corporate taxes, the spread of electric cars, six-hour working day, the death of plastic cards and much more.
Only a few sections are devoted to cryptocurrencies and the crisis of the financial system. They were written by Jim Reid, head of global fundamental credit strategy and case studies at the bank, and economist Marion Laboure. The document underlines that the report reflects the views of its authors, but not the official position of Deutsche Bank. Thus, Jim Reid predicted the collapse of the fiat system back in 2017, and the new study only unfolds and complements his arguments.
The authors of the study believe that as soon as one of the major tech giants (American Google, Apple, Facebook and Amazon or their Chinese counterparts Baidu, Alibaba, Tencent and Xiaomi) can overcome regulatory barriers, the attractiveness and spread of cryptocurrencies will increase dramatically.
The authors consider the current fiat system "fragile" because of decades of low labor costs, inflation, and an imbalance between high incomes and record levels of debt. Regulators are well aware of this, which is why they are so actively planning the launch of digital currencies from central banks (CBDC).
The main cause of financial volatility is the strategies used to control inflation, which cause fiat national currencies to lose value: harsh regulation, increased leverage, and the printing of unsecured money.
The basis of Reid's argument is that the existing fiat system could only survive today because of the deflationary shock experienced in the 1980s, when China's rapid economic development in the 1970s and the explosive growth of the world's working-age population allowed inflation to be controlled from the outside, as rising labor supply during globalization naturally suppressed wages. But that period is now coming to an end.
Central banks will no longer be able to prevent inflation from rising, because raising interest rates to an acceptable level, given the enormous debt burden faced by economies, would be fraught with serious economic downturns. They would therefore be forced to prioritize low interest rates, which could herald the beginning of the end of the global fiat currency system.
Under this scenario, inflation would increase as the working-age population stops growing and labor prices recover as demand rises and supply shrinks.
Inflation could stimulate demand for alternative currencies. If cryptocurrencies become legal tender in the eyes of regulators, it would ensure their widespread adoption, the report said. As a result, their volatility will decrease, they will gain global reach and we will see increased interest from payment companies and retail giants.
The main advantages of cryptocurrencies over fiat money are that they are decentralized, based on the laws of mathematics rather than governments, relatively confidential, secure, and have minimal transaction fees. All of this will encourage their mass adoption in the coming years. So, based on current trends, the authors predict that in 10 years the number of cryptocurrency wallet users will increase to 200 million.
At the same time, the authors noted that the adoption of cryptocurrencies will create new problems, the main of which are complete dependence of the financial system on electricity (the economy will not work without it), vulnerability to cyberattacks, as well as cyberwarfare.
Deutsche Bank analysts are not the only ones who believe that the traditional financial system will face hard times, while cryptocurrencies will be the solution to all problems. Most crypto-enthusiasts hold a similar point of view. Thus, futurist Thomas Frey is also sure that "cryptocurrencies came for a long time". However, according to his predictions, everything will not change overnight – it will take years to transfer all trading operations to blockchain. By 2030, only 25% of fiat will be phased out.
Venture capitalist Tim Draper has repeatedly suggested that fiat currencies will soon be replaced by cryptocurrencies, including in everyday use, and that only criminals will use cash. In 2017, the expert gave fiat only 5 years.
What is difficult to agree with the authors of the report?
The report of Deutsche Bank analysts is not a full-fledged scientific study, but only a set of assumptions. There is no explanation of the methodology and specific calculations – only naked allegations. The text lacks a definition of crypto- and fiat currencies, and decentralized coins and stabelcoins are considered together.
We at DeCenter found the logical connections in the text odd. For example, the fact that cash is decreasing in the world does not mean that cryptocurrencies will replace it – people continue to pay with cards. Hyperinflation in developing countries does not mean that inflation threatens developed countries. Moreover, inflation, like sovereign debt, is a kind of engine of the modern economy. Japan has been fighting deflation for years, which keeps their economy from growing. Deflation limits economic growth and contributes to social upheaval. The fact that Venezuelans are buying up the dollar en masse does not mean that it will soon replace the national currency.
As far as we understand, the authors are proponents of the so-called "gold standard," which suggests that all currencies must be backed by some precious metal. Its followers often blame the abandonment of the gold standard, the unsecured dollar and the resulting unmanageable inflation for all the troubles. Crypto-optimists still see deflationary bitcoin, whose issuance is limited, as an escape from rampant inflation.
However, this view is inconsistent with the economic consensus and is not supported by practice. The gold standard did not work-it destabilized the global economy. The economy was growing too fast, and there was not enough gold backed money. Governments abandoned the gold standard and started issuing fiat currencies, unsecured by precious metals, because they could be printed as much as the economy needed. Fiat currencies are backed by the entire economy, not by a single commodity, such as gold.
Tying money to an external parameter (like gold) deprives regulators of the ability to adapt the economy to change, taking it out of control. Modeling a situation in which cryptocurrencies become the global standard shows that the economy would become even more unstable than it is now, but regulators would lose leverage over it. And the economy would self-regulate at the expense of higher unemployment, lower wages, and an economic downturn.
Moreover, in May 2018, the European Parliament Committee on Economic and Monetary Affairs (ECON) issued a report on cryptocurrencies titled "Virtual Currencies and Central Bank Monetary Policy: Future Challenges." The conclusion of the reports shows that cryptocurrency will not replace fiat currency, even in the long term.
Bitcoin was created as a digital analogue of gold. Its issuance is predetermined, which means it cannot adapt to the needs of the economy. It was supposed to create a deflationary effect, but that only makes it a commodity and does not allow it to be used as money. With other cryptocurrencies the situation is similar.
Cryptocurrencies: not money yet, but an asset
Another claim to the report is that the authors clearly believe that modern cryptocurrencies can replace traditional money in everyday settlements. However, this claim is very controversial.
Cryptocurrencies are not really money. Regulators call them crypto-assets (crypto asset) for a reason and apply to them the legislation on securities, assets, goods or property.
If cryptocurrencies are recognized as full-fledged money, then only as a modern form of private money – a digital analogue of those coins that were issued by individual cities or principalities centuries ago (but unlike their metallic predecessors, cryptocurrencies are used globally, ignoring national borders). Before there were unified national currencies and clearing houses, banknotes could only be exchanged at the bank that issued them. The same is true for cryptocurrencies, which no one has a monopoly on creating. Therefore, they are poorly suited for building a whole economy.
Cryptocurrencies are financial assets, not full-fledged currencies, and they will not be able to perform the basic functions of a currency. Without getting into economic subtleties, a currency is always backed by a lender of last resort. In markets, the government is the only possible such creditor. When we buy cryptocurrencies, we are buying an asset that is listed on cryptocurrency exchanges. Yes, we can buy goods and services with it. But so far there are very few such examples – cryptocurrencies are hardly used to perform the function of money.
Cryptocurrencies are on their way to becoming money, but they will not necessarily complete this process to the end. Especially the first decentralized generation like bitcoin. Decentralization is good for international and anonymous payments, but bad for mass use. Until the technology is mature enough to handle thousands of transactions per second at little cost, cryptocurrencies cannot even claim to replace fiat. Despite breakthrough technology, cryptocurrencies cannot yet process the same number of payments as Visa or Mastercard, which process up to 65,000 transactions per second at their peak.
The transition to cryptocurrency payments, if it happens, will stretch for decades. The main reasons for this:
Speculation and sharp fluctuations in exchange rates.
Moving all fiat settlements to blockchain would cost astronomical amounts of money. There is still no clear understanding of how much it will cost to implement the technology and whether it is even worth doing it at all.
Decentralization will almost certainly be an obstacle to legalizing cryptocurrencies. For financial regulators around the world to recognize cryptocurrencies as a legal means of payment, decentralization will almost certainly have to be abandoned, subject to the will of the central issuing authority.
Digital currencies from banks (CBDC) – the future of the financial system
Cryptocurrencies are unlikely to replace currencies issued by central banks, but they may issue their own digital currencies – CBDCs. They may turn out to be the future of the global financial system. CBDCs will allow commercial banks and their clients to pay each other directly, bypassing intermediaries, but will lack the drawbacks of decentralized cryptocurrencies – volatility and uncontrollability.
Such cryptocurrencies may well be issued and recognized by regulators: we have repeatedly written about digital currencies from central banks, digital yuan, digital dollar, BRICS cryptocurrency. Traditional financial institutions have realized the benefits of crypto and are trying to incorporate it into their processes, and banks are starting to use CBDC for international settlements.
The transition to digital currencies by central banks would reduce the number of intermediaries, commissions and timing of transactions, as well as greatly simplify international transfers.
However, the risks are also great: the loss of central banks' full control over currency and unpredictable changes in their role, the fall of national currencies of developing countries, the destruction of the traditional system of commercial banks, the reduction of cash to a minimum, the almost complete disappearance of decentralized cryptocurrencies from the market. Therefore, the introduction of CBDC, if it does happen, will not be quick.
Global stackablecoins are the most dangerous for fiat
DeCenter believes that "second-generation" cryptocurrencies – global steblecoins from Facebook and Telegram – are the most dangerous for the traditional financial system. These projects don't just offer cryptocurrencies, but also create payment ecosystems in which paying with tokens will actually be more convenient than paying with fiat money.
For this reason, regulators recognize staplecoins, including Libra, as a growing threat to the global economy and financial stability. After all, if they become popular, central banks will be deprived of significant instruments of influence. So financial authorities in various countries are seeking to avoid their launch by tightening the regulatory screws.
The financial system will restructure, but not so radically
For now, cryptocurrencies are an addition to, not a replacement for, the global monetary system. They may indeed become widespread in a few decades, but they are unlikely to shake fiat currencies and certainly not replace them.
It is much more likely that we will live in a mixed economy, where traditional and cryptocurrency money will coexist. At least the next generation will still be able to pay for a cup of coffee with real coins and bills, not tokens.
In everyday payments, people will most likely prefer traditional money. But cryptocurrencies will be popular for international payments and settlements in decentralized ecosystems.
Most likely, current crypto-assets will be replaced by technically better ones. They will not necessarily be built on blockchain, perhaps they will run on hashgraph or other technology we have not yet heard of. It is important to understand that future cryptocurrencies will be subject to government regulation and will probably be issued by central banks themselves.