When discussing the failure of fiat currencies, countries that have a deteriorating economy are often mentioned. Over the past few decades, inflation levels and intermittent economic crises in countries such as Venezuela, Zimbabwe and Argentina have been alarming. These conditions have consolidated the scenarios in which the Central Bank's Digital Currency (CBDC) can be applied.
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However, many developed countries have to deal with similar crises while continuing to rely on fiat currencies to run their economies. For example, since 2009, several countries such as Spain, Ireland, and Portugal have been unable to repay government debt without assistance from the European Central Bank, the International Monetary Fund, and other Eurozone countries.
History shows that fiat currencies may collapse. However, cryptocurrencies and the solutions they provide are still under development. According to Thomas Mayer, a former chief economist at Deutsche Bank, this emerging alternative to paper money could prevent the ultimate boom-depression cycle and wave of credit bubbles created by fiat currencies.
In a recent article written for German news magazine Focus, Mayer announced that the euro was in danger of depreciation, stating that limiting digital euros as a small substitute for paper currency would hurt the European economy.
At present, the central bank has little incentive to change the way it operates. The ability to fund investments without using savings has huge short-term benefits, and the consequences are hard to ignore. The ability to make money out of thin air also allows them to provide governments with new funding by buying bonds, and countries don't want to lose that power.
Bitcoin is also not perfect. Low market penetration and high volatility make cryptocurrencies far from the ideal means of transferring value. Bitcoin's scalability issues also prevent it from surpassing mainstream adoption, making it a niche currency with unstable purchasing power.
Although volatility can be addressed by using stablecoins, achieving scalability today requires a more centralized approach. Meyer claims that the European Monetary Union may become more stable after issuing the CBDC and may reduce its debt ratio to 25% of collective GDP.
It could also prompt banks to collect savings and pass them on to borrowers instead of printing money backed solely by financing loans.
Despite the shortcomings of cryptocurrencies and stablecoins, they still seem to be a better long-term option compared to the fragile fiat currencies we already take for granted. While it is clear that countries already suffering from the use and abuse of their currencies would be better off adopting better forms of currency, pre-emptive action by more developed countries could protect them from the effects of economic collapse.