Cryptocurrencies completely replacing fiat is the stuff dreams are made of for many crypto purists. However, a government need to control currency means complete replacement is unlikely to ever happen. A more likely scenario is one in which fiat and cryptocurrency exist side-by-side with free exchange on-the-fly. Call it a convergence if you like.
Such a convergence is actually closer than most people think. And it is getting closer every day. The most brilliant minds behind blockchain, the same minds that created the 'blockchain, not bitcoin' movement a couple of years ago, see no reason why fiat and crypto cannot coexist in an environment that facilitates seamless transactions.
Numerous products have come about as a result of their work. One of the more recent is a new trading and settlement platform that will allow traders to deal in both Ether and British pounds on the same blockchain. That is just the start. Once the platform is more fully developed, its backers say there is no reason that dozens of currencies, both fiat and crypto, cannot be traded on the blockchain.
From the minds of RBS engineers
This new project is being rolled out as the Digital Asset Shared Ledger (DASL) on the Corda Network. It is the brainchild of a team of engineers who used to work for the Royal Bank of Scotland (RBS). These engineers have taken traditional trading and settlement protocols and aligned them with the blockchain philosophy of open, distributed ledger systems.
DASL works by employing two mirror networks that seamlessly and simultaneously process transactions as they occur. One network is the Corda Network that handles the crypto side of things. The other network belongs to a brokerage the team has brought on board. The brokerage will act as the custodian of customer assets, both fiat and crypto.
Why two networks? The Corda Network will process transactions in much the same way the Bitcoin network does. Its primary responsibility is to facilitate crypto-to-crypto transactions. For example, you might have a customer wanting to convert Ethereum to Bitcoin at some point down the road.
The brokerage network is tasked with handling settlement between banks and any other traditional financial entities that might be involved in transactions. Think payment processors, for example. The ledgers on both networks will mirror each other so that fiat-crypto transactions can be made seamlessly as well.
This convergent system is known as layer 2 settlement. It is a system that can process and finalize transactions in mere minutes. And thanks to its capabilities, it all but eliminates the lag between fiat and cryptocurrency transactions. Customers will be able to freely move between multiple cryptos and fiat currencies in nearly real time.
Lots of work to do
Of course, there is still plenty of work to do in getting DASL fully up and running. And once it is up, you can bet development will continue until the platform reaches maturity. What engineers decide to do with it between now and then will be fascinating to watch. Remember that the goal is total convergence.
Complete and total convergence becoming mainstream is going to require a tremendous amount of effort and cooperation. As DASL engineers have found out, convergence is not something that can be accomplished on the cryptocurrency side alone. The crypto community has to partner with the traditional financial sector to make it all work. That may be a sticking point.
The other thing engineers are up against is technology. Total convergence is going to require a near total adoption of blockchain by the banking sector. Convergence does not work without it. Where there is no blockchain you cannot have mirrored ledgers capable of facilitating near instant transactions. So again, there really is no choice here.
The good news is that convincing banks to adopt blockchain technology has not proven difficult thus far. Even central banks that do not want anything to do with cryptocurrency still see the value of blockchain. It is a technology that promises to transform the banking sector and eventually usher in the era of digital fiat.
What convergence will look like
Complete and total convergence between fiat and cryptocurrency is getting ever closer. The DASL project is evidence of that. But DASL is not alone. There are other projects in the works within the crypto community, and we know that a small number of national governments are already working on creating their own digital currency projects.
The question is no longer one of 'if' convergence will ever happen. It is going to happen. It is just a matter of when it occurs and what it will look like once it gets here. In light of that, it is always fun to speculate. So let us imagine what convergence might look like just a few years from now:
1. Daily commerce
One of the most disappointing aspects of cryptocurrency thus far is that it has not gained acceptance as a vehicle for daily commerce. Yes, growing numbers of merchants are accepting Bitcoin payments. But the number of such merchants is miniscule compared to the total number of merchants doing business around the world.
Convergence aims to change that. Once mature, convergence will offer enough benefits that it will not make sense for merchants to not be on board the cryptocurrency train. This suggests that you and I might be engaging in daily commerce using a variety of fiat and cryptocurrencies.
Could this lead to an eventual global currency that supersedes all others? In theory, yes. But practically speaking, a global currency is still a long way off. National governments are going to need a lot of convincing before they cede control of their own currencies to a global replacement.
2. Cryptocurrency payroll
A totally convergent marketplace should make it possible for people to accept their weekly pay in either fiat or crypto. A small number of companies are already doing this, but widespread adoption is far from reality. In a completely convergent environment, nearly every company would offer the option.
Moreover, convergence would dictate that the crypto option is not limited just to Bitcoin or Ethereum. Rather, workers could choose from any one of dozens of crypto options - or their country's native fiat.
3. On-the-fly conversion
Complete and total convergence should help to further blur the line between different currencies and their values. It should make it possible to convert from one currency to another on-the-fly, in much the same way an American visiting Canada can use U.S. dollars to make a purchase and receive Canadian dollars in change.
On-the-fly conversion would dictate that people do not have to maintain a certain level of one particular currency over another. They can keep whatever currency they prefer with the full expectation that it is freely exchangeable at any point of sale.
4. New digital fiats
A lot of people who have thought through the convergence idea suggest that it will not become reality until national governments start replacing their paper and minted fiat with a digital equivalent. They make a good point. If convergence relies on blockchain as its foundation, it makes no sense to continue working with printed bills and minted coins. Digital fiat is the way to go.
This might explain why countries like the U.S., Canada, and the UK have been quietly working on developing cryptocurrencies for some years now. It will be interesting to see how they choose to pursue the crypto concept.
One way to do it is to simply replace bills and coins with digital tokens. Another way is to do what Venezuela did in 2018: create a brand-new cryptocurrency that exists separate from fiat but is still considered equal to it. If Venezuela's lack of success thus far is any indication, the model doesn't seem to work well.
5. New regulatory regimes
There is a downside to complete convergence: achieving it is going to require entirely new regulatory regimes. There is no other way to marry fiat and cryptocurrency and still protect the rights of individual consumers. So rather than oppose regulation at every turn, those hoping to achieve convergence should focus on finding ways to work productively with regulators to moving things forward.
It is possible that regulation will only exist at the national level. This is to say that national governments create their own regimes in order to regulate convergence in a way that is compatible with their fiats. However, it is equally possible that a global regulatory regime will be developed.
Such a regime would severely test national sovereignty. After all, a nation's fiat and economic control are the foundations of its political sovereignty. Take away those foundations and any lines of political delineation suddenly disappear. We say all this to suggest that regulation may be the biggest hindrance to eventual convergence.
Complete and total convergence between fiat and cryptocurrency is getting closer. As the world watches DASL's progress, you can bet the other engineers will be learning from it and applying the lessons to their own projects. It could be that convergence will arrive within the next five years. And if not within five years, it is hard to imagine it taking more than a decade to implement.