Can Cryptocurrencies Replace Fiat Currency?

6 min readMay 6


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On April 23, the Reserve Bank of Zimbabwe (central bank) announced that as part of its efforts to stabilize the local currency, it will introduce a gold-backed digital currency to be used as legal tender for transactions in the country.

The Central Bank of Zimbabwe stated that the introduction of the digital gold currency would be the first step in utilizing the country’s gold reserves to stabilize the Zimbabwean currency, the Zimbabwean dollar.

This measure will allow those holding small amounts of Zimbabwean dollars to exchange their money for the digital gold currency tokens, enabling them to store value and avoid exchange rate fluctuation risks.

On May 5, the Reserve Bank of Zimbabwe (central bank) announced that it would begin selling gold-backed digital tokens to investors next week, with a minimum subscription price of $10 for individuals, and $5,000 for businesses and other entities.

These two announcements undoubtedly sent shockwaves through the global financial and cryptocurrency markets, as the integration of digital currencies into fiat money has been a research direction worldwide and has faced significant skepticism. Zimbabwe will be the first country to actually implement digital currency as legal tender, while other countries remain in the pilot stage.

So, is it really possible for digital currencies to replace fiat currencies?

Previously, the American country of El Salvador officially announced Bitcoin as its legal tender, which delighted those who are passionate about integrating digital currencies into the fiat system. However, this may be just wishful thinking and hype, with the possible aim of stimulating the continuous rise of virtual digital currencies to obtain profits or returns.

Cryptocurrencies like Bitcoin do not possess the stability, low inflation rate, global acceptance, and interchangeability that fiat currencies have. They cannot be compared to central bank digital currencies, and their negative impact on the financial system and individual investors is clearly visible. Speculation or efforts to make cryptocurrencies legal tender are worth being cautious about, and such actions will ultimately be futile. This is because the underlying logic does not conform to economic common sense, and cryptocurrencies like Bitcoin do not have advantages over fiat currencies in the monetary system.

In other words, for digital currencies primarily based on cryptocurrencies to become legal tender within the global mainstream, they must address three pain points:

1. Consensus: At least 40% of the population must have consensus recognition of a particular cryptocurrency;

2. Stability: Legal tender requires strong stability, which most cryptocurrencies currently lack, with the exception of a few stablecoins, such as the US dollar-pegged USDT. Stability is the most critical pain point to be addressed.

3. Interchangeability: Cryptocurrencies must shed bond-like attributes and achieve 100% interchangeability to enter the realm of legal tender.

The vision of digital currencies becoming fiat currencies must break away from the speculative asset attributes dependent on sovereign currencies.

Some small countries’ measures to integrate digital currencies into their legal tender system are due to the inadequacy of their financial and economic systems. Although innovation in the monetary system is inevitable in modern financial development, the purchasing power of “currency” for digital currencies largely depends on exchanging them for fiat currencies, and their value or exchange rate is determined by the demand from fiat currency holders.

However, this creates information asymmetry in reality, where some people take advantage of the information gap in digital currencies to make profits, further damaging the stable development of the digital currency market. The current speculative ups and downs of digital currencies have caused incalculable losses for some non-professional investors, disrupted the order of currency market development, and even hindered the promotion and system building of central bank digital currencies in the financial system.

Therefore, regulatory authorities in major world economies are studying the direction of digital currency development and actively guiding cryptocurrencies towards central bank digital currency systems, playing a complementary role to sovereign currency systems.

Progress in the integration of digital currency with fiat currency.

Currently, except for a few small countries facing financial collapse (such as Zimbabwe), mainstream countries’ plans for legal digital currencies are still in the research stage and have not been issued in practice. However, from the published research results, a certain consensus has been reached on the basic characteristics of legal digital currencies. Legal digital currencies have the following economic characteristics, which are significantly different from electronic currencies or cryptocurrencies.

1. Legal digital currencies are equivalent in value to existing legal currencies

As a new payment method issued by central banks, legal digital currencies are the “central bank version” of electronic currencies. Their main purpose is to replace cash for payment and settlement. Therefore, legal digital currencies do not need to have an independent unit of account but should continue to use the existing legal currency’s unit of account. Their value is equivalent to that of banknotes and is generally stable.

2. Legal digital currencies are classified as cash in circulation

The target of legal digital currencies is banknotes, and the legal digital currencies held in account holders’ accounts are not deposits of any bank-type financial institution. Thus, from an economic perspective, they belong to M0 (cash in circulation). Legal digital currencies held in account holders’ accounts cannot be used for lending, and there is no monetary investment relationship between the holder of legal tender and the institution that manages the legal digital currency. As a result, holders do not face credit risk and do not earn interest from holding legal digital currencies.

3. Legal digital currency services should be free of charge

As an alternative form of cash, legal digital currencies are a basic public service for society. The public should not pay fees for using national legal currencies. Therefore, legal digital currency payments and settlement should be free for users. Commercial banks can request fees generated during the operation and management of digital currency business as agents for the central bank.

However, in actual use, cryptocurrencies generate payment and settlement fees. For example, with the growth of transactions across the Bitcoin network, transferring Bitcoin requires paying “mining fees” in the form of Bitcoin to participating accounting nodes. The more mining fees are paid, the faster the transaction is confirmed; otherwise, it may take several hours to get a transaction confirmation.


Based on the progress of integrating digital currencies with fiat currencies, a question arises: Is it digital currencies becoming fiat or fiat currencies becoming digital?

It can be said that the integration of digital currencies with fiat currencies currently being studied by various countries and the integration envisioned by cryptocurrency practitioners are two completely different concepts. The former simply transforms fiat currencies through blockchain technology and the digital currency transition.

Therefore, the integration of digital currencies (cryptocurrencies) with fiat currencies is still in the exploratory stage, and the road ahead is long!

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