Are currencies losing their currency in our modern digitised world?

19 Aug 2019

The rise (and fall) of cryptocurrencies has forced global financial markets to think more closely about how they classify and use currencies in the modern context.

Regardless of which economic theory investors ascribe to, be it classical, Austrian, supply-side or anything in between, the role and relevance of currencies in the modern economy has become a hot-button topic of debate since cryptocurrencies burst onto the scene.

Investec Wealth & Investment’s Global Investment Strategy Group gives their opinion on whether currencies will become defunct.

Are currencies losing their currency?

The fiat fundamentals

Depending on your economic orientation, investors generally view fiat currency as either a tradable asset, a store of value, or a simple transactional medium. However, centralised control of fiat currencies and the influence of global economic factors make them prone to inflation. 
 
“When considered as a mechanism for exchange between two parties, currency volatility should, in theory, be a reflection of the difference in interest rate policies between them, adjusted for people’s faith in a specific fiat currency,” suggests Chris Hills, Chief Investment Officer at Investec Wealth & Investment UK.
 
“Traditionally, when currencies lose value, investors use gold and the dollar – the global reserve currency – as safe havens.”   
However, that dynamic is changing as China manoeuvres to make the yen another reserve option in the long-term, and proponents of cryptocurrencies suggest that the decentralised nature of the system insulates it from the effects of inflation. 

 
“I doubt whether cryptocurrencies, as a collective, will ever replace fiat currency,” continues Hill. “That’s not to say it couldn’t, but the means of increasing supply to meet demand concerns me. It appears to be fairly easy to create new versions, which adds new supply. In theory, you shouldn’t be able to do that with real currencies and you clearly can’t do that with gold.”

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Digital currency for a digitised world

While Phil Shaw, Chief Economist at Investec UK, feels that fiat currencies will eventually disappear in an increasingly digitised world, he believes that one of the issues that cryptocurrencies face is that no one is sure whether they’re a means of transaction or a store of value. 

“And without centralised regulations, there's no rules governing who supplies them and who determines how much is created. As such, as they grow in prominence as a financial instrument, authorities will increasingly attempt to regulate them.”
 
In contrast, John Haynes, Head of Research and Chairman of the Global Investment Strategy Group at Investec Wealth & Investment, believes that there’s nothing inherently wrong with existing currencies and that cryptocurrencies are merely an interesting diversion. 

 
“As such, there is currently no incentive to switch the mediums we use to transact. Cryptocurrency technology is, in itself, unproven in terms of its efficacy as a transaction enabler, so it doesn't meet any immediate need. There are also questions around its security. That's why I believe fiat currencies are here to stay.”

Beyond a medium of transaction

Annelise Peers, Chief Investment Officer at Investec Wealth & Investment in Switzerland, adds that there is no legal structure behind cryptocurrencies like Bitcoin. “That means you have no recourse if you lose your money. If something goes wrong, nobody can actually help you.” 

However, it's in the application of the technology that underpins cryptocurrencies – the blockchain – where the true potential likes, believes Peers. 
“It acts as a kind of ledger, which has myriad applications, particularly in the financial sector. I think the blockchain will, therefore, play a pivotal role in the future of money as it holds the potential to disintermediate central banks, but that would possibly only happen much further down the line. Outside of blockchain's application, I don't see Bitcoin as a competitive or compelling investment in its current format.”