Elon Musk was making headlines in crypto news over his answer to a unexpected question about cryptocurrency during a relatively recent interview with ARK Invest. The entire podcast can be heard on ARK’s website here.
Musk’s answers on the crypto question included some jokes and revolved around the energy intensiveness of cryptocurrencies, like Bitcoin and why that would not be a good use of Tesla’s resources. Any idea that Musk stated crypto is going to replace paper currency is coming from this statement:
“Yeah, it bypasses currency controls…Paper money is going away and crypto is a far better way to transfer value than pieces of paper that’s for sure. That has its pros and cons.” -Elon Musk
This was in response to the interviewer stating that many transactions in Africa are being done using BTC in order to avoid the prohibitive fees of transferring between different fiat currencies.
One of the biggest problems with the opinions amongst cryptocurrency communities are the frequently encountered unrealistic opinions or outright lies. Crypto news sites have picked up on this quickly with extremely clickbait articles. Let’s get it straight, Musk DID NOT say that crypto is going to replace paper currency. Even if looking at just the logic of the statement, it takes quite a leap to arrive at this conclusion.
The Basics of How Fiat Moves
Understanding the conversation on the movement of currency and the costs associated with the process is important in understanding any types of benefits cryptocurrencies have over fiat currency and how it is transferred.
Current traditional banks process payments using multiple methods to ensure accuracy, speed, as well as the best possible method of managing the cost. Here are some basics of the movement of currency.
The easiest type of transfer is of course if the transfer is occurring within the same bank.
If both Bob and Alice have an account with ABC Bank, then the bank can digitally log the debit and credit from each respective account. This is only a matter of the bank updating their own records.
The issue then evolves when we begin considering transfers between different banks. It is obviously not productive if banks are constantly moving physical cash back and forth and thus arises settlement accounts.
If Bob has an account with ABC Bank and sends $10 to Alice’s account at XYZ Bank, it would not make sense for the banks to actually transfer this money at that point in time. Having to confirm the money is instantly transferred between the banks and then confirmed as being debited and credited from each respective account would not only affect transfer speeds, but also costs.
The process utilized is called correspondent banking. In this process ABC Bank and XYZ Bank hold accounts with each other. When Bob sends $10 to Alice, ABC Bank debits the account they hold with XYZ Bank while XYZ Bank does the reverse by crediting their account with the $10 before also reflecting that onto Alice’s account.
Instead of Bob owing $10 to a bank in which he does not hold an account, the real debit/credit is between the two banks and is later settled. This system allows banks to quickly process transfers for their account holders with other banks, but obviously has flaws.
First issue to arise is that this would require banks to hold accounts with other banks around the world. With accounts all over the place, banks would have money tied up in settlement accounts, causing problems with liquidity.
This of course is an issue that is being addressed with multihop channels in Ethereum’s planned Raiden Network so as to prevent the necessity of all parties to open payment channels with every single user.
Another major problem with this settlement process is the risk, as seen with the bankruptcy of Herstatt Bank in 1974. Due to some poor decision making, Herstatt Bank was drawing deep in the red, with losses of 470 million Deutsche Marks compared to capital of 44 million Deutsche Marks.
This deficit stirred German regulators into action and Herstatt Bank was forced to liquidate their assets. Due to the processes in place, banks had released settlement payments to Herstatt during the day. Although payments issued towards Herstatt Bank had been received at start of day, the corresponding payments were never released due to Herstatt’s closure at 16:30 German time.
Central Bank Transfer
In order to resolve the issue of multiple correspondent accounts as well the risks involved with direct settlement transfers, the idea of the central bank was born. A country establishes an institution which controls the national currency, the supply, or even the interest rates for the respective currency.
Instead of individual banks having to open settlement accounts with each other, they can now open a settlement account with the central bank of each country. The central bank is then able to facilitate the transfers between private banks.
By consolidating these settlement accounts into the central financial authority, the logistics for each private bank is simplified. This also reduces the risk of losing settlement payments if a private bank fails, as the central bank is in charge of settling those accounts within their system.
This is a very simplistic breakdown of the movement of fiat currencies and does not cover all the bases. Regardless, it should be enough to understand what Musk is referring to when he is talking about paper currency being a poor means of transferring value.
Transfer Fees and Cryptocurrency
Musk’s statement can really be broken down into three parts and highlights his knowledge on the transfer of money around the world. This of course makes a lot of sense considering his past experience with Paypal.
Speaking with a Chinese resident provides a great example of the type of currency controls that become problematic for people. China limits the amount of currency you are allowed to transfer as well as exchange if with a specific pair. For example, Chinese residents are typically limited to purchasing a total of $50,000 USD per year. Once that limit is reached, the CNY/USD pair is locked to the person without the utilization of some loopholes or maneuvering.
If utilizing cryptocurrencies, you have the ability to completely bypass these types of checks and balances in the initial transfer process.
Another type of control involves the amount of money you are transferring. In the US, it can vary between bank, but banks typically allow up to $25,000 wire transfers before additional fees are tacked on.
When again comparing to cryptocurrency, the fee you pay is dependant on fees for the blockchain and not the amount of value for your transaction, giving it an edge over current conventional processes.
Crypto Over Paper
The main point of Musk’s statement that is being latched on to is that paper currency is not only going away, but also that cryptocurrency is much better at transferring value.
Whilst both parts of this can be true, it does not mean cryptocurrencies are replacing paper currency. It is very simple logic that is being mutated by crypto news sites.
Just because paper currency is going away and is inferior to cryptocurrency in some ways does not mean that cryptocurrency defaults as the replacement. If the current fiat currency system switched to an entirely digital currency, this could also equally become paper currency’s replacement.
Jumping to the conclusion that cryptocurrencies are the automatic replacement of paper currencies is a very optimistic position.
The Pros and Cons of Crypto
This part of Musk’s statement in fact requires the most consideration because of how much it will or will not refer to.
As much as crypto enthusiasts want cryptocurrencies to replace existing currencies, there are still many hurdles that need to be overcome. These are the obvious real world and current benefits of cryptocurrencies over fiat currencies.
- Bypass currency controls
- Potentially lower transfer fees
- Potentially faster transfers
As the current crypto sphere includes numerous projects with different aims, there are many projects which are still developing their solutions. Although some projects might be specifically targeting functions such as transfer speeds and costs, others may focus on anonymity.
Regardless of which project we want to use for comparison, each will have its flaws even when comparing to current methods of transferring traditional currency.
The only guaranteed advantage cryptocurrency has over the current currency transfer processes is its ability to bypass currency controls and depending on the project, do so anonymously. Whether or not the speed and cost of the transfer beats out the traditional system will depend on a project or its blockchain at the time of transfer.
Inevitably, how the transfer is performed will bring in many more moving parts that begin to affect aspects of cryptocurrency that are advantageous. Figuring out the best way to handle a cryptocurrency transfer becomes its own convoluted process, at least with the current state of cryptocurrencies.
Think about cryptocurrencies in their current state as well as the logistics necessary to move large amounts or even small amounts of these cryptocurrencies.
Imagine you needed to transfer a value of USD 1 to a friend using BTC. At time of writing, this would mean you need 0.0002649041709161711 BTC. Being able to purchase this amount and then actually transfer it at the moment is difficult if not outright impossible. Ask people in the cryptocurrency community and they will mock you for even trying to transfer such a small amount.
Of course, as many in the sphere state, if you do not hold your private keys, you do not own the coins. However, it is near impossible to deal with small values unless you are purchasing Over-The-Counter (OTC) transactions. It also ignores the fees associated with the transfer of these low amounts through the blockchain.
There are projects which focus on very low or no transfer fees that address some of these issues, however, these specific solutions only work in specific scenarios for multitudes of reasons. Most of the current projects capable of these low value low fee transfers are because the fiat value of each coin is also low, which means any very high transfers risk affecting the value of the coin and thus affecting the transfer itself. More popular low transaction fee projects like NANO for example, when calculating current value and total circulating supply, only equates to a total market value of USD 115,686,431 which disqualifies it for high value transfers.
When considering high value transfers like those most likely being discussed in the ARK interview, then other aspects of cryptocurrency shine. Primarily with the ability to bypass currency controls if these are in place for specific currencies or jurisdictions. However, at these values, other factors must be considered.
Although less of a factor with high value coins, you still run into the issue of needing to first acquire large amounts of the cryptocurrency for the transfer.
When looking at forex transfers, the current fiat currency system typically involves fees to process the transfer itself as well as the fees associated with converting back into a fiat currency.
This highlights one of the main problems with cryptocurrency in that use of a cryptocurrency as a form of payment relies on the ability to convert it back into a fiat currency for actual use. Until adoption reaches critical mass, this will remain the primary hurdle for cryptocurrencies.
Although traditional fiat currencies can be volatile, they do not suffer from the same volatility as cryptocurrencies, which can see extreme price fluctuations in a short amount of time. As such, the risks of not immediately converting cryptocurrency transfers back into fiat quickly are exacerbated.
World of Crypto
Contrary to the conclusions and assessments of cryptocurrency news sites, cryptocurrency has a long journey ahead in order to be remotely capable of replacing fiat currencies.
With the right cryptocurrency and the right circumstances, they can very much be a better tool for the transfer of value, especially if across borders. However, the circumstances required to make this true will not apply to the vast majority of users or even many of the current projects being developed.
There are currently plenty of useful methods around the world when it comes to transferring fiat currency. The Automatic Clearing House (ACH) system of transfers for example are designed for high volume low value transfers. An average user can complete these types of transfers without ever paying any fees. Processing times vary, but the ability for same-day transfers is there and depends on a banks policies. ACH is however limited to a relatively small number of nations.
In China, where mobile payment systems such as AliPay and WeChat Pay have taken over payment processing, transfers are incredibly easy, fast, and cheap.
Besides the fact that bank transfers in China are already near instant and without fees, Alipay provides an additional path of easily transferring up to CNY 20,000 per month to any bank card/account before a small fee of %0.10 sets in.
Similarly, WeChat Pay allows users to withdraw cash from their WeChat Wallets to bank connected bank accounts with a minimum fee of 0.10 CNY or 0.10 percent for each 1000 CNY (1 CNY).
Mobile payments in China have taken over the payment industry in such a way that many businesses no longer possess the ability to process a bank card. Food stalls on the street have QR codes physically printed out and taped to their stalls, taxi drivers have laminated QR codes on paper, even the homeless in China are sporting small QR code printouts.
You can pay your rent, your phone bill, food delivery, and many other fees using these funds without the need for withdrawal.
These types of solutions around the world highlight the problems with the notion that cryptocurrency will replace fiat currency. Barring a paradigm shift of massive proportions, it is best that cryptocurrency enthusiasts keep their excitement grounded.
Exaggeration of the benefits or possibilities in the cryptocurrency community risks deterring adoption from new users. As long as a currency is stable enough that the average user knows they will be able pay their rent and feed their families, the type of currency is irrelevant.
If or when cryptocurrencies overtake current monetary systems, it will be due to the actual gains they make over traditional systems.