There are thousands of currencies used for financial transactions. 180 currencies are recognized as legal tender across 195 nation-states [1]. Beginning with the introduction of Bitcoin in 2009, there are now tens of thousands of cryptocurrencies in circulation [2]. While cryptocurrency payment volumes represent a small fraction of total global cross-border payments [3], crypto payment volumes are expected to grow significantly over time [4].

With the proliferation of currencies and the increasing interconnectivity of our global economy, the notion that individuals and businesses should rely solely on a single national currency for all their financial transactions is becoming outdated. How should individual actors in the modern economy decide what currencies to use for their financial transactions? How will the future currency landscape — across national currencies and cryptocurrencies — evolve over time?

To answer these questions, we summarize how national currencies work and how national currencies can become global reserve currencies, i.e. currencies that are held in significant quantities by central banks and other monetary authorities for the purpose of international transactions, investments, and to support the stability of the global economy. We will end by positing a hypothesis for how the future global currency landscape might evolve, and how cryptocurrencies might play a role. Let’s begin.

How national currencies work

As previously mentioned, most nation-states today have their own national currencies [5]. Different countries experience different domestic economic conditions. Controlling monetary policy through a national currency is an important lever countries can use to adapt their local economies to domestic needs. Nations issue currencies so they have increased economic sovereignty and control.

The value of a national currency constantly evolves as the needs and pressures facing a nation change. The basis for currency valuation tends to follow a general pattern across national currencies. We call this pattern the national currency valuation cycle.

In the currency valuation cycle, currencies move from hard money to paper money to fiat money and then back again [6].

Most currencies start their lives as hard money, i.e. valuable resources such as gold and silver. Hard money gives currency holders confidence in the value of their currency due to the value of the hard asset. However, because precious metals are difficult to carry, most currencies eventually transition from hard money to paper claims on hard money. The value of the paper currency is tied to the underlying hard asset, and paper currency is expected to be convertible to the hard asset at any time.