Currency Substitution in High-Inflation Economies: Are Cryptocurrencies Emerging as an Alternative to Fiat Currencies
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In recent years, the global monetary system has faced heightened instability, particularly in economies struggling with chronic inflation, currency depreciation, and a lack of trust in domestic monetary authorities. This paper examines the evolving phenomenon of currency substitution, traditionally characterized by "dollarization"—the shift toward stable foreign fiat currencies to preserve purchasing power. However, with the rise of decentralized financial technology, cryptocurrencies have emerged as a novel, technologically advanced alternative for economic agents seeking a store of value independent of central bank policy. This study explores the drivers behind the adoption of digital assets in high-inflation contexts, comparing them with traditional foreign exchange substitution. Through a review of current literature and economic trends, the research investigates whether cryptocurrencies serve as a complete replacement for fiat money or as a supplementary tool for financial hedging. The analysis highlights a critical trade-off: while cryptocurrencies offer autonomy and accessibility, their price volatility, regulatory uncertainty, and limited acceptance as a medium of exchange hinder their ability to fully perform the functions of money. The paper concludes by discussing the implications of this "digital dollarization" for national monetary policy and financial stability, filling a gap in the literature by integrating traditional substitution theories with the modern digital asset landscape.
Keywords
Cryptocurrencies, Currency Substitution, Decentralized Finance (DeFi), Digital Assets, Dollarization, Economic Trust, Financial Stability, Inflation, Monetary policy, Store of Value