The biggest argument against cryptocurrencies is that unlike fiat currencies, they do not have the backing of any government. As multiple rating downgrades show, government support isn’t what it used to be.
Thumbs down to Britain
Moody’s downgraded the credit rating of the United Kingdom from Aa1 to Aa2 on September 22, citing weakening public finances and calling into question the Government’s fiscal consolidation plans. The pound sterling, which had been slowly recovering following the Brexit debacle, promptly lost ground after the rating downgrade. Other rating agencies like S&P and Fitch had downgraded the UK to AA in 2016.
The UK suffered its first ratings downgrade, from Moody’s and Fitch, in 2013. This ended a 35 year period of being rated AAA, and it’s been a downward slide ever since.
China in a soup
A day before the UK was downgraded by Moody’s, S&P cut the sovereign rating of China, downgrading it from AA- to A+. According to S&P, China’s prolonged credit growth had increased its economic and financial risk. The rating cut brought S&P’s rating in line with other rating agencies. It is ironic that China had taken action against ICOs and cryptocurrency exchanges shortly before its own rating was downgraded.
US and Japan drift downwards
Though the sovereign ratings of the United States and Japan have not been cut recently, the trend has been negative. The US was downgraded by S&P from AAA to AA+ in 2011, after being AAA rated for 70 years. Since the dollar is the primary reserve currency of the world, the rating of the United States government has great significance in the global financial markets. With the US national debt crossing $20 tln recently, the country’s creditworthiness likely isn’t improving any time soon. Japan, which was last Aaa rated by Moody’s in 2009, has seen multiple rating cuts in the last eight years. It is currently rated A1/A+ by Moody’s / S&P.
Is government backing Important?
A fiat currency derives its value from the support of the government. While currencies were initially backed by gold, governments across the world felt that this was restricting their ability to print currency and expand their economies, and withdrew from the gold standard long ago. Today, the US dollar, like all fiat currencies, is solely backed by the “full faith and credit” of the nation’s government. Clearly, this “faith and credit” isn’t what it used to be.
Misguided government policies can result in the value of fiat currency depreciating rapidly. Thankfully, Bitcoin is backed by math and nothing else.