Crypto Isn’t Replacing Fiat — But It’s Changing Everything

In recent years, crypto advocates have made bold claims: Bitcoin will replace the dollar. Ethereum will power a new world economy. Central banks will become obsolete.

But that’s not what’s happening.

According to Mark Copelovitch and Thomas Pepinsky in their new paper, The Political Economy of Shitcoins, the most plausible future isn’t one of total disruption or total collapse. It’s something more complicated — and more dangerous to ignore.

It’s a future where cryptocurrency survives, but doesn’t replace, sovereign fiat currencies. Where Bitcoin, stablecoins, and crypto platforms exist alongside the dollar, the euro, and the yuan. This is what they call World 2, and it’s already taking shape.

A Dual Monetary System

In this world, fiat money still does the heavy lifting: taxation, public spending, central bank policy, and international trade. Governments retain monetary sovereignty.

At the same time, crypto persists — not at the core, but around the edges. It thrives as:

• A speculative asset class

• A workaround for capital controls

• A remittance tool in underbanked economies

• A way to transact outside of formal institutions

• A banner for ideological movements that want to break from the state

• A cheaper way to make international payments (my addition)

This coexistence isn’t a stable arrangement. It’s a delicate balancing act, and it raises hard questions for regulators, central banks, and finance ministries.

Innovation or Extraction?

Some see promise in this model. Crypto, they argue, forces financial innovation. It expands access. It pushes governments to modernize payments systems and build CBDCs. The friction between crypto and fiat leads to productive reforms.

But there’s a darker side.

Crypto’s survival often depends on avoiding regulation while benefiting from state legitimacy. It introduces new risks without offering new protections. It invites speculative bubbles, facilitates illicit flows, and complicates monetary policy — all while framing itself as an alternative to the very systems it leans on.

And as Rohan Grey, a law professor at Willamette, puts it: the stablecoin trilemma makes it impossible to create coins that are simultaneously stable, denominated in a public unit of account, and free from reliance on public collateral.

Copelovitch and Pepinsky put it plainly: crypto in World 2 is either a symbiont or a parasite. It’s either helping to modernize finance or draining state credibility. Likely, it’s doing a bit of both.

The Policy Challenge

What does World 2 mean for policymakers?

It means crypto is not going away — but neither is the state. The real challenge is not deciding whether to ban or embrace crypto. It’s managing the tension that comes from living in this hybrid system.

That means:

• Crafting smart regulation for stablecoins and decentralized finance

• Developing CBDCs not just as innovation, but as a defense of monetary sovereignty and innovation

• Collaborating across borders to avoid regulatory arbitrage

• Preparing for new kinds of systemic risk, even from assets that don’t look like money

• Deciding when — and if — the state should backstop private crypto failures

Because in World 2, the line between public and private, fiat and crypto, is constantly shifting.

A Final Thought

Crypto doesn't need to win to matter. It just needs to persist — and it has.

This future, where crypto and fiat coexist uneasily, is not a footnote in monetary history. It's the battlefield. And what’s at stake isn’t just which currency we use — it’s who gets to decide.

World 2 is here. The question now is whether policymakers are ready to govern it — before it governs them.

Inspired by The Political Economy of Shitcoins by Mark Copelovitch & Thomas Pepinsky (2025)