What is Fiat currency?

The term fiat fiat currency is commonly used to distinguish regular money from cryptocurrency, a form of digital payment that can exist without a central bank. Fiat currency is a term that describes the money you use every day. The US dollar is a fiat currency, like most other modern currencies circulating around the world.

The values ​​of fiat currencies are usually backed by the economic power of a government. This type of currency is different from an asset-backed currency, which derives its value from an underlying asset.

A currency based on the value of gold, for example, would be an asset-backed currency. Asset-backed currencies can also be legal tender, but since the Great Depression, the international monetary system has emphasized fiat money.

Today, the term fiat currency is commonly used to distinguish regular money from cryptocurrency. Cryptocurrency is a digitally created form of payment that can exist without the help of a central bank.

Why is it called fiat money?

A "fiat” is an official order or decree. So if a currency is created by government order, it could be said to have been created by fiat – making it a fiat currency. An expression of such fiat is written right there on the dollar bills in your wallet: “This note is legal tender for all debts, public and private.”

What gives value to fiat money?

For many years, dollars were actually backed by reserves of valuable assets such as gold and silver. The United States gave up the gold standard for domestic transactions in the 1930s and ended international conversions in 1971. . Dollars have not been redeemable for cash since the 1960s.

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Today, the US Federal Reserve is required to hold collateral equal to the value of dollars in circulation, and it does so using government-issued debt.

So basically the dollar has value for two reasons:

• Because the US government says so.
• Because investors and lenders around the world believe that the government American will repay its debts.

Fiat currency against cryptocurrency

The advent of cryptocurrencies has sparked a debate about the future of fiat currencies and whether they will eventually give way to digital coins.

Cryptocurrencies such as Bitcoin are not fiat money as they are not issued, controlled or backed by any central authority. And in some cases, the total maximum bid is designed to be capped at a certain amount.

The main difference between fiat money and cryptocurrency is that cryptocurrencies are independent. While fiat currencies depend on intermediaries.

Most cryptocurrencies are created using a cryptographic computer network technology known as blockchain. This technology allows them to circulate without the need for a central authority such as the Federal Reserve.

Many cryptocurrency proponents argue that this “ decentralization in which currencies are governed by users rather than by central authorities, will result in more efficient and less corrupt monetary systems.

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However, nothing prevents governments from using cryptocurrencies or their associated technologies in national monetary systems. El Salvador in September 2021 became the first country to adopt Bitcoin as legal tender. And China is developing a digital version of its national currency, the yuan.

Because most cryptocurrencies are not backed by central banks, they derive their value from different sources.

Bitcoin, the first and most valuable cryptocurrency, generally has its value determined by the market logic of supply and demand. There is a limited supply of Bitcoin which is governed by its underlying software, so when demand increases, prices too.

The pros and cons of fiat currency

One of its greatest advantages is the relative stability of fiat money and the ability of central banks to control supply and manage the economy. However, these efforts are not always successful, and some critics argue that instead of providing a cushion against economic shocks, fiat currencies can sometimes exacerbate them if policymakers print too much money.

Advantages of Fiat Currency

• It gives issuers greater control over the money supply, helping them manage the economy.
• It is relatively stable and easily stores current value, unlike commodity-backed currencies which can fluctuate in the short term.
• Is widely accepted and can be used as legal tender in various contexts.

The disadvantages of Fiat currency

• Printing too much money can fuel inflation.
• Its potentially unlimited supply can erode value and create bubbles.
• With its value tied to a government, a fiat currency can depreciate significantly if the issuer runs into trouble.