What is Fiat Currency?
If you are venturing into cryptocurrency, you might come across the term “fiat” quite frequently.
Fiat currency, or fiat money, refers to money that a government designates as legal tender and supports. The word “fiat” itself means an authoritative or arbitrary order.
Essentially, the government issues a decree stating that currencies like USD, GBP, INR, EUR, or other global currencies are acceptable forms of payment for public and private debts.
What is Fiat Money | Source: Investopedia
The Fiat Money System Explained
Fiat money is created and released into circulation by governments through their reserves, treasury, and central bank systems.
Unlike commodity money backed by gold or silver, fiat money relies on the backing and trust of the government responsible for minting and distributing it.
However, this can be risky as governments sometimes print excessive money to stimulate their economies, leading to inflation.
Fiat currency grants governments the authority to implement policies to control factors such as money supply, liquidity, and interest rates.
Fiat Currency vs Cryptocurrency
In contrast to fiat currency, cryptocurrency operates in a decentralized manner.
No central authority or country has approved or controlled its distribution or use.
Cryptocurrency exists purely in digital form, without physical bills or coins.
Except for El Salvador, recognized as a legal tender, cryptocurrency cannot be widely used for transactions in many places.
Digital Fiat Currency vs Cryptocurrency
Cashless transactions have become commonplace in many parts of the world, with digital fiat currency serving as the primary means of conducting business.
Some governments are considering the introduction of entirely digital currencies, potentially built on blockchain technology.
These are known as central bank digital currencies (CBDCs).
Inspired by cryptocurrencies like Bitcoin, CBDCs differ in that they are centralized, and the government’s monetary policies still control their value.
Is Cryptocurrency Better Than Fiat?
Cryptocurrency has the potential to replace fiat currency in all its functions.
It can serve as a store of value, a medium of exchange, and a unit of account.
Crypto and decentralized finance eliminate the need for expensive, inefficient intermediaries like banks.
Furthermore, the value of cryptocurrency is not determined by the government, as is the case with fiat currency.
It replaces outdated record-keeping systems with an immutable and trustless ledger accessible to all users.