Fiat Currency: Definition, Examples, Fiat Vs Crypto, Advantages And Disadvantages 

What Is Fiat Currency? 

A Fiat currency is money that is issued by a local government and is used for real-world payments. Fiat money lacks intrinsic value and is not redeemable in gold or silver. Fiat money is a legal tender by the government. The term fiat is derived from Latin. It means a formal authorization. As the name suggests, fiat money is authorized by the government. 

The earliest use of fiat currency dates back to China. At that time, they were asset-backed money. Earlier governments used to mint money from a physical commodity, usually from precious metals such as gold or silver. However, at one time, the capacity of the government to hold these metals for every coin became tough. Till that time the use of fiat currency has become common. Currently, there are a total of 180 fiat currencies in the world. 

A digital form of fiat currencies is emerging over the past few years i.e., CBDCs. CBDC stands for Central Bank Digital Currencies. CBDCs will be created and backed by the nation’s central bank. 

How Does Fiat Money Work? 

The value of fiat money is driven by supply and demand. The supply or how much money is needed in the economy is determined by Central banks. However, the government does not have the liberty to print as much money as it wants and therefore, the economy experiences inflation and deflation. Central banks offer a kind of stability in the system.

But one question usually arises: if not backed by assets then what provides value to fiat money? The declaration of government and the faith of its holders provide value to fiat money. The value of fiat money depends on the performance of the country’s economy, the governance of the country,y and interest rates. For instance, a country experiencing political unrest will also have a fragile currency. 

Example Of Fiat Money 

For years the national currency of the U.S was backed by gold and silver. Then, in 1933, during the great depression, the government passed the Emergency Banking Acts. The purpose of introducing this bill was to re-instill the confidence of the public in the national finance sector. Later, the act bought a program for the rehabilitation of the bank. In 1971, the U.S government completely abandoned the gold standard for international transactions. The dollar then officially became fiat money. Now the U.S dollar is backed by “full faith and credit of the U.S. government.”

Fiat Money Vs Cryptocurrency 

There are two use-cases of any currency: a store of value and a mode of payment/exchange. Let’s understand the two currencies in this light. But before that let’s have a brief understanding of what cryptocurrencies: 

The first cryptocurrency, Bitcoin, emerged in 2009. Cryptocurrencies are nothing but virtual or digital currencies and are part of decentralized finance (DeFi). These days the term fiat currency is used to differentiate it from cryptocurrencies. Cryptocurrencies are decentralized by nature while fiat currencies are very much centralized. Cryptocurrencies do not need a central identity to regulate while fiat currencies depend on a centralized organization. Cryptocurrencies are managed by a distributed network of nodes or computers. 

Fiat Money Vs Cryptocurrency: A Store Of Value 

Cryptocurrency is more popular as a store of value. They function pretty much similarly to precious metals such as gold. Bitcoin is often termed as “digital gold.” Bitcoin is also mined hence its supply is also limited. The total supply of Bitcoin is 21 million. 

On the other hand, the supply of fiat money is limitless since it is printed and can be produced as per the demand. For instance, the balance sheet of the Federal Reserve shows significant growth since 2007.

Fiat Money Vs Cryptocurrency: A Medium Of Exchange 

While crypto enthusiasts argue that cryptocurrency will replace fiat money as the mode of payment. The argument is based on the fact that certain cryptocurrencies offer instantaneous transactions around the world. However, it is practically decades away, especially looking at the current scenario of the crypto market. Although, some firms and individuals have started transacting in crypto. Fiat is still the primary mode of transaction worldwide. 

Fiat Currency: Advantages And Disadvantages 

The major benefit of fiat currency is that it is easy to produce and promotes easy transactions. Fiat money can be easily carried from one place to the other. Since it is managed by the central bank, it offers stability. Additionally, in case of a financial crisis, the government can handle it better. 

Another advantage of the fiat currency is not reliable for precious metals or physical commodities such as gold. Therefore, outside players can not influence or manipulate the market’s supply and demand. Hence, there is no risk to the price of the currency. Fiat money is less volatile. 

The central bank controlled fiat money also has a disadvantage. The central bank can easily mismanage the money. Like in some cases it can print too much money which can result in hyperinflation in some cases. 

Is Crypto an Alternative To Fiat Money?

As we discussed above, cryptocurrencies are far from replacing fiat. However, their use as an alternative to fiat has begun. But the fact remains that most cryptocurrencies are volatile which makes them difficult to use as a mode of payment. Meanwhile, some people still refuse to consider crypto as a currency at all. Although many crypto investors firmly believe that cryptocurrencies will grow. 

Saurav Bhattacharjee is in charge of the Broadcast development team of The Coin Republic.
He has been covering the Metaverse and NFT niche for the past 2 years.
With stellar interviews on his portfolio like Nicehash, Paxful, WallstreetWolvesNFT, Bitholla, Totemfi, EOS.io etc. Saurav has spearheaded the NFT SUPERSTARS AWARD and successfully hosted the first award in 2021.

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