What is Fiat Money?
Fiat currency refers to a currency that, rather than being backed by gold or silver, is backed by a government.
It derives its market value and validity as a medium of exchange from collective societal beliefs. Thus, its intrinsic purchasing power is highly reliant on the government’s decree and collective social conventions; when compromised, the purchasing power declines.
It is issued by a government’s treasury, reserves, or central bank, which is responsible for its generation and distribution to the public. This gives the government the power to control supply variations, interest rates, and liquidity.
Some examples of fiat money include the USD, EUR, GBP, JPY, CAD, and other currencies lawfully accepted by governments as legal tender.
What is the Difference Between Fiat Money and Cryptocurrency?
Cryptocurrencies differ from fiat money in several ways:
- Cryptos are not a legal tender of any country, except El Salvador, which adopted Bitcoin as its legal tender.
- Fiat is controlled by the government, while crypto is decentralized, i.e., it doesn’t have a central authority controlling supply variation.
- Fiat currencies have physical forms such as paper money or coins, while crypto is completely digital.
- Because cryptocurrencies are decentralized, cross-border transactions are seamless in crypto. On the other hand, fiat currencies transactions require conversions to the corresponding nation’s currency.
- Crypto enables peer-to-peer transactions, while fiat currencies need a middleman or bank to verify transactions.
- Crypto transactions are irreversible, in that, crypto payments cannot be reversed once the transactions are confirmed or added within a valid block of the chain, and refunds can only be done by the receiving party. On the other hand, credit card transactions can be canceled by the sending party.
Crypto has introduced an alternative to fiat currency as a store of value, unit of account, and medium of exchange. It has inspired a number of governments to develop Central Bank Digital Currency, which are digital fiat currencies based on blockchain technology.