Fiat currency: A quick guide

This article provides a quick introduction guide on fiat currency and the main differences between fiat and digital money.

History and general facts of fiat currency

Fiat money (from the Latin “fiat”) is also called fiduciary. This is a classic means of payment that people use in everyday life. This includes all national currencies: United States dollar, Canadian dollar, Euro, pound etc.

Fiat currencies are issued in the form of paper banknotes by the government. The state also determines what people should pay in national currency (taxes, goods, etc). It was not that long ago that fiduciary means of payment were supported by gold and each banknote had a certain amount of precious metal from the state’s gold reserve. Today, fiat is not supported by anything, but the government.

As far back as ancient times, people were exchanging pearls for a pot of honey. After millennia, precious metals and iron were used for the production of money. Plato also argued that citizens should not use gold as payment method and the state has the power to issue a currency that will operate within its borders. Attempts to introduce fiat currency were also made in ancient Rome during the reign of Emperor Diocletian.
The prototype of paper money appeared in the 1st century BC in China. They were given, as an experiment, to pilgrims who didn’t want to weigh their luggage with a bag of coins.

The Differences Between Fiat Currency and Cryptocurrency

Cryptocurrency is a virtual alternative to regular money. Its main goal is to eliminate intermediaries which are involved in the transfer of funds between people from different parts of the world. In this case, financial operations become more profitable and faster. The main difference between digital and fiat money is that it does not have a physical counterpart or borders. Moreover, crypto coins are carefully encrypted, which reduces the likelihood of counterfeiting. Some countries have already accepted it as a means of payment, whereas others still doubt it. Nevertheless, fiat money is legal and permitted in all countries of the world; its rate is determined by state policy and guarantees given by the authorities.

Pros of fiat money

Fiduciary currency is more stable and does not have strong volatility. Despite the growing popularity of cryptocurrencies, fiat money is still used in the modern world. They are traded by a huge number of people and this makes course fluctuations more predictable. Fiat money is widespread and accepted everywhere: in shops, restaurants, taxis and airports.

Cons of fiat money

The main disadvantage of this type of exchange is centralization. Most of the projects that work with cash are based on a local server that can be easily hacked. Inflation rate also acts as a catalyst for money’s gradual devaluation.

The future of fiat currency

The question arises whether cryptocurrency could ever replace fiat money? And if so, how soon will this happen? Experts from around the world cannot give an exact answer. Only 9 years have passed since cryptocurrency was created, and fiat money, in turn, has been used by mankind for thousands of years. Of course, with the development of the Internet and technology, progress began to move rapidly. But still, most analysts agree that it is too early to talk about the full adoption of cryptocurrencies. No matter how many crypto enthusiasts there are in the world, the final decision lies with the authorities.

Despite all the advantages (speed, anonymity and low cost of transactions), cryptocurrency is a relatively new and obscure phenomenon to the market exchange. We can only wait and observe the situation of whether the fiat is going to give way.

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