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What is fiat currency?

fiat currency

7 min reading

Let’s discover together what is fiat money, its origin and what it is used for.

What is fiat money

What is fiat currency?

Fiat or fiduciary money is a currency, in other words, ordinary paper bills and money on our bank cards (US dollar, euro, ruble, yuan, etc.), the value of which is set and issued by the government. Fiat money almost always acts as a means of payment, which is based on state laws. From Latin, the word fiat translates as: “Let it be!”, and it also means “instruction” or “decree”. Most countries use this currency to buy goods and services, invest and save. The fiat currency can be either in cash or in electronic form. Before the abolition of the “gold standard” in 1973, fiat funds were provided with gold, that is, behind each banknote, there was a certain amount of precious metal from the state’s gold reserve.

History of fiat currency

It is said that in the ancient world many types of commodity money were used for exchange, loans, or gifts, such as shells and pearls; animal skins; live cattle and other long-term food, honey; pebbles, etc. Some of these types of money had practical value, for example, it was possible to sew clothes from the skin, and slaughter cattle, and feed the family. And for example, pearls were primarily a means of exchanging goods. It is worth noting that it was not science, religion, or poetry that led to the emergence of human writing, but accounting. It was necessary to count the money, and there were more and more calculations. 

It was too difficult to remember so much information, and people started taking notes. Beginning with, the first monuments of writing were discovered in China, which date back to the IV millennium BC. Starting from the second millennium BC, money was made from iron, silver, gold, and other metals. First, there were arrowheads, sword fragments, and so on. Then, the oldest coins in Europe consisted of an alloy of silver and gold and were issued in Lydia, by King Ardis, around 685 BC. 

At the end of the XIX century, all developed countries had already used coins. Paper money appeared in the first century AD. Due to the fact that the mining of precious metals was expensive, the coins themselves could be easily forged, so it was necessary to control the purity of the alloy, as well as since that it was necessary to carry a large number of coins, and this is very inconvenient. The first paper money appeared in China, in 812.

Differences between fiat money and cryptocurrency

The main difference between cryptocurrency and fiat money is that digital currency is not physically expressed in any way, and at the information level, the coins are carefully encrypted, preventing the possibility of forgery. The balance calculation is based on the sent and received transactions. Fiat currency is accepted on the legislative level in many countries around the world.

This currency has no independent value, and the exchange rate is set depending on government policies and guarantees. At the same time, crypto-currency is quite unpredictable and its rates depend on various factors such as news, legislative regulations, government policies, and even statements of celebrities.

Advantages and disadvantages of fiat money

The first advantage of fiat money is that it has more noticeable stability so that there is no strong volatility. Despite the growing popularity of cryptocurrencies, fiat money is still in demand. They are traded by a huge number of people, which makes the exchange rate fluctuations more predictable. Moreover, the advantage of these payment methods is that if you lose your plastic card or forget your PIN code, it does not mean that you have lost money. Your funds are still in the bank, so you can dispose of them without limits after a new card will be received. Another advantage is that banking operations are fast and reversible. In case of an error, it is possible to cancel the transaction if the fact of fraud is proved, and the bank considers the reasons weighty. Also, paying with fiat money differs with a much faster transaction speed compared with crypto-currency. The users should wait 20-60 minutes for the transaction to be verified and validated. However, fiat money is accepted everywhere: in shops, restaurants, taxis, airports. 

It is said that centralization is a weak point of fiat currency. Most projects that work with fiat are based on a central server. By hacking the servers, the hacker gains access to the user accounts and steals money. Moreover, inflation is also considered to be a big disadvantage. Since the state is forced to regularly issue money, it leads to their gradual depreciation. The fiat currency does not have anonymity. Thus you have to provide the bank with all your personal data such as your last name, passport data, your place of work in order to create a new bank card or account.

How and where to exchange cryptocurrency for fiat money

If you are wondering how and where you can exchange cryptocurrency for fiat money, here are some popular ways to do so. For someone trying to sell or buy cryptocurrency for the first time, this method may seem the most obvious – private cryptocurrency exchanges. This is supposed to be a service of buying cryptocurrency or fiat money directly at the offices. It is also possible to exchange cryptocurrency through an acquaintance, but you need to be extremely careful and cautious here. Another way to exchange currency from another person is through P2P exchanges like LocalBitcoins. These platforms advertise to buy or sell. Buyers can negotiate a deal and set their own terms. One of the most legitimate and popular ways to exchange cryptocurrencies for fiat currency and conversely is through professional crypto-exchanges. You only deal with the platform – not other users. Fiat money can also be withdrawn to a bank account. OTC providers are over-the-counter agents who match the buyer with the seller for a commission. Traders usually negotiate large sums of money to buy and sell. This method of OTC trading is now rising. 

However, we studied the detailed information about fiat currencies, and how they differ from cryptocurrencies. Although states and people all around the world trust fiat currencies, all their disadvantages make us believe that digital currencies have to come a long way to replace fiat on the financial market. Therefore, we should follow the situation on the crypto-currency market, read the news, and make conclusions about the possible perspectives of the fiat money and crypto-currency market.