If you are starting to learn about cryptocurrency, one word you are likely to frequently encounter, always in negative terms, is the word fiat money. It has nothing to do with the Italian car maker, but is a catch-all term for government created money. So why does fiat money have such a bad rap?
There was a great meme circulating in 2017/8 when Bitcoin was experiencing a rapid increase in price, better known as a bull market. It was supposedly a tweet from the official account of the Italian car maker Fiat, simply asking ‘why cryptocurrency people hate us so much?’
Fiat didn’t send that tweet, it was just a clever meme encapsulating the negativity that the world of crypto has toward what fiat money – not the car brand – represents. So what does fiat money represent and why does it play such a key role as the crypto community’s bogeyman?
Fiat money is a type of currency that is declared legal tender by a government and has value because of the government’s authority to issue and regulate it. Unlike commodity money, such as gold or silver, which has intrinsic value, fiat money has no intrinsic value and its value is determined purely by the government’s declaration that it is legal tender.
This means that fiat money is not backed by a physical commodity or any other asset, and its value is not guaranteed by the government in the same way that a commodity-backed currency would be. Instead, the value of fiat money is determined by supply and demand in the economy, as well as the government’s control over its issuance and circulation. Fiat money is the primary means of exchange in most economies around the world, and is used for a wide range of transactions, from day-to-day purchases to international trade.
The use of fiat money can be traced back to the early modern period, when European governments began to issue paper money as a means of financing their military campaigns and other expenses. Prior to this, commodity money, such as gold and silver coins, was the primary form of currency used in many economies around the world. However, commodity money was often scarce and difficult to transport, which made it challenging for governments to use it to finance large-scale projects or to fund their military operations.
The use of paper money allowed governments to finance their activities more easily, as they could simply print more money as needed, rather than relying on the availability of scarce commodities. Over time, the use of paper money became more widespread, and many governments began to issue paper currency as a means of regulating their economies and stabilizing their monetary systems.
In the 20th century, the use of fiat money became even more widespread, as governments increasingly took control of their monetary systems and began to issue and regulate their own currencies. Today, fiat money is the primary means of exchange in most economies around the world, and is used for a wide range of transactions, from day-to-day purchases to international trade.
Being useful boiled down to six key characteristics which still apply today:
Fiat money is often seen as crypto’s nemesis because it represents the traditional financial system that crypto seeks to disrupt. Many crypto enthusiasts view fiat money as inherently flawed because it is subject to government control and manipulation, and because it is vulnerable to inflation and devaluation. They see crypto as a more stable and secure alternative that can provide greater financial freedom and independence.
Unlike fiat money, which is issued and regulated by governments and central banks, crypto is decentralized and operates on a distributed ledger technology, such as blockchain, that allows for transparent and secure transactions without the need for intermediaries. This means that crypto is not subject to the same government control and manipulation as fiat money, and is not vulnerable to the same risks of inflation and devaluation.
However, fiat money still remains the primary means of exchange in most economies around the world, and is widely accepted and trusted by consumers and businesses alike. While crypto has made significant strides in recent years, it still faces a number of challenges, including regulatory hurdles, scalability issues, and a lack of mainstream adoption. As such, it remains to be seen whether crypto will ultimately supplant fiat money as the dominant form of currency in the global economy.