You can often come across fiat money being mentioned as a concept opposed to cryptocurrencies. Read ahead to learn what the differences between these two terms are!
What Is Fiat?
The word “fiat” derives from Latin and translates to an official decree, order, or resolution. It is a type of currency that is declared to be legal tender by a government but has no intrinsic value.
Such money is usually made out of low-value or worthless materials and is not backed by any tangible asset, such as gold or silver. Aside from government regulation, the key reason why fiat money is considered valid as a payment method is the collective belief.
What You Need To Know About Fiat
The creation of the first form of fiat money dates back to the 11th century. At that time, the Chinese Song dynasty issued the “jiaozi”, a primitive form of banknote that was created to replace the heavy iron cash coins used back then. Some of the modern fiat currency examples include the US dollar, the Indian rupee, the British pound, and the euro.
As the fiat definition suggests, the value of such money is assigned by a collective agreement and solidified by official documentation. This means that if the social belief or government decree gets compromised, the market value of fiat currency will experience a quick and significant downfall.
Thus, the main distinction between fiat money and cryptocurrency is that the latter is independent of government backing while the former relies on it heavily.
Fiat currencies are not backed by precious metals or any other commodities, so central banks control the money supply. Cryptocurrencies, on the other hand, derive intrinsic value from their blockchains. This means that although they don’t follow a fiscal policy, they are subject to the governance and consensus mechanisms of the protocol itself.
While fiat currency is still the dominant payment form, many agree that crypto assets may be the next step in the evolution of money.
