What is fiat currency. Its difference from cryptocurrency

Description

When reading articles about cryptocurrencies, the term «fiat» or «fiat money» occasionally appears. It may seem like a term that everyone understands, but we believe it's necessary to delve into this concept in more detail.

What is Fiat Currency

Fiat currency (also known as «fiat») is a legal tender whose value is established by the government and issued by it, not backed by a physical commodity or product. The authority of the government is a key factor in determining the value of fiat currency. Most countries use a fiat currency system for buying goods and services, investing, and savings. Fiat currency has replaced the gold standard and other commodity-based systems in defining the value of legal tender.

We invite you to explore a related topic:

• What is a stablecoin and what is it used for.

History of Creation

The first fiat currency emerged in the 11th century in China, in the Sichuan province. It was there that the first paper money was introduced. Initially, these notes could be exchanged for gold, silver, and silk, but after the rise to power of Kublai Khan in the 13th century, the first fiat currency system was established.

Historians claim that these currencies played a crucial role in the downfall of the Mongol Empire: excessive spending and hyperinflation were the causes of its decline.

In Europe, fiat money began to be used in the 17th century. Spain, Sweden, and the Netherlands were among the first to adopt them.

However, this system proved unsuccessful in Sweden, and the government was forced to abandon it in favor of the silver standard.

Global adoption of fiat currency was driven by the return to commodity currency in the United States in the 20th century with certain restrictions. In 1933, the government ceased the practice of exchanging paper money for gold. In 1972, during President Nixon's tenure, the United States completely abandoned the gold standard, finalizing its worldwide termination and transitioning to a fiat currency system.

Difference Between Fiat and Cryptocurrency: Advantages and Disadvantages

The primary goal of creating cryptocurrency was to eliminate intermediaries involved in financial transactions between people, even if they live in different parts of the world. When using cryptocurrency, payments become significantly more cost-effective and faster.

The key difference between cryptocurrency and fiat is that cryptocurrency has no physical expression. The likelihood of counterfeiting is close to zero due to highly encrypted information. User balances are calculated based on sent and received transactions. Legislation in many countries views such payment methods skeptically and with caution.

Meanwhile, fiat money is entirely legal and accepted in all countries worldwide. Its value depends on government policies and guarantees provided by the authorities.

Let's now proceed to the advantages and disadvantages of both forms of currency.

Let's start with the advantages of fiat money:

• Stability and Lack of Volatility. Despite the growing popularity of cryptocurrencies, fiat money remains the most widely accepted form of currency in both everyday life and on currency exchanges. A vast number of people use them, making exchange rate fluctuations more predictable;
• Widespread Acceptance. Fiat money is accepted for payments in stores, restaurants, taxis, and more. Cryptocurrencies, on the other hand, are not as widely accepted;
• Recovery of a Lost Bank Card. If you lose a plastic card or forget your PIN code, it doesn't mean you've lost your money. You can go to the bank with your ID, withdraw your funds, or request a new card with the lost funds;
• Bank Transactions are Reversible. In the event of a transfer to a scammer, you can prove fraud and get your money back.

Next, let's move on to the disadvantages of fiat money:

• Centralization. Most projects that deal with fiat money use a central server, and in the event of a breach, hackers can access all user account data. Such incidents are becoming increasingly common;
• Inflation. Governments are forced to regularly print new money, leading to its gradual devaluation;
• Lack of Anonymity. To open a bank account, you are required to provide personal information, including your name, passport, and employment details.

Now, let's discuss the advantages of cryptocurrencies:

• Decentralization. The absence of a central server, whose breach could lead to the loss of money for millions of people, simply doesn't exist. Copies of the blockchain are distributed across many computers worldwide, requiring the consensus of the majority for any changes;
• Transaction Transparency. Information about all transactions is permanently stored in the blockchain and is accessible for viewing by anyone;
• Counterfeit Prevention. Technically, the possibility of counterfeiting is absent;
• Resilience to Inflation. Due to the limited issuance of cryptocurrencies, the likelihood of inflation is extremely low or non-existent;
• Absence of Government and Banking Regulation. It's no secret that cryptocurrencies are not subject to government and banking regulations, the absence of which safeguards the position of cryptocurrencies even in the event of a global financial crisis;
• Anonymity. Despite the fact that addresses and transactions are publicly available, it is impossible to determine the actual owner of a wallet. Using cryptocurrencies does not require providing personal information and passports.

Now, let's move on to the disadvantages of cryptocurrencies:

• Transaction Reversal Is Impossible. Yes, that's right. In case of an error during a transaction, you won't be able to reverse it and will lose your money;
• Value Depends on Supply and Demand. This leads to high volatility, sudden price fluctuations, and complexity in prediction. Although, on the other hand, volatility often works in favor of traders seeking substantial profits;
• Easily Lose Access to Your Wallet. Forget your password, fail to save your seed phrase or private key for recovery? Congratulations! You've lost access to your account permanently.

As you may have noticed, both forms of payment have their own set of advantages and disadvantages. Currently, they complement each other, as cryptocurrencies cannot exist without fiat.

Conclusion

Despite all the advantages over fiat currencies, cryptocurrency remains too new, incomprehensible, and inconvenient for the world. Moreover, transitioning to cryptocurrencies would not be in the best interest of leading financial institutions.

Fiat has been in use for quite some time, and it may eventually fully replace the use of cryptocurrencies. For now, fiat is the undisputed favorite for global transactions.

The future of both fiat and cryptocurrencies is uncertain. Cryptocurrencies must navigate a long path and confront many challenges. Fiat currency, on the other hand, has demonstrated vulnerabilities in its monetary form.

Most likely, Bitcoin was not created for a complete replacement of fiat but to offer an alternative economic network that can create a better financial system for society.

We hope this article has been useful to you. Feel free to leave your thoughts on this topic in the comments. Wishing you successful and profitable investments!