1. Kennisbank
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  3. What is Fiat currency?

What is Fiat currency?

Fiat currency is money with the legal tender status given by the currency issuer in a country and has an indirect market value. In most cases, the word is also used for paper money or coins with a face value. The currency is dependent on the value of the economy and government enforcement. Its introduction was to replace commodity money used in the past. The most known examples of fiat money are the United States dollar, Euro, and Pound sterling.

History of Fiat currency

The currency came into existence in the 10th century after the demand for metal currency and the scarcity of silver contributed to the payment method’s change. In the 18th century, the American colonies, continental congress, and France started to provide credit bills to settle transactions.

Over time, the bills devalued and became unreliable paving the way for fiat currency to preserve the metals’ value. In 1971, President Richard Nixon presented a sequence of economic measures. They stopped the direct exchange of dollars into gold because of the decrease in mines. Since then, the majority of the states embraced the currency.

Characteristics of Fiat currency

  • The currency is easy to carry and move around.
  • Globally accepted since it has no intrinsic value of its own.
  • Divisible into a range of values to make the exchange easier.
  • Unlimited supply since the central banks can print endless amounts.

Upside of Fiat currency

Fiat currency is manageable on credit provision, interest ratio, and liquidity. Since it is not a limited reserve, its supply and worth are greatly measurable by its central bank. As a result, the interchange becomes more reliable.

Steadiness is key. The threat of unpredictable depreciation affected by its supply is minimal. Its distribution gets planned and controlled by the corresponding currency’s administration. So, any rise is a pre-empted result decided by the regime.

Downside of fiat

Fiat currency has no links to a tangible asset. Its value is reliant on liable financial policy and controlled by the government. Thus, reckless strategies lead to price increases like inflation and hyperinflation.

Financial collapse: Historically, there have been cases where economies have collapsed, indicating that the currency presents some risks.

Fiat currency vs. cryptocurrency

Both currencies are similar in that a physical commodity backs neither. The differences include, cryptocurrency is not a legal tender; hence, not backed by any government. It’s decentralized and an algorithm regulates it. Moreover, its transactions are not reversible making tracking difficult.

Conclusion

Fiat currency is an assurance from a country’s central bank that it can be traded for goods. When faced with uncertainty, governments can stop and reduce severe impacts during a significant economic crisis. Its value is dependent on a nation’s confidence in its currency issuer.

Notably, fiat currency is a better option as a trade tool with no limits to its supply.

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